San Francisco Chronicle, July 12, 2021
By Susie Neilson
The Bay Area needs to build over 440,000 units of housing between 2023 and 2031 to keep pace with its population, an average of nearly 50,000 units a year, according to the Association of Bay Area Governments. But over the last three years, it’s constructed an average of under 25,000 units annually. That’s because the region is one of the hardest places in the country in which to build homes, thanks to restrictive zoning, intensive permitting procedures and state laws that have historically allowed local groups to block residential development.
A pair of researchers at the University of Pennsylvania set out to understand just how much these type of restrictions cost home buyers. To quantify this, they estimated the difference between what homeowners in large metropolitan areas across the U.S. are willing to pay for additional land they can have as part of their own lot — but cannot build on or subdivide so they can sell to someone else — and what prospective home builders in those areas are willing to pay for the same amount of land to construct single-family homes on. Basically, how much less would land cost if people could build a home wherever they wanted.
The researchers called the difference between how much land actually costs and how much it would cost without restrictive zoning the “zoning tax.” It’s not actually a government tax — just the estimated amount that artificial supply constraints, like zoning laws and permitting delays, add to the price of land across different metropolitan areas.
In a working paper published by the National Bureau of Economic Research, the researchers found that in the San Francisco metropolitan area (which includes San Francisco, Alameda, Contra Costa, Marin and San Mateo counties), the median “zoning tax” for a quarter-acre of land was $409,000 — more than four times the region’s median household income.
To put that number into perspective, imagine you’re a Google software developer making $200,000 a year, over twice the median household income of the central Bay. The median “zoning tax” alone is twice your annual salary. This estimated extra cost makes up about one third of the area’s median home price of $1.26 million, making it unlikely you would qualify for a mortgage on a home at or near the median without a large down payment.
“That’s how you know it’s expensive, when Google engineers are getting priced out” of a median home, Joseph Gyourko, an economist at the University of Pennsylvania and the study’s lead author, told The Chronicle. And if you’re making closer to a traditionally middle-class wage, forget about homeownership, Gyourko said.
In order to make their “zoning tax” estimate, the researchers analyzed 3,640 purchases of land parcels across the U.S. Among the transactions they studied in the San Francisco metro area, the researchers found that “zoning taxes” were highest within 15 miles of the “core” of the metropolitan area. In San Francisco’s case, that’s the Moscone Center, just southeast of Union Square. Once land parcels were 15 miles out or farther from the Center, the median zoning tax decreased substantially, but remained over $260,000 — still more than 2.5 times the median household income.
These zoning restrictions not only make it costly for home buyers, but they also make it difficult for home builders to construct housing in the Bay Area, even as the region continues to serve as one of the nation’s major employment hubs. A recent report from the Manhattan Institute found that the San Francisco metropolitan area created nearly 3.5 jobs for every housing permit issued from 2009 to 2018.
And while his study did not explicitly examine the impact of “zoning taxes” beyond land used to purchase single family homes, Gyourko said it’s likely that these taxes cause apartments and condominiums to be more expensive as well.
“As an economist, I undoubtedly believe that’s true. Why? Because the restrictions against multifamily are almost always more severe” than for single-family homes, he said. “People hate apartments, particularly in the suburbs.”
It’s not just buyers who are impacted. Renters also end up paying more due to restrictive zoning. They are impacted in two ways. First, fewer multi-family buildings are built at all, lowering supply. Second, the increased expense of purchasing a house means more high-income renters, who then compete with middle and lower-income renters for the limited units on offer. These relatively higher-income renters — think the $200,000-income Google engineers — drive up rents in the metropolitan area overall, pushing out lower-income and even middle-class families.
“What it says is, your market’s becoming a market for richer people,” Gyourko said. “It’s a very bad place to be poor, (and) it’s not a particularly good place to be middle-class.”
As unfavorable as it is to the region’s economic growth and livability, the Bay Area’s housing shortage has been difficult to fix, Gyourko said. That’s partly because it favors existing homeowners, whose houses have dramatically inflated in value. Homeowners tend to be more active than renters and prospective home buyers in local politics, and thus are more influential in shaping housing regulations.
“This cycle, once this starts, it never tends to end,” Gyourko said.