Why mansions are artificially cheap
And how you’re paying for them
Mansions are artificially cheap? That may seem strange. Mansions are, after all, by and large expensive things. In fact, one often suspects their very expensiveness is their chief function, the better to show off the occupant’s wealth. But I’m going to argue that they are, actually, a lot cheaper than they ought to be.
Consider the buildings below: a mansion on a 1 acre lot in Atherton, and a 350 unit mixed use condo on a 1.6 acre lot 2 miles further up the peninsula in Redwood City. The mansion just sold for $6m. The condo building, when finished, will probably fetch hundreds of millions.
If it weren’t for Atherton’s zoning code, you’d never be able to buy that mansion for a mere $6m. A developer that wanted to tear it down and build condos could bid far more than that. But the zoning code mandates single-unit buildings with a floor area ratio below 18% on lots of at least 1 acre, so $6m it is. Quite the bargain.
Now and again, somebody manages to cobble together rent for an Atherton mansion by forming an ad-hoc commune, but generally speaking, the zoning code is working exactly as intended: the people that live in Atherton determine the zoning that determines who gets to live in Atherton, so the process perpetuates itself.
And this comes at the expense of people who want to buy condos or rent apartments. Since so few are available, and the market allocates them to the people with the deepest pockets, only people with deep pockets can buy or rent an apartment in the mid-Peninsula.
The case of Atherton is, of course, extreme. Atherton has the highest median household income of any city in the nation. Of course it’s going to be an elitist sort of place.
The same effect happens in San Francisco, too, though. Here’s three ways a similar 25' wide lot (standard in the Western Neighborhoods) can be used: a 1 unit building, a 5 unit building, and a 24 unit building.
That house is selling for $895k, and the 5 unit building for $2m, which works out to $400k per unit. If it were easy to buy the house and know for sure that you could knock it down and replace it with a 5 unit building without delays or uncertainty, somebody looking to buy it just to live in it would have to compete against developers that could pay a lot more than $895k.
The house is kept artificially cheap, though, because the city makes it hard to just knock down a house and replace it with a 5 unit building, let alone a 24 unit building. If it were easier to do so, the house would cost a lot more. And if nobody were willing to pay that much for a house, it just might be turned into a larger number of cheaper units.
This story was also published on the Tech4Housing blog.
