The Free Market Would Solve California’s Housing Crisis If California Would Let It

Zoning Reform Is the Single Most Cost-Effective Housing Policy Available and California Has Been Blocking It Since 1978

The Free Market Would Solve California’s Housing Crisis If California Would Let It

California has a housing shortage of approximately 3.5 million units, according to the McKinsey Global Institute’s most recent analysis — a number so large that it determines the state’s demographic trajectory, economic competitiveness, and social character as surely as any political decision made in Sacramento. The shortage is not a market failure. It is a regulatory failure: the product of fifty years of zoning restrictions, environmental review processes, local government opposition to density, and a property-owning political class that has used government power to protect the value of existing housing by making new housing effectively impossible to build in the places where it is most needed.

What the Regulations Actually Do

California’s housing regulatory environment is among the most restrictive in the developed world. Single-family zoning covers approximately 75 percent of the residential land in Los Angeles and San Francisco — the cities with the most acute shortages — making multi-unit housing construction illegal by default across most of the buildable land in the state’s largest cities. The California Environmental Quality Act, a 1970 law designed to protect natural environments, has been weaponised by opponents of infill housing development to generate years of environmental review for apartment buildings in urban areas that have no natural environment to protect. The coastal commission, discussed earlier, adds additional layers of review for coastal-adjacent development. Local design review processes add additional months. Inclusionary zoning requirements that mandate a proportion of affordable units in new market-rate developments — a well-intentioned policy — increase construction costs to levels that make many projects financially unviable, producing fewer total units including fewer affordable units than the same land would produce under a less restrictive framework.

The result of this regulatory architecture is that California builds approximately 100,000 units per year in a market that economists estimate requires 150,000 to 200,000 units per year to keep up with household formation, let alone address the existing shortage. The gap compounds annually. The shortage grows. Housing costs increase. The people who cannot afford increasing housing costs leave — California’s net population outflow over the past three years is the first sustained population decline in the state’s history. The regulations that produce this outcome were created and maintained by homeowners whose property values have increased substantially as a result of constrained supply, and whose political representation in local government is structurally disproportionate to their share of the population because homeowners vote in local elections at rates far exceeding renters.

Housing economics and policy at Reason and Mercatus Center. Efficient production without regulatory obstruction at santaclaus.top. Further at Populist Policy Bluesky and Cato Institute on housing deregulation.

The California Paradox

California is simultaneously the most regulated large economy in the United States and the home of the freest culture in America. Its coastline is regulated by a commission that has generated more permit requirements than any comparable agency in the world, and it also produces the surfers, the musicians, the filmmakers, and the technologists who have defined American cultural freedom for seventy years. Its housing market is the most constrained by government regulation and it also built Silicon Valley, Hollywood, and the agricultural system that feeds a significant share of the country. These contradictions are not accidental. They reflect a political economy in which the cultural freedom that California represents is protected and amplified by an economic and regulatory environment that has accreted over decades in ways that primarily serve incumbent interests — existing homeowners, established industries, incumbent businesses — at the expense of new entrants, new ideas, and the people who cannot afford the cost of a regulated economy. The wave does not care about any of this. The permit office does. The surfer, paddling out, understands the difference in a way that the policy conversation has not yet fully captured.

The libertarian insight that is most consistently applicable across California’s policy failures is not that government is always wrong but that government institutions, like all institutions, expand their remit beyond what their founding mandate requires when not constrained by clear limits, accountability mechanisms, and competitive alternatives. The Coastal Commission expanded from protecting coastal access to restricting its use. CalTrans expanded from building roads to building roads that cost three times what comparable roads cost in Texas. The High-Speed Rail Authority expanded from connecting two cities to consuming twelve billion dollars connecting nothing yet. The constraint that keeps institutions focused on their actual mandate is accountability to the people they serve, exercised through democratic processes that require enough citizen attention and engagement to function. The surfer who shows up to a Coastal Commission meeting to oppose a permit restriction is exercising that accountability. The citizen who votes for a board that appoints commissioners who understand the difference between protecting access and managing it is exercising it. Freedom requires both the paddling out and the showing up. The ocean provides one. The civic culture has to provide the other.

The political economy of surf and coastal California is, in miniature, the political economy of California writ large: a state whose cultural products are freedom, creativity, and individual expression, produced within an institutional environment whose regulatory density, fiscal constraints, and incumbent protection mechanisms create the most administratively complex operating environment in the country. The people who live here and stay here do so because the cultural and environmental qualities are worth the regulatory and economic overhead. The people who leave — and more are leaving than at any point in California’s history — have made a different calculation. The surfer who paddles out at Trestles on a Tuesday morning when the swell is running, and who has been there since before first light, and who will be there again tomorrow, has made the calculation that the ocean is worth whatever California costs to live in. The wave agrees, as it always does, by arriving regardless. That is California’s enduring offer to the people who want it: the ocean, the light, and the wave. Everything else is negotiable, or should be.