Home prices have reached an all-time high in Los Angeles and rents have become increasingly unaffordable for the majority of the city’s residents. The UCLA Anderson School of Management believes that the situation is unlikely to change in the foreseeable future.
Supply and demand
The UCLA report revealed that six of the seven most unaffordable cities in the United States are located in California and three are in Southern California. This doesn’t mean that LA is the most expensive housing market in the country; home prices are still more exorbitant in places like San Francisco and New York City.
The unaffordability rating is based on the ratio of the median home price to the median household income in LA. While home and rental prices have surged in the past several years with rental rates increasing at a rate of 4%; the average income is still too low, making it continually difficult for residents to pay rent or pay down their mortgages.
The report also notes that home prices and rental rates are correlated and that both will continue to increase, due in part to the lag in new housing development.
Moreover; job creation outpaced new home construction in LA and other nearby cities from 2014 to 2016.
Other contributing factors
Low housing inventory has definitely compounded the situation. Census data indicate that new construction housing units increased by a paltry 0.47%, or 16,600 new units in 2016 throughout LA County compared to an average 0.68% increase nationwide.
Builders cannot keep up with the city’s rapidly growing population and they cannot build homes fast enough. The high cost of land and the low profit margin also means that they face a high level of risk when undertaking real estate projects in the city.
That is, if they even get permits in the first place; with the California Environmental Equality Act (CEQA) in place, builders must undergo a stringent approval process that evaluates the project’s environmental impact. The process causes delays in development and also prevents certain projects from even getting started.
In 2016, Governor Edmund Brown proposed a bill that will allow builders to circumvent additional CEQA requirements as long as they meet zoning requirements and dedicate a certain number of units to low-income residents. The bill was heavily criticized by residents and community groups.
A strong Not-In-My-Backyard culture has also prevented housing developments from moving forward, with residents opposing projects that are incompatible with the architectural character of their neighborhoods, block city views and impact the community.
Rapid gentrification has also priced many residents out of the market and the vacancy rate for rental properties still remains quite low at 2.6%.
An oversupplied luxury rental market
Despite the languid pace of new housing development, however, the luxury rental market is likely oversupplied. This means that rental rates for upscale housing units may decrease, which is positive news for middle-class to upper-class renters.
Another UCLA report released early this year predicts that builders might be hesitant to take on luxury real estate projects as a result, further slowing down the rate of development in the city.
