To solve affordability crisis, Bay Area housing stock must grow 50 percent in 20 years
As of 2015, the median annual household income in San Francisco was $90,530, and the average market-rate apartment rent is approximately $3,600 per month, or $43,200 per year. By these estimates, the average market-rate apartment rent consumes about 48 percent of the median household’s annual pre-tax income. This is a staggeringly high rate: A more normal level is for housing to cost between 25 and 30 percent of pre-tax income. No wonder San Francisco has the lowest housing affordability in the nation, and almost one quarter of the population living below the poverty level when local housing costs are factored in. The figures differ by county but are similar throughout the Bay Area.
So what would it take for the Bay Area to bring its housing costs down to an acceptable level?
A 2016 academic analysis by David Albouy, Gabriel Ehrlich and Yingyi Liu estimated that, in general, rents decrease by 3 percent for each 2 percent increase in the housing stock. (This estimate is close to the estimate of a lengthy blog post analysis at Experimental Geography, done two years ago, looking specifically at San Francisco’s history over the last six decades.)
If our goal is to reduce the average market-rate apartment rent to 27.5 percent of median household income (the midpoint between the 25-30 percent range that is normal), that means reducing the rent from $43,200 to $24,895, a 42.4 percent reduction. Using our ratio of a 2 percent housing stock increase leading to a 3 percent decrease in rents, that means, keeping all else equal, the Bay Area would theoretically need to increase the number of housing units overnight by 28.3 percent. (Let’s round up to 30 percent to make the subsequent calculations more intuitive).
In reality, of course, housing is not built overnight. It will take many years for the Bay Area to make up its housing deficit, so we need to take into account the underlying trend growth of the U.S. population over the intervening period.
For example, if it takes 20 years to make up our housing deficit, and underlying trend growth for the U.S. population is 0.7 percent per year (15 percent over 20 years), and the average household size remains 2.3 persons, then the Bay Area will need to grow households 30 percent more than the amount of households needed to accommodate trend U.S. population growth (i.e. 30 percent more than the underlying 15 percent population growth), for a total growth of housing stock of approximately 50 percent over 20 years.
Let’s state it plainly: The Bay Area must increase its total housing stock by 50 percent over the next 20 years to bring affordability down to a reasonable level.
