For younger professionals like me living in California one of the most common questions is "Why do houses cost so much in this state?" Many people will give you the answers like:
1: The weather
2: People "Want" to live here, thus being more desirable, the prices are higher.
3: Jobs pay better thus the cost of housing is justified.
Perhaps there is some truth to these points. But after all is said and done, housing prices especially in places like San Francisco and Silicon Valley still don't make sense given what the average median income is. I had previously compared the median income in Austin to San Francisco. The median in Austin is $54,000. The median in SF is $65,000. But... the median cost of a home in Austin is just under $200,000. The median in SF is $656,000. Thus as can be seen, there's something definitely wrong with these numbers.
But moving on, there's another major reason why California and most of its major cities are so heavily overpriced: Proposition 13. The law was passed in 1978 . The law put a cap on property taxes at 1% and moved taxable values back to 1975 valuations. At the time it was deemed as necessary to prevent older residents from being taxed out of their homes. But instead of targeting just elderly residents the measure was given to ALL homeowners AND businesses.
Perhaps at the time nobody really sat down to consider what the long-term effects of the law would have on the state. In many ways the law is self-destructive for none other than the simple reason that as a rule, most states get a significant percentage of their revenue from property tax- both business and residential. The cost of government along with everything else goes up in time. Yet with proposition 13, with the taxable values on homes and businesses virtually frozen, this income only diminishes over time. Thus the law is counter-productive
This has created a number of problems. First of all such public services like schools, roads, and other forms of public infrastructure have had to function with less and less available taxes. Secondly these taxes have had to be collected via other means whether that be bridge toll hikes, additional income taxes, taxes on things like alcohol, and so on. But its also had a perhaps unforeseen impact on the way the state's housing market functions. In a normal market houses trade hands fluidly. Older residents living in larger homes with their kids long-gone tend to trade down for a smaller home, usually because the cost of taxes makes owning their home less financially desirable. With prop 13 there is basically zero incentive to move down. Additionally, there are clauses in the law that allows older homeowners to grandfather their homes to their children with the same tax protection. As a result the supply of housing is grossly limited, the average age in many Bay Area communities grows older and this results in grossly inflates the cost of housing. Another element to this is due to severe land use restrictions which I'll go into at length in the next post.
But the bottom line is that when the state government put this law into motion it began a new era in California where homes started becoming increasingly unaffordable and the state started a downward trend of financial disaster. The worst part is that nobody in Sacramento will EVER touch the law. Any mention of it gets all the old people in a rage because they cry that they'll be tossed out into the street. I'm in no way suggesting we do that. But at the very least the law needs to be grandfathered away. Let the old people keep their prop 13 protection.
As long as this law is active there will be no such thing as even reasonably priced housing in the state.
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