Many people stay off the coast of California.
In the seas, there are boats that are not even sea-worthy.
Clusters of these boats remain anchored to the same spot.
They belong to people who stay on the boats and commute to the mainland for work, shopping, leisure, etc.
The boats are a touchy topic.
For those living on land, they are an obstruction. Some call them a security risk.
To those living in the boats, this is the reality of living in California.
California real estate is prohibitively expensive.
So expensive that even people with decent wages have to live as though they’re unemployed.
Technically, this living-on-boats is not legal.
The rules require the boats to not stay anchored for more than 72 hours. Some have started taking action against these boats, and their number is reducing.
This is just one manifestation of California’s insane real estate market.
There are many others.
Every now and then, social media has mentions of a well-paid salaried employee of a big-tech company living in a parking lot in a van because of high rents.
Since rents are so astronomical, sleeping pods are available for a monthly rental.
Many absolutely dilapidated homes are selling for prices simply for the lot value. Buyers would tear the house down and rebuild all over again.
California is the home of some of the biggest tech companies in the world.
Does that explain why real estate is so expensive? How?
Working Class State
California was not always this expensive.
In fact, in the mid 1900s, it was a blue-collar worker’s paradise.
Right after World War 2 ended, soldiers were returning home and moving west to California.
Back then, it was relatively uninhabited. Cities like Los Angeles and San Francisco rapidly expanded. Trees were cut to make way for orchards.
People flocked to the state.
Homes in California were priced more or less the same as the rest of the country.
All good till here.
Then, a change was brought about.
The California governor signed a new act into force. California Environmental Quality Act (CEQA).
The aim was to protect the environment of California. It forced developers, factories, etc to study the impact of their project on the air, water, soil, and wildlife.
At the same time, CEQA became an excellent weapon in certain hands.
Residents realised that CEQA could be used to prevent development from happening. If a person didn’t like a new bigger apartment house coming up next to their bungalow, they could sue them using CEQA and drag the matter in court for years.
A few years later, Californian cities adopted rules to preserve their neighbourhoods’ ‘character’.
This essentially meant no high density homes. Only very large homes with a few people staying in them.
Duplexes and apartments could not be built in most parts of the cities.
The policy was to not allow density to build up. They said no to lots of people living in the same area.
As the economy of the state picked up, more people moved to California. But, thanks to building rules, the amount of land available for building homes remained fixed. And a lot of those land parcels already had homes built on top of them.
So there was scarcity.
Scarcity is how the price for anything goes up.
Prices Rise, Taxes Rise
Now, with lots of land locked out, and apartment-buildings effectively not allowed, California saw home prices shoot up.
But that’s fine if you already own a house, right?
Nope.
Since the home prices were rising, the property tax they had to pay was also rising.
And this pinched the retired the most.
The retirees would have originally bought the homes at a much lower price. In the meantime, the price had gone up, pushing their annual taxes up too.
The retirees are retired. Their income is not going to increase. Such senior citizens started to sweat seeing their tax bills.
The concern grew and became a public matter.
In 1978, California passed rules to remedy this problem.
The tax would not be applied based on the latest house prices. It would apply based on the last purchase price of the house.
So even if the real estate price grew, the senior citizens and retirees would not be burdened with higher taxes.
While on the surface this seems like a good solution, it created problems of its own.
People buy bigger homes when they have families. As they grow older and their children move out, they do not need to have large homes. So they sell and downsize homes.
This allowed older, larger homes to become available on the markets for younger families.
But doing this was prohibitive after the new property tax rule.
If a senior citizen sold their house and bought a new smaller house, they would need to pay higher taxes based on the latest house price.
So for them, it made sense to just stick to their old and big house. That way, they would continue to own their homes and pay very low taxes.
And thus, very big homes would barely ever come to the market.
That only made the scarcity even worse. Prices continued to climb up.
By the 1980s, California homes on average were about 80% more expensive than homes in the rest of the USA.
Tech Boom
As if those weren’t enough, California became the centre of global technology companies in the 1990s.
Some of the biggest companies in the world were headquartered in the state. They generated massive revenues and paid massive taxes.
They also attracted talented folks from across the world to work in their offices, in California.
These very talented employees were paid massive salaries. Of course these talented people wanted to continue to stay and work in California.
In order to do so, they needed homes. And thus, the prices kept getting pushed higher and higher. So high that even basic homes cost more than a million dollars today.
Since so many talented people were already living in California, it just became abundantly easy for new tech companies to hire in California.
So even more companies set up shop there. Those companies grew bigger. They hired more people (who were paid very well).
The cycle repeated and now you have examples of extremely well-paid tech employees living in vans in parking lots to save rent.
Investors
Regulations that practically prevent large-scale new homes, highly paid citizens, and a state everyone in the world wants to be in.
Sounds like an excellent recipe.
Many investors love the idea of owning homes in California.
So did many Private Equity (PE) firms.
During the post-2008 recession period, home prices actually fell about 40%. Not to the levels that they’d match the rest of the USA, but still low for California.
Not enough people had money lying in the bank to take advantage.
But many PE firms and other institutional investors bought homes in California in bulk.
These investors were attracted by the idea that the supply was limited. So the prices would always go up, or if they fell, they wouldn’t fall much.
And further, rents were always astronomically high in the state.
The investors wanted to earn rents from these homes. They did not really have intentions to sell the homes.
And thus, even more homes went away from the markets.
The scarcity grew even more.
The problem of California’s real estate market seems like a bubble to some.
The scarcity of land is artificial. It’s not like a small island that is forced to have more people. It is the regulations that are preventing land from being available.
The scarcity is artificial and man made. Not natural. Technically speaking, it can be easily solved.
So it feels like it’s only a matter of time before regulations allow more buildings to come up.
Right?
There are a few markets around the world that operate similarly. Their prices are held up artificially.
And yet, many of them have not popped. They regulators continue holding on to their argument. Homes continue being expensive.
In the 2020-22 period, interest rates were reduced to near 0% levels. Taking loans was very cheap.
Many home buyers used that opportunity to buy homes in California.
The story of California’s real estate boom is often confusing to investors.
Is it a bubble? Or is it a real price?
There are many opinions. But nobody can give a definitive answer.
We will know if it is a bubble only after it pops. Else, we might just continue debating the matter.
Sometimes, very high-return investments are like this.
It’s hard to say if it is a bubble or real.
Quick Takes
+ India’s wholesale inflation rose to 1.81% in Jan (vs 0.83% in Dec).
+ India’s unemployment rose to 5% in Jan (vs 4.8% in Dec).
+ India’s merchandise exports rose 0.6% year-on-year to $36.56 billion in Jan while imports rose 19.2% to $71.24 billion. The trade deficit widened to $34.68 billion.
+ The central government approved multiple road and rail infrastructure projects in Maharashtra, Gujarat and Telangana with a total cost of around Rs 11,000 crore. It also approved a Rs 18,662 crore underwater road and rail tunnel under the Brahmaputra in Assam.
+ Fractal Analytics IPO listed on the stock exchanges at a discount of 2.67% to its issue price and closed 5.87% down at the end of the day.
+ Aye Finance IPO listed flat on the stock exchanges and closed 0.07% down at the end of the day.
+ The National Green Tribunal gave the go ahead for India’s Great Nicobar Infrastructure Project worth around Rs 80,000 to 90,000 crore. The project has been delayed since 2023 due to several environmental concerns.
+ Tamil Nadu signed 2 MoUs totaling Rs 5,980 crore with Aequs Group and Japan’s MinebeaMitsumi for investments in the aerospace and semiconductor sectors.
+ India and Israel have signed an MoU to expand defence ties between the countries.
+ India’s forex reserves rose by $8.66 billion to $725.73 billion in the week that ended on 13 Feb.
+ India’s manufacturing PMI rose to 57.5 in Feb (vs 55.4 in Jan) as per preliminary estimates. Services PMI fell marginally to 58.4 (vs 58.5 in Jan). Composite PMI (manufacturing + services) rose to 59.3 (vs 58.4 in Jan). This means economic activity rose more in Feb than in Jan.
+ India’s infrastructure output of 8 core industries grew 4% year-on-year in Jan (vs 4.7% in Dec).
+ The India-US trade deal is expected to come into effect in April 2026: Commerce and Industry Minister
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest