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. After visiting friends in California and falling in love with the state, she 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). Pat’s story is not unique — this is the reality of many people trying to find housing in the Bay Area, a region of California also known as Silicon Valley. So, why are people like Pat unable to find housing today? The simple answer 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). 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). 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 purchase the good. 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.

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, rising housing prices in the Bay Area contribute to many adverse effects. So, what can be done? While some might argue that the solution to the Bay Area housing crisis involves action through demand and price controls, I argue that a more effective response would be to increase the housing supply through national or state-level initiatives.

First, let’s explore a price-based intervention that appears to work in the short term but demonstrably fails in the long term: rent control. 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. A 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 finds 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 issue of housing affordability in the long run.

Whereas rent control caps prices, another candidate solution seeks to reduce demand by restricting home purchases to citizens, a strategy whose drawbacks will be outweighed by the slight price decrease it could cause. Those who back this solution state that the demand for housing is drives prices to unreasonable levels, and the foreign buyers are the ones who drive demand too high. This new argument has already taken foot in Canada. Our northern neighbor, in particular, has vowed to enact 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 about the benefits and drawbacks before making such a decision.

In the case of the Bay Area, banning foreign buyers from purchasing real estate will be problematic since Silicon Valley thrives and relies on globalization. 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 a 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.

As shown, both demand and price controls are unlikely to bring about a long-lasting solution to the housing crisis. 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 has Japan done that Silicon Valley has failed to do?

Unlike the Bay Area, Japan has been able to increase the supply of housing by loosening its zoning restrictions. In Japan, landowners can build whatever type of building 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). As a result, the market for housing in Japan saw a large amount of housing supply built amidst the rising prices before the bill was passed. As housing supply continued to increase to meet demand, housing prices continued to remain stable. 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. Once a high-density establishment with affordable housing is proposed, community members pressure city officials to stop development because these activists argue 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. It is also true that when Tokyo rezoned their land, there was also community opposition to high-density housing. So, how did Tokyo get over this problem?

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, unlike in the US where many of the housing initiatives originate from cities themselves. As such, many of those who oppose high-density housing have much more power in their respective cities compared to the federal government. As such, “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 will give cities more incentive to withstand community opposition. 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 whatever they want on their properties. Currently, many cities in the Bay Area are exclusively zoned for low-density single-family housing. If these restrictions were to be removed, this would increase the supply of housing, as it would allow developers to build high-density housing. Second, the federal government should incentivize local governments in the Bay Area to relax housing regulations. According to Raetz, “additional local regulations and lengthy review processes specific to the Bay Area may also add to the cost of construction…Moreover, workforce procurement rules — such as San Francisco’s Small Business Enterprise, Local Business Enterprise, and local hire requirements…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” (15). While these regulations are noble 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 and decrease the cost of building new housing, which brings 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). This means that developers are free to develop any type of housing they want, which may incentivize more supply to be built. Therefore, the solution to housing affordability in the Bay Area is to adopt policies from Tokyo, mainly by involving the federal or state 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. While there will inevitably be harm to existing homeowners, the current situation where homeowners have a massive advantage over non-homeowners in the Bay Area, and the sheer unaffordability of housing in the Bay Area demands more attention. No solution is perfect, but I argue that a supply-side solution preserves the spirit of globalization that the Bay Area relies on while delivering meaningful progress towards increasing housing affordability.

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