How to Remedy Silicon Valley’s Red-Hot Housing Market?

Today, the Bay Area faces a housing crisis on an unprecedented scale. Take Pat Swan, who grew up in Wisconsin and, after visiting friends in California and falling in love with the state, moved to the Bay Area in 1989. However, Pat, now 62, has lived in a rent-controlled studio apartment for 20 years. In preparation for retirement, Pat wanted to move to another more spacious apartment with a yard. Unfortunately, Pat is unable to find any sort of housing that meets her criteria and is affordable. “‘I should have tried to buy something long ago, but I never made that much of a salary until the last few years,’ Swan said. She’s looked as far north as Cloverdale and as far south as Paso Robles (San Luis Obispo County), with little luck. ‘California is pricing people out’” (Garofoli). Imagine being unable to find a decent apartment that has space for a small yard in almost the whole state of California. This is the reality of many people living in the Bay Area, a region of California also known as Silicon Valley. Many who want to upsize or move into the region are met with the astonishingly high cost of housing that only a few could dream of affording. Pat, while unable to afford an apartment in our present day, hinted that housing in the Bay Area was more affordable not long ago. So, what changed?

The simple answer of why the Bay Area is so expensive is that supply has not caught up to demand. “Overall, California’s household population has been growing at a faster rate than its housing supply. Between 1990 and 2017, the population expanded 33.4 percent whereas the housing supply has only increased 25.8 percent, or about 32 new housing units for every 100 new residents” (Niehaus, 8). When there is more demand than supply for a good like housing, the price of it rises because only those who are willing to pay the most will be able to buy housing. This increase in demand can be partially explained when “the state economy then started a strong expansion that persisted through the rest of the 1990s. This growth spurt coincided with the birth of the internet age as Silicon Valley companies claimed market dominance in a number of fields” (Niehaus, 3). One may ask, why has supply not caught up if house prices are soaring? According to Niehaus, “despite broad public support for housing policy reform in general, the state’s regulatory landscape, natural geographic constraints, and political climate make it difficult to address these issues in a meaningful and sustainable way. Local land-use regulations often severely limit the number of new residential housing units. Besides basic physical barriers (e.g., ocean and mountains) and local infrastructure utilized near capacity, California also has higher construction costs than most of the U.S” (1). While housing becoming more expensive might not sound like a big deal, it has real negative impacts on citizens who struggle to buy or afford a place to live. While some might argue that the solution to the Bay Area housing crisis involves looking at the issue by artificially reducing demand for housing, I argue that, through a global perspective, find a supply-side solution that is more effective because we can learn from other cities that have solved their housing crises.

A high cost of rent can be detrimental to families because the funds that would be spent on necessities or other areas must be funneled to pay rent. This has a wide range of negative effects, as “higher costs also incentivize renters to take on roommates, move to outlying communities, or relocate out of the area. Households with high rent burdens have less disposable income to save or spend on other forms of consumption, thus reducing local demand for goods and services as well as limiting their ability to absorb economic shocks. Additionally, high housing prices may also delay major milestones for renters and prospective first-time homebuyers, such as marriage and having children” (Niehaus, 1). As evidenced, higher costs of rent will cause people who are struggling to have issues in all areas of their lives. In extreme cases, those who are unable to afford a home can eventually become homeless, which is a major reduction in well-being for these individuals. “The Bay Area’s homeless population today is larger, less sheltered, and growing faster than ever before. Between 2017 and 2020, the Bay Area’s homeless population grew by 6,878 individuals to a total of 35,118 — accounting for more than a quarter of the growth in the total U.S. homeless population” (Bellisario, 4). Clearly, the rising housing prices in the Bay Area contribute to many adverse effects.

One commonly suggested solution to the housing problem in the Bay Area is to simply lower the cost of renting by imposing more stringent rent control. The general idea of rent control is to set the upper bar on how much landlords can charge rent for certain properties. While proponents of this plan may point out that rent control does help renters in the short run, it harms the overall availability of affordable housing in the long run, according to a study done. The study finds that “leveraging new data tracking individuals’ migration, we find rent control limits renters’ mobility by 20% and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15% by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law” (Diamond, 1). The study does find that while imposing rent controls on the housing market may help some tenants in the short run by preventing eviction, the long-run effect of rent control is not desirable. In the long run, rent control causes landlords to pull their rental properties off the market to either sell or repurpose them because it is more profitable than renting them out. The researchers found that the net effect of this drove up the price of housing in the long run, which indicates that more stringent rent control, while an appealing short-term solution, only deepens the issues in the long run.

However, others argue that the demand for Bay Area homes is driving the price to unreasonable levels and that the foreign buyers are the ones who drive the demand. This new argument has already taken foot in Canada. Our northern neighbor, in particular, has enacted a two-year ban on real estate purchases by foreign buyers in an attempt to control their rising home prices. Some may take this and apply it to the Bay Area, where foreign investment into Silicon Valley real estate has indeed caused housing price inflation. According to Gorback and Keys, “ house prices grew 8 percentage points more in U.S. zipcodes with high foreign-born Chinese populations after 2011, subsequently reversing with the onset of the U.S.–China trade war” (1). In addition, “news sources report that Chinese capital has flowed disproportionately to cities known to have higher than average shares of residents of Asian descent, such as Melbourne, Sydney, Vancouver, San Francisco, and Seattle” (Gorback & Keys, 9). The study shows that the Bay Area is a hot area for foreign investment into real estate, which has only exacerbated the housing shortage. In addition, “Among foreign buyers who lived in the U.S., 68% purchased the property for primary residential use. On the other hand, 65% of foreign buyers who lived abroad purchased a property for use as a vacation home, to rent out, or for both purposes” (Yun, 21). This source finds that foreign buyers are less likely to make their recently purchased Bay Area property their primary residence; rather, it seems that some foreign buyers intend to treat these houses as investments. In the wake of the Evergrande Crisis, where the large Chinese property developer is now in financial trouble and house prices in China are uncertain, foreign investors may want to flee to the relative safety of the US real estate market. Therefore, it seems that not only are foreign buyers increasing the price of homes in the Bay Area, but they are also doing so to generate a return on their investment while potentially leaving these houses vacant. While it might seem easy to block foreign buyers or impose taxes to prevent them from buying homes in the Bay Area like in Canada, we should think critically before making such a decision.

There is one main problem in banning foreign buyers from purchasing real estate in the Bay Area. The problem is that Silicon Valley thrives and relies on globalization, and an attempt to restrict foreign investment may cause more harm than good. First, let’s establish why globalization is so vital to the Bay Area. “But it is the economy, more than demography and land area, that marks the Bay Area as a star of the economy it is the electronics and information technology capital of the world. Silicon Valley has long been acknowledged as the most important global hub of electronics, and with the arrival of the internet it became the leading force in information technology” (Walker, 562). In addition, “The first companies to build assembly plants in Southeast Asia were from Silicon Valley (National Semiconductor and Hewlett Packard). The Bay Area’s large companies are fully globalized operations that integrate enormous systems of production, design, sales and trade. Apple’s global empire reaches into dozens of countries” (Walker, 574). This shows that the Bay Area is not only a place that has global impact, as the technology and software that is created here is used by users around the globe, but also that the Bay Area is also a leader in advancing globalization. We can see this through the fact that many technology companies in the Bay Area were the first to build assembly plants in Southeast Asia. In addition, Silicon Valley draws heavily on global talent, with “…more than 50 percent of computer scientists with graduate degrees employed in the country today were born abroad, as were nearly 70 percent of enrolled computer science graduate students” (Zwetsloot, 1). Therefore, a ban on foreign homeownership is likely to hit the Bay Area negatively in two ways. First, Bay Area may be seen as a less open place for global collaboration, and as a result, global companies may choose to focus their efforts elsewhere. Second, the Bay Area will lose much of its tech talent because these employees will be unable to live in the Bay Area long term, which could detriment Silicon Valley as a whole. Suppose Silicon Valley is seen as a less desirable place to work and live. In that case, housing prices might go down because the area is not desirable anymore, not because there has been a reduction in foreign investment. Such a change would cause the unique space that is the Bay Area to deteriorate, which may make life more unpleasant for everybody involved, as the job market may contract and the culture of the Bay Area may shift. Similar to how rent control may work in the short term, banning foreign investment may provide temporary relief. However, there is still light at the end of the tunnel. While globalization may contribute to the housing crisis, it can also offer us solutions to our current predicament.

We have seen that the Bay Area is an attractive destination for many, and trying to curb such demand is unwise. Therefore, we may attempt to fix the other half of the housing market — supply. If we were to pursue such a solution, we could look at the problem from a global perspective to fine-tune a solution for the Bay Area. One global city that has been able to keep housing prices stable over the past few years due to a supply-side solution is Tokyo, the capital of Japan. Tokyo has been able to keep housing prices extremely stable even as its population has grown tremendously. “In Minato ward — a desirable 20 sq km slice of central Tokyo — the population is up 66 percent over the past 20 years, from 145,000 to 241,000, an increase of about 100,000 residents. In the 121 sq km of San Francisco, the population grew by about the same number over 20 years, from 746,000 to 865,000 — a rise of 16 percent. Yet whereas the price of a home in San Francisco… has increased 231 percent…Minato ward has absorbed its population boom with price rises of just 45 percent” (Beyer). Clearly, if building more housing works so well in Japan, what makes it so special?

Unlike the Bay Area, Japan has few zoning restrictions, so anybody can build what they want on their land. To explain in more detail, Japan “…passed the Urban Renaissance Law. The law stripped municipalities of the ability to control private property. As a result, owners can build a variety of uses on their land, regardless of resistance from local bureaucrats or neighbors” (Beyer). Unlike Japan, the Bay Area still has very restrictive zoning regulations and fierce opposition to building high-density affordable housing from community members under the NIMBY (not in my backyard) movement. Yet, one of the main driving arguments behind the NIMBY argument is that building more high-density housing reduces “neighborhood character.” However, Beyer states that most cities that are considered desirable by those who support NIMBY “…were mostly built during an era of laissez-faire land-use policy, before the implementation of zoning laws. This meant they developed spontaneous urban patterns that were dense, diverse, complex, walkable, and in many cases, charming. According to Harding, this unregulated strategy is producing the same effect in Tokyo.” This clearly shows that it is not strict zoning that creates neighborhood character, but rather that natural patterns of urban development led to what NIMBY activists might call desirable. Many attempts to build housing and size-up zoning laws allowing for higher-density housing have all been shut down by supposed community activists. So, what has Japan done that the US hasn’t?

What Japan has done differently is involve the federal government in the issue of housing. The law that Japan passed came from the federal government, yet many of the housing decisions fall onto the local and state governments in the US. In addition, “left to their own devices, local zoning authorities tend to block homebuilding, especially when it entails filling in existing neighborhoods. But many of them will welcome housing abundance if their budgets depend on it. Establishing state or federal incentives that reward cities for allowing more housing can make a huge difference; it can give local officials the courage to withstand pressure from housing obstructionists” (Durning). What the author is suggesting is that the federal government should step in and try to increase the supply of housing, as they have more ability to withstand those who oppose building more housing. In addition to offering incentives to build more housing to local governments, the US should learn from Tokyo and make it so that developers can build what they want on their properties. This would increase the supply of housing, as it would allow developers who have been restricted to building low-density housing to instead build high-density housing, which will increase the number of open units available. Second, the federal government should incentive local governments in the Bay Area to relax housing regulations. “Additional local regulations and lengthy review processes specific to the Bay Area may also add to the cost of construction. For instance, while raw materials costs are relatively similar across the state (notwithstanding variation in transportation costs), local regulations that require certain materials or building components can contribute to the costs of materials. Moreover, workforce procurement rules — such as San Francisco’s Small Business Enterprise, Local Business Enterprise, and local hire requirements — reflect worthy policy goals; they may also result in restricting the labor pool for projects, particularly in a region where living costs are so high that few construction workers can afford to live locally” (Raetz, 15). While these regulations are good goals, the more pressing issue is that there is a severe shortage of housing. Therefore, in the short term, these regulations should be relaxed, which would speed up the development of housing and decrease the cost, which is beneficial to bringing more supply onto the market. In addition, new housing itself doesn’t have to be affordable in order to help stabilize housing prices. According to a UCLA meta-analysis, “five [studies] find that market-rate housing makes nearby housing more affordable across the income distribution of rental units, and one finds mixed results” (Phillips, 1). Therefore, the solution to housing affordability in the Bay Area is to adopt policies from Tokyo, mainly by involving the federal government to establish incentives to build more housing and remove zoning restrictions on building higher-density housing in order to increase the supply of housing.

While some might argue that a collapse in housing prices would be detrimental to people living there, I believe looking at houses as an investment vehicle first and a necessity second has caused a lot of people to oppose building more housing when they are the only ones benefitting from high house prices. Take iPhones, for example. Nobody is complaining about iPhones getting better and how newer iPhones decrease the value of our current phones. We all welcome technological progress when it comes to phones, or else we would be all stuck using flip phones. We don’t complain about our old phones decreasing in value because we benefit from better phones coming out because when we want to upgrade our phones, we can get a better experience. In addition, we don’t think of our phones as investments but rather tools that we use that provide utility to us. I think we should think of houses in a similar fashion. While a house may be a good investment vehicle, some residents’ obsession with protecting property values has caused them to forget that housing is a vital part of many people’s well-being that should not be denied.

In conclusion, while globalization may be partially to blame for the housing crisis in Silicon Valley, the issue should not be solved by blaming global citizens as drivers of this housing price mania. Instead, we should draw on global solutions to solve the housing crisis to preserve the ideals of globalization that the Bay Area represents.

Works Cited

Bellisario, Jeff, ‘Bay Area Homelessness New Urgency, New Solutions’, Bay Area Council Economic Institute, 2021

Beyer, Scott, ‘Tokyo’s Affordable Housing Strategy: Build, Build, Build’, 2018 <https://marketurbanismreport.com/blog/tokyos-affordable-housing-strategy-build-build-build> [accessed 29 November 2021]

Diamond, Rebecca, Tim McQuade, and Franklin Qian, ‘The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco’, American Economic Review, 109.9 (2019), 3365–94 <https://doi.org/10.1257/aer.20181289>

Durning, Alan, ‘Yes, Other Countries Do Housing Better, Case 1: Japan’, Sightline Institute, 2021 <https://www.sightline.org/2021/03/25/yes-other-countries-do-housing-better-case-1-japan/> [accessed 29 November 2021]

Garofoli, Joe, ‘California Exit Interview: She Doesn’t Want to Leave. She May Not Have a Choice’, San Francisco Chronicle, 2021 <https://www.sfchronicle.com/politics/article/California-Exit-Interview-She-doesn-t-want-to-16004832.php> [accessed 28 November 2021]

Gorback, Caitlin S., and Benjamin J. Keys, Global Capital and Local Assets: House Prices, Quantities, and Elasticities, Working Paper Series (National Bureau of Economic Research, June 2020) <https://doi.org/10.3386/w27370>

Niehaus, Robert D, ‘California Housing Trends’, 2018, 24

Phillips, Shane, Michael Manville, and Michael Lens, ‘Research Roundup: The Effect of Market-Rate Development on Neighborhood Rents’, 2021 <https://escholarship.org/uc/item/5d00z61m> [accessed 29 November 2021]

Raetz, Hayley, Teddy Forscher, Elizabeth Kneebone, and Carolina Reid, ‘The Hard Costs of Construction: Recent Trends in Labor and Materials Costs for Apartment Buildings in California’, 2020, 25

Walker, Richard, ‘Tech City: Myths of Silicon Valley and Globalization’, Annales de Geographie, 723724.5 (2018), 561–87

Yun, Lawrence, ‘International Transactions in U.S. Residential Real Estate’, National Association of Realtors, 2020 <https://www.nar.realtor/sites/default/files/documents/2020-international-transactions-in-us-residential-real-estate-08-06-2020.pdf>

Zwetsloot, Remco, Roxanne Heston, and Zachary Arnold, ‘Strengthening the U.S. AI Workforce’, Center for Security and Emerging Technology, 2019, 38