Causes and Effects of High House Prices in San Francisco

How High are the San Francisco House Prices?

San Francisco is world-renowned for their astronomical house prices. With an average sale price of US$1.45 million1, it ranks second in most expensive homes in America2, trailing only behind San Jose which is located 50 miles South East of the city. In the last decade following the 2007-2009 housing crisis, house prices have over doubled in value meaning that now it is predicted that one will need to earn at least $172,000 a year to afford a home there3. The housing market in San Francisco is so inflated that in 2018 it was thought that there was a severe risk of a possible housing bubble, as it ranked a 1.44 in the Union Bank of Switzerland’s (UBS) annual Global Real Estate Bubble Index (a score of 1.5 is considered “dangerously overpriced”)4. Although the risks of a housing bubble have dropped recently, there is still a worrying possibility of a housing market crash.

Figure 1. Median House Price

Within San Francisco, there is some differentiation between the zip codes across the city. As shown in Figure 2, the most expensive zip code is 94123 with a median sale price of US$2,275,000 due to its stunning overlooking view of the Golden Gate and newer condo projects. Compare this to the cheapest zip code (94124) which had a median home sale price of slightly over US$650k – the equivalent of the average home in Los Angeles. There are several reasons for the recent astronomical rise in real estate value in San Francisco, and there are also a large range of effects on both the residents and the city itself.

Figure 2. House Prices Within San Francisco5

Causes

A. Environmental Factors

One environmental influence on the inflated house prices of San Francisco is the lack of space. The city covers just 49 square miles and is hemmed in at three sides by the Pacific Ocean and the San Francisco Bay6. With a high population density of 17,250 per square mile, there is very little land and space available for residential development. Moreover, the only form of transportation available across the waters are the bridges, making travelling into San Francisco extremely inaccessible and time consuming. This strongly encourages people to buy a house inside the city rather than in the surrounding areas as most don’t want to experience the traffic twice a day for 33 minutes (the average commute time7). Therefore, demand for housing in the city is highly inelastic as there are very few alternatives because people would rather pay higher prices than sit in traffic for a larger proportion of their day.

Another environmental reason for the high house prices is the threat of earthquakes. San Francisco lies directly over the continental plate boundary of the San Andreas Fault and has an experience of severe earthquakes; the last one occurred in 1906 destroying 500 city blocks and 28,000 buildings making over half the population homeless8. With the lack of space available, a customary solution would be to build up and increase the supply of housing with skyscrapers. However, with a risk of a possible repeat of the disastrous 1906 earthquake, a significant amount of ‘red tape’ surrounds and restricts the development of high rise buildings. Consequently this denotes a substantial increase in the price of constructing buildings meaning people would rather buy existing property than pay the extraordinary costs of building from scratch. Amid the housing crisis, the increasing costs of architecture has seen the construction of new housing to foreshorten in recent years as the number of new units built plummeted by 41% between the years 2017 and 20189. San Francisco also has a building height zoning system for the entire city with the areas in yellow disallowed to have buildings taller than 40 feet. This further reduces the availability of housing as there is a cap to how many houses that are able to be built in certain areas.

Figure 3. Building Height Zoning in San Francisco10

B. Silicon Valley

South East of San Francisco lies one of the world’s leading areas for technology, innovation and intelligence. Attracted by the cutting-edge research, the proximity to both suppliers and customers and the availability of a highly educated workforce from Stanford, it is now home to 2,000 tech companies11. Due to the fierce competition between the mammoth corporations such as Apple, Google and Tesla, companies must shell out very generous salaries in order to lure the best ‘techies’ to work for them. As prices rose almost exponentially in and around the Silicon Valley area, the employees of these companies decided to move into the surrounding areas such as San Francisco with their sizeable pay checks. The tech industry alone accounts for over 30% of San Francisco’s job growth since 201012 and with an average wage of $122k13, it skyrocketed prices in not just the housing market but for other sectors as well.

Figure 4. San Francisco Bay Area House Prices14

C. Supply and Demand

Ultimately, any economic problem boils down to a simple supply and demand graph. The demand for houses in San Francisco has been increased significantly by the wealthy tech employees moving in from Silicon Valley. On the supply-side, as I mentioned previously, simply not enough houses are being built. Out of the 390,000 housing units in San Francisco, nearly half of them were built before 1940 which reiterates the scarcity of new housebuilding occurring in the city3. Additionally, there is a question over the types of homes that are being built. Only a quarter of new housing built in 2018 was deemed ‘affordable housing’9 and since 2007, San Francisco has built 190% more luxury housing compared to only 18% more middle class housing15. Therefore, the housing shortage problem could lie not with the number of houses being built but the types of housing being built.


Effects

A. Homelessness

One direct effect of the exorbitant house prices is the chronic problem of homelessness in and around San Francisco. It is estimated that there are over 8,000 people living on the city streets16 and although drug addiction and mental health is one cause, the lack of affordable housing further increases the numbers. As shown in the choropleth map below, the highest number of homeless people are located in Bayview where there is also the highest percentage of affordable housing units. This suggests that a proportion of the homeless population in Bayview is made up of former residents of the city’s public and affordable housing units. Because of the large numbers of homeless people in San Francisco, it contributes to it being the nation’s ninth dirtiest city17. After one NBC survey in the downtown area, the number of drug needles, garbage and faeces was comparable to that of the ‘world’s poorest slums’18.

Figure 5. San Francisco’s Homeless Population in Relation to Housing19

B. Residential Segregation

By 2015, the proportion of African Americans in San Francisco was lower than the levels before World War One20. As represented by Figure 6, African Americans have been pushed out to Bayview by the high house prices along with historical reasons such as when the city used to heavily enforce racial zoning laws. Traditionally, lower-skilled jobs that receive lower incomes (for example support staff like carpenters, cleaners and electricians) in America are made up of people of Hispanic or African origin. As these households are not earning as high a salary, they are being priced out of their homes and economically forced to move to more affordable areas such as Bayview and Hunters Point. Compare this with Figure 2 which shows the zip codes with highest house prices, white people are very dominant in the areas where it is most expensive (for instance the Northernmost area of 94123). There is also a very high concentration of Asian Americans in the West Sunset District; this is due to chain migration, rich Shanghai businessmen being able to afford the house prices and then renting them out and because Asian migrants usually buy the houses in pools so that the expense is shared21. Cumulatively, the extortionate house prices in San Francisco has led to a more residentially segregated city which could lead to further problems such as ethnic tension.

Figure 6. Ethnic Diversity in San Francisco

C. Hyper Gentrification

The entire Bay Area has felt the effects of the rising house prices in the form of gentrification. Oakland, located across the bay to the East, is one city that has experienced the full force of the housing crisis. Only forty years ago, Oakland was the home to the ‘Harlem of the West’ corridor and almost half of its population was African American. In under half a century later, black residents make up only 16% of the population22. People of lower incomes have found it the norm to be evicted from their homes and then struggle to find other affordable places to live, often having to move in with relatives. Those that are moving in aren’t bothering to fit into the present culture and usually the new developments are gated, exclusive and uninviting. Although gentrification can be considered a benefit to an area as the increased salaries can improve the city’s infrastructure and image, it is also extinguishing the historical identity of places such as Oakland

Figure 7. Income Needed to Afford a Median Priced Home in the Bay Area

Endnotes

1. Inc, Z. (n.d.). San Francisco CA Home Prices & Home Values. Zillow. Retrieved 28 May 2020, from https://www.zillow.com:443/san-francisco-ca/home-values/

2. Dishman, L. (2019, November 4). These 10 cities have the most expensive homes in America right now. Fast Company. https://www.fastcompany.com/90426550/these-10-cities-have-the-most-expensive-homes-in-america-right-now

3. McCamy, L. (n.d.). 11 facts about San Francisco’s housing market that will make you glad you live somewhere else. Business Insider. Retrieved 28 May 2020, from https://www.businessinsider.com/san-francisco-housing-market-facts-rent-2019-5

4. Brinklow, A. (2019c, October 2). SF housing bubble risk down—but still worrisome. Curbed SF. https://sf.curbed.com/2019/10/2/20894923/sf-housing-bubble-risk-prices-2019-index-homes

5. San Francisco Home Prices Reach All-Time High. (n.d.). Retrieved 28 May 2020, from https://www.propertyshark.com/Real-Estate-Reports/2015/08/04/q2-san-francisco-housing-market-report/

6. San Francisco | History, Population, Map, & Facts. (n.d.). Encyclopedia Britannica. Retrieved 28 May 2020, from https://www.britannica.com/place/San-Francisco-California

7. Brinklow, A. (2019b, July 31). San Franciscans stuck at work, in traffic longer than almost any city. Curbed SF. https://sf.curbed.com/2019/7/31/20748288/hardest-working-cities-san-francisco-commute-times-average

8. Fuller, T., Singhvi, A., & Williams, J. (2018, April 17). San Francisco’s Big Seismic Gamble. The New York Times. https://www.nytimes.com/interactive/2018/04/17/us/san-francisco-earthquake-seismic-gamble.html

9. Brinklow, A. (2019a, March 21). San Francisco housing construction down 41 percent in 2018. Curbed SF. https://sf.curbed.com/2019/3/21/18275965/sf-housing-inventory-2019-construction-new-affordable-data

10. Russell, K. (n.d.). This One Intersection Explains Why Housing Is So Expensive In San Francisco. Business Insider. Retrieved 28 May 2020, from https://www.businessinsider.com/why-housing-is-so-expensive-in-san-francisco-2014-4

11. Analysis, & Amadeo. (n.d.). 5 Reasons Why No One Can Copy Silicon Valley’s Success. The Balance. Retrieved 28 May 2020, from https://www.thebalance.com/what-is-silicon-valley-3305808

12. Ryder, S. (2018). The Effects of Silicon Valley Companies on the Bay Area Housing Crisis [Columbia University]. https://doi.org/10.7916/D89S37HH

13. Silicon Valley’s typical tech worker makes $122K per year. (n.d.). Retrieved 28 May 2020, from https://www.bizjournals.com/sanjose/news/2018/11/05/median-pay-goog-fb-csco-intc-orcl-crm-twtr-tsla.html

14. The Uneven Housing Recovery. (2013, December 17). SPUR. https://www.spur.org/publications/urbanist-article/2013-12-17/uneven-housing-recovery

15. Rosenthal, L., Donovan, M., & Wagner, G. (n.d.). A Study of Housing Affordability in San Francisco for the NATIONAL ASSOCIATION OF REALTORS.

16. San Francisco’s homeless population is more visible than ever. Is it bigger? (2019, December 19). SFChronicle.Com. https://www.sfchronicle.com/bayarea/article/San-Francisco-s-homeless-population-is-more-14919590.php

17. Report Says San Francisco is Nation’s 9th Dirtiest City, But NYC Takes the Cake. (n.d.). NBC Bay Area. Retrieved 28 May 2020, from https://www.nbcbayarea.com/news/local/report-says-san-francisco-is-nations-9th-dirtiest-city-but-nyc-takes-the-cake/162005/

18. Robinson, M. (n.d.). San Francisco’s downtown area is more contaminated with drug needles, garbage, and feces than some of the world’s poorest slums. Business Insider. Retrieved 28 May 2020, from https://www.businessinsider.com/why-is-san-francisco-so-dirty-2018-2

19. Levay, B. (2015, April 17). Mapping homelessness and affordable housing in San Francisco. Information Visualization. https://studentwork.prattsi.org/infovis/visualization/mapping-homelessness-and-affordable-housing-in-san-francisco/

20. African American Segregation in San Francisco – FoundSF. (n.d.). Retrieved 28 May 2020, from http://www.foundsf.org/index.php?title=African_American_Segregation_in_San_Francisco

21. Silveira, D. D. (2019, March 3). Sunset District, a district with vast history and a large Chinese community. Bay News Now. https://www.baynewsnow.com/2019/03/03/sunset-district-a-district-with-vast-history-and-a-large-chinese-community/

22. Levin, S. (2019, July 2). ‘There’s no way to stop this’: Oakland braces for the arrival of tech firm Square. The Guardian. https://www.theguardian.com/cities/2019/jul/02/theres-no-way-to-stop-this-oakland-braces-for-the-arrival-of-tech-firm-square

23. Cheng, L. G., Jenny. (n.d.). The income needed to afford a median-priced home in every San Francisco Bay Area county. Business Insider. Retrieved 28 May 2020, from https://www.businessinsider.com/san-francisco-bay-area-what-it-costs-to-live-2018-6


Contextual Bibliography

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Buhayar, N., & Cannon, C. (n.d.). How California Became America’s Housing Market Nightmare. Bloomberg.Com. Retrieved 28 May 2020, from https://www.bloomberg.com/graphics/2019-california-housing-crisis/

Cheng, L. G., Jenny. (n.d.). The income needed to afford a median-priced home in every San Francisco Bay Area county. Business Insider. Retrieved 28 May 2020, from https://www.businessinsider.com/san-francisco-bay-area-what-it-costs-to-live-2018-6

Editors, T. B. I. (2016, April 1). These Are SF’s Richest Zip Codes — The Bold Italic — San Francisco. Medium. https://thebolditalic.com/these-are-sf-s-richest-zip-codes-the-bold-italic-san-francisco-9e85373ad15f

Fuller, T. (2018, October 4). As a San Francisco Skyscraper Leans, a Call for Stricter Building Codes. The New York Times. https://www.nytimes.com/2018/10/04/us/san-francisco-building-codes-earthquakes.html

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Levin, S. (2019, July 2). ‘There’s no way to stop this’: Oakland braces for the arrival of tech firm Square. The Guardian. https://www.theguardian.com/cities/2019/jul/02/theres-no-way-to-stop-this-oakland-braces-for-the-arrival-of-tech-firm-square

Russell, K. (n.d.). This One Intersection Explains Why Housing Is So Expensive In San Francisco. Business Insider. Retrieved 28 May 2020, from https://www.businessinsider.com/why-housing-is-so-expensive-in-san-francisco-2014-4

Silveira, D. D. (2019, March 3). Sunset District, a district with vast history and a large Chinese community. Bay News Now. https://www.baynewsnow.com/2019/03/03/sunset-district-a-district-with-vast-history-and-a-large-chinese-community/

Tarver, E. (n.d.). The Most Expensive Neighborhoods in San Francisco. Investopedia. Retrieved 28 May 2020, from https://www.investopedia.com/articles/personal-finance/092515/most-expensive-neighborhoods-san-francisco.asp

These are the best places to begin your commute into San Francisco. (n.d.). Retrieved 28 May 2020, from https://www.bizjournals.com/sanfrancisco/news/2019/03/25/these-are-the-best-places-to-begin-your-commute-sf.html