Strict land-use regulations — zoning — is the key to rapidly rising rents, according to a report by Zillow.
Zillow’s study of rents and zoning finds that cities with the most restrictive land-use regulations have seen average rents rise three times more quickly than cities with the least restrictive regulations. Strict zoning regulations make it more difficult for builders to add more rental inventory in the places that need it. Therefore, demand outstrips supply and rents rise unnaturally fast.
As expected, this translates to renters in highly regulated cities more often living with roommates to make ends meet. In fact, since 2011 the average household size has increased twice as quickly in restrictive zoning cities than in less restrictive cities.
In Southern California (SoCal), rising rents are catching up with residents, having quickly surpassed income growth in the region.
In SoCal, the average asking rent price has increased:
- 52% from 2011 in Los Angeles, while per capita income has increased just 11%;
- 24% from 2011 in Orange County, while per capita income has increased just 9%;
- 34% from 2011 in San Bernardino, while per capita income has increased just 8%;
- 33% from 2011 in Ventura, while per capita income has increased just 10%; and
- 22% from 2011 in San Diego, while per capita income has increased just 9%, according to Zillow’s Rental Index and the U.S. Bureau of Economic Analysis.
True, the construction recovery continues, which will ease the rapid rise in rents. However, according to the Los Angeles Times, of the 38,000 new multi-family construction units started in Los Angeles County in 2015, many are luxury — expensive — apartments. Further, the California Housing Partnership Corporation estimates Los Angeles County needs an additional 500,000 below-market rental units to bring rents in line with low-income residents’ incomes.
Why do real estate agents care? As rents become more expensive relative to incomes, residents spend more of their monthly paycheck on rent, and less on saving for a home purchase or contributing to their local economy. This is bad news for renters and for the long-term stability of the housing market.
Local legislators need to give builders room to respond to demand. Only when local cities loosen zoning restrictions will the appropriate number of new units be built. Read more on local efforts to reform zoning here.