Turning 69 next month, I try not to look back. Can’t change the past. But one thing I wish I had done was buy a house when I came to Orange County in 1987. Even if it meant taking a second job flipping burgers at McDonald’s.
Jonathan Lansner headlined a story May 11, “It takes $349,200 income to buy an Orange County home, 3.5 times the U.S. salary.” I’m wondering how much that will affect my rent, currently $2,500 a month for a matchbox-sized studio in Irvine.
But why are houses so much more expensive here? Basically, it comes down to property rights, of which there aren’t enough. Let’s begin with a factor you might not have considered: Proposition 13 from 1978. No, I don’t want to get rid of it. It’s a cornerstone of what reasonable taxation remains in this state.
From Michigan, in 1978 the U.S. Army posted me to Monterey during that election, learning Russian at the Defense Language Institute in Monterey. My new Golden State friends worried about losing their homes to skyrocketing property taxes as President Jimmy Carter’s inflation pushed assessments ever higher.
It cut property assessments to 1976 levels, taxed property at 1% and limited increases to 2% a year. The problem is Prop. 13 also brought market distortions, tolerable for decades until construction was severely restricted, as detailed below.
With property taxes among the lowest in the country, the reform channeled investment money into housing and commercial real estate from other sources. By contrast, other tax rates stayed high. Today’s top income tax rate of 14.4% is the second highest after New York City’s 14.8%. The state sales tax rate is 7.25%, and higher in many counties and cities. When there’s a tax haven, in this case real estate, investment flows there.
The low property tax discouraged mobility. A house owner keeps Prop. 13 in-state, but not in another state. New home owners pay the 1% tax at the time-of-sale assessment, and want to keep it. “Empty nesters” stay in their homes instead of moving to smaller homes so they don’t lose the low-tax benefit. That prevents young couples starting families from moving into such larger houses.
Proposition 58 from 1986 allowed parents to pass on the Prop. 13 tax limitation to children, again discouraging mobility. A child inheriting a large home might not need, say, four bedrooms. But the low taxes dictate living there anyway. Prop. 58 was modified by Proposition 19 in 1996, adding some restrictions, but remains in effect.
This was tolerable until property rights to construct new homes were restricted by two landmark bills I’ve criticized ever since Gov. Arnold Schwarzenegger signed them. Assembly Bill 32 is the Global Warming Solutions Act of 2006. A new Scoping Plan by the California Air Resources Board is required every five years, just like a Soviet Pyatiletka – Five Year Plan.
“Appendix F: Building Decarbonization” from the 2022 Scoping Plan includes such mandates as, “Achieving a successful and equitable transition to building decarbonization will require a range of actions by government, utilities, manufacturers, developers, contractors, households, and businesses.” Compliance raises costs.
Senate Bill 375 from 2008 was worse. According to the text, it mandated for communities “unable” to meet dictated greenhouse-gas emission targets “alternative development patterns.” It also imposed Five Year Plans to achieve the “objectives of the housing element.”
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Throw in only piecemeal reforms of the cumbersome California Environmental Quality Act and the obstruction of needed new building is made even worse. Potential homebuyers are squeezed in a vise between artificially increasing demand and restricting supply through new anti-housing laws.
The worst damage from these new impositions was delayed until after the Great Recession of 2007-10. Add soaring interest rates the past two years and the damage is multiplied.
Repeal Prop. 13? No, just the opposite: Universalize it by revaluing all properties to 1976 assessments, plus 2% per year since. Then repeal AB 32 and SB 375 and advance major CEQA reform.
To afford a house in California shouldn’t require being a millionaire.
John Seiler is on the SCNG Editorial Board and blogs at: johnseiler.substack.com