This commentary was originally published by CalMatters. Sign up for their newsletters.
The spiraling cost of housing in California has affected virtually every facet of life.
California has the nation’s largest unsheltered homeless population and among the highest rates of cost-burdened renters and overcrowded homes.
One reason for the seemingly endless upward trajectory of rents is how expensive it is to build new apartments in California. Those costs are a major contributor to “break-even rents,” or what must be charged for a project to be financially feasible.
I recently led a study that compared total apartment development costs in California to those in Colorado and Texas. The average apartment in Texas costs roughly $150,000 to produce; in California, building the same apartment costs around $430,000, or 2.8 times more. Colorado occupies a middle ground, with an average cost of around $240,000 per unit.
For publicly subsidized, affordable apartments — a sector that California has spent billions on in recent years — the gap is even worse. These cost over four times as much as affordable apartment units in Colorado and Texas.
There’s no single factor driving these huge differences. Land costs in California are over three times the Texas average. “Hard costs,” or those related to improving the land and constructing buildings, are 2.2 times those in Texas. California’s “soft costs,” which include financing, architectural and engineering fees, and development fees charged by local governments, are 3.8 times the Texas average.
There are some unavoidable California-specific costs, like ensuring buildings are resilient to shaking from earthquakes. But the truly lifesaving seismic requirements explain only around 6% of hard-cost differences, the study estimated. The state’s strict energy efficiency requirements add around 7%.
California’s high cost of living may drive up the price of labor, but we found that construction wage differences explain only 6% to 10% of hard-cost differences for market-rate apartments. However, for publicly subsidized apartment projects, which are often mandated to pay union-level wages, labor expenses explain as much as 20% to 35% of the total difference in costs between California and Texas.
“Soft costs” in California are a major culprit. California property developers pay remarkably high fees for architectural and engineering services — triple the average cost in Texas. It’s five times as much or more if you’re building publicly funded, affordable apartments in the Los Angeles and San Francisco metro areas.
Seismic engineering requirements play a role. The bigger factors are complex and burdensome design requirements for affordable housing. These are dictated by state and local funding sources, and have little to do with habitability or safety but contribute substantially to these astonishing differences.
Development fees to local governments make up the largest soft-cost difference in California. Such fees, which were the subject of a 2024 U.S. Supreme Court case, average around $30,000 per unit. In Texas, the average is about $800. (Again, Colorado occupies a middle ground at around $12,000.)
A construction worker walks through the Ruby Street apartments construction site in Castro Valley on Feb. 6, 2024. The construction project is funded by the No Place Like Home bond, which passed in 2018 to create affordable housing for homeless residents experiencing mental health issues. Photo by Camille Cohen for CalMatters
In San Diego, for example, these fees on average eat up 14% of total development costs per apartment.
But the biggest thing driving up California apartment costs? Time.
A privately financed apartment building that takes just over two years to produce from start to finish in Texas would take over four years in California. It takes twice as long to gain project approvals and the construction timeline is 1.5 times longer.
That means land costs must be carried for longer, equipment and labor are on jobsites longer, and that loans are taken out for a longer term, and so on.
Most of the differences that the study uncovered stem from policy choices made by state and local governments. Many are legacies of the so-called “slow growth movement” in California, which has shaped housing production since the 1980s.
Those efforts worked. Population growth in the state went negative for a few years after 2020, due primarily to the high cost of housing. Even more recently, California’s growth was half the numbers seen in Texas and Florida, with younger and higher earners disproportionately leaving.
These departures have dire implications for the state’s fiscal future and political influence nationally. California recently lost a congressional seat for the first time in its history. If current national population trends hold, it could lose four or five seats in 2030.
The California Legislature has become increasingly focused on reducing the cost of living, but meeting this goal requires substantial progress on lowering housing costs. New proposals to exempt urban infill housing production from state environmental law and a package of permitting reforms are steps in that direction.
Will policymakers also take lessons from Texas and Colorado’s cheaper housing methods? That remains to be seen. But the future of California may well hinge on it.
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
“Population growth in the state went negative for a few years after 2020, due primarily to the high cost of housing.”
Perfect – it’s working, then.
But truth be told, the country itself is not growing very quickly anymore. Young people aren’t having kids anywhere near replacement levels, and each generation is smaller than the one preceding it.
And for those who want cheap housing (but high property taxes) they can move to Texas, rather than moving to Texas. (Where housing prices are now declining, to boot.)
That’s how it works, and is also the reason that many in Davis came from the Bay Area. Davis is viewed as “cheap housing” (in the middle of nowhere, with overly-hot summers) for those people. But it’s still nice for a valley town, at least.
Ron (and Keith), with the Trump Immigration policies and initiatives, we can expect the whole US to drop down below zero population growth into net population loss territory. For a number of years the only way that population has increased has been through immigration. The existing population of the US has been below the replacement rate of 2.1 births per woman since 2007, reaching a record low of 1.62 in 2023.
EDIT: it is nice to have the ability to edit back.
That is true. Plus, with Trump sending International students to prisons in El Salvador (and cutting off funding to the universities themselves), it seems likely that there will be disproportionate impact on college towns.
(Slight exaggeration intended.)
But seriously, it must be causing some potential International students to “think twice” before investing in a degree program here.
It’s probably having an even bigger impact on those thinking of illegally crossing the border.
Correction – move to Texas, rather than moving to California.
NIMBYISM in carnate
No. It’s just that Texas doesn’t care about its own environment. (Actually, that’s still true in most of California, as well.)
There’s an episode of The Simpsons from awhile back, where the character “Tex” said that they don’t have a problem with the environment – since they simply “got rid of it”. (That’s pretty much my impression of that place, as well.)
But it is true that they still have lots of undeveloped land – the largest state in the lower 48, with a population that’s still less than California’s, not hemmed-in by mountains or coastline in the same manner.
I’ll save what I can – not places where they don’t care. Sort of like the climate change issue – I have no influence whatsoever regarding China or India, for example.
But like I said, Texas also has some of the highest property taxes in the country. (That’s a “housing cost”.)
The line from Vietnam comes to mind.. we had to destroy that village in order to save it.
Not familiar with that reference, but it seems that we may be on that path.
Fortunately, population growth is slowing dramatically (nationwide), at this point. We may need to find an alternative to the Ponzi scheme manner of sustaining ourselves.
Battle of Ben Tre during the Tet Offensive
“Land costs in California are over three times the Texas average.” — That’s a consequence of the land speculators ability to hold the land off the market cheaply (Thanks prop 13!) until they maximize the price.
The speculators are not making any new land, so their “unearned increment” (their profit) is a good example of economic rent–money paid for nothing. Classical economics was all about maximizing productivity by minimizing economic rent.
Ironically, prop 13 drives land price increases, and makes it profitable for banks to lend on pricier homes. Prices increase to whatever the lender will lend, uninhibited by potential property tax increases.
Meanwhile, the article doesn’t mention that thanks to prop 13–something that doesn’t apply in Texas–local governments need to get their infrastructure (roads, schools, etc.) costs up front, or they will never get them. When Butte County lowered its building fees a while ago, they nearly had to file bankruptcy.
Public policy has a role to play, even in (no planning) Houston. And let’s not forget all those Houston homeowners flooded by hurricane Katrina because of un-prudent public policy.
As for “affordable land,” density takes care of that. All that vacant asphalt in shopping centers is “affordable,” and if you simply build a duplex rather than a single-family home, that cuts land costs in half.