Public Comment

Why is There a Housing Crisis, in Berkeley and Elsewhere?

Thomas Lord
Friday December 18, 2015 - 08:36:00 AM

In a friendly on-line conversation, someone recently said:

"Ah well K., that sort of small thinking is why we are here with this housing crisis. Every city battens down the hatches instead of building the housing needed."
Pardon me but that is poppycock.

There is a housing crisis mainly because incomes have diverged so wildly, not because of a supply shortage. I can say it another way:

There is not a housing crisis because there is a supply shortage. That's the wrong way round. There is a localized supply shortage because there is an income crisis.

That is why the crisis manifests as increased housing insecurity and increased economic segregation. There is plenty of housing in the greater region. What is really going on is a very stepped up tendency to segregate the rich from the not-so-rich and the poor. This is why in some cities, economic sectors reliant on labor from lower-income households are struggling to find enough employees. 

Cities "batten down" on development, as someone put it, because the inner Bay is, mostly, a very land-limited region. Would-be developers are struck by a double whammy: the dearness of the land itself, and the already high densities that challenge quality of life, government finances, and so on. New development for profit is very expensive. Everyone knows, for example, that if Palo Alto were to permit its population to rapidly double -- which could really house a lot of tech workers who work in that area -- that the quality of life in Palo Alto would decline terribly. And it is not just the rich cities having this experience. East Palo Alto now faces the same problem only, there, because the current population has far less income, they are far less able to defend themselves against the tidal-wave of displacement that is hitting their shores.

Nevertheless, in spite of the sane resistance, throughout the region, to new development: there is a lot of money potentially to be made.

That is why there is so much lobbyist-led intervention in home rule in this area, ranging from state-ordered public subsidies for developers, "density bonuses", and so on. It is ironic that today public officials paint this intervention in home rule as "green" or some kind of blow against climate change. Their reports on this are a joke. It is nothing of the sort. And you know everything you need to know when you figure out that all of these interventions, all this "transit corridor" stuff, all this infill and push for density goes back to long before any of the legislators involved ever heard of climate change. It's a real estate scheme. Period.

Employers and regional investors (e.g. tech investors) play an interesting role here. We have a large number of international monopolists in the region, such as Google, Facebook, and various pharmaceutical firms.

It is characteristic of those specific kinds of monopoly that the ratio of their income to their payrolls and capital costs is very, very high. In other words, their gross rate of profit is through the roof.

Since such firms tend to have a high rate of gross profit *per employee*, they can afford to spend much more than other sectors on employee compensation, both direct and indirect.

Suppose that such a firm wants to expand. They face the problem that the housing market is already tight. A firm with lower gross profits in this situation might start expanding in, say, Nevada where land is far less dear (like, say, Zappos did). The local monopolies on the other hand have the option to beat the regional median income by a large amount, even to subsidize employees with private buses, and thus... the choice of those employers... create a crisis of economic displacement and economic and racial segregation. Further, the big investors in tech can individually recoup some of the high spending on employee compensation by expanding their own regional real estate portfolios.

For example, if you are a big shareholder in Google, your board of directors is spending a lot of your firm's gross income on compensation, but my gosh that's good for you if you take ownership of some San Francisco rental property or dabble in condo conversions.

That is why: There is not a housing crisis because of a supply shortage. Instead, there is a supply shortage, because there is an income crisis.

Berkeley experiences some of those issues, but also faces an additional issue related to Cal.

The student population has three properties of note:

a) Their individual incomes tend to be very low.
b) They tend not to have formed families yet.
c) They are captive buyers with no practical choice but to live as close to Cal as possible.

Together, those factors mean that students can be crammed into overcrowded units of lower quality, such that their pooled incomes add up to a high rent. From the news reports, it appears that this is the way Library Gardens has gone.

Compounding that factor is the fact that decision makers within Cal, who have influence over the size and composition of the student body, overlap with people who benefit financially if Central and South Berkeley can, over the course of a couple of decades, be converted into an over-crowded, low-quality student ghetto.

The politically powerful hills on both sides of campus and the posher parts of lower North Berkeley are in an interesting position. If Central and South Berkeley become a student ghetto for an eventually *even larger* student population, it will mirror the situation in places like Palo Alto or much more closely, the Oakland district of Pittsburgh or New Haven Connecticut. In particular, those posh regions will see their land values and house values continue to do very nicely, even as the central economic engine of the city decays and turns into a private vacuum for ghettoized student incomes.

You may have heard of pressures to upzone West and South West Berkeley, to eliminate light industry and encourage residential and office space use. Here too, you have a convergence of a few big land-owners and Cal-related speculators making a very similar play to leverage the opportunity to profit from Cal's expansion into Richmond and surrounds.

The punchline *may* come when the next big crisis of capital hits. The region weathered the storms of 2007-2008 fairly well, at least from the perspective of real estate speculators. Nevertheless, the region will run into big obstacles if or when the bottom drops out on revenues from on-line advertising and pharmaceutical patents.

If that crisis hits, I suspect, the people of heavily gentrified areas will quickly learn why economic diversity was something they ought to have fought hard to preserve. Much harder than they do now