5 Reasons It's So Expensive to Build Housing in California

California is the worst of the worst when it comes to the cost of housing construction.

The average price tag to build just one unit of housing — a home or an apartment — was $326,000 in 2018, according to the U.S. Government Accountability Office. And it’s even worse for affordable housing, which averaged $480,000 per unit across the state in 2019.

High construction costs are one big reason why rents and home prices in California are also some of the highest in the nation.

But the construction industry has also been one of the slowest to innovate. It’s a $10 trillion operation, globally, employing a whopping 7 percent of the world’s population, according to a 2017 McKinsey & Company report.

The report found that, globally, productivity in the construction industry has increased an average of 1% a year over the past two decades, compared with 2.8% for the total world economy and 3.6% for manufacturing. In the U.S., many industries, including agriculture and manufacturing, have increased their productivity by 1500%, while productivity in construction has barely budged.

KQED’s new podcast, SOLD OUT: Rethinking Housing in America, takes a look at one solution that’s trying to “hack” the system: factory-built housing, also known as prefabricated or modular housing.

It’s an idea that’s been around for over a century, but it hasn’t always worked. Listen to the second episode, “Prefabulous”, to hear why some people think modular housing construction could now be the big innovation to help us out of our housing crisis.

It’s not just the construction industry’s unwillingness or inability to change that’s driving high housing costs. Here are some other reasons why housing is so expensive to build in California:

• Land is just more expensive in California than other places. In the Golden State, the cost of land is about 12% of total construction costs, compared to about 5% in other states.
• Labor is also more expensive. One reason: After the Great Recession in 2008, a lot of construction workers left the industry, creating a shortage of skilled workers. To top it off, the construction boom that followed has far outpaced the growth in the construction industry. An analysis by the Terner Center for Housing Innovation at UC Berkeley found that the number of permitted housing units grew by 430% between 2009 and 2018, while the number of workers grew only 32% during that same time period.
• Density restrictions that limit how many apartments can be built on one lot also adds to the cost. As the size of a building increases, developers are able to take advantage of economies of scale, reducing the cost per apartment. But opposition to large affordable apartment buildings makes it difficult to get projects approved. Researchers at the Terner Center spoke to one developer who said, “It is impossible to overstate the continued resistance to new affordable development in most cities in California.”
• The complexity of financing affordable housing projects is another big factor when it comes to developing housing for low-income people in particular. A report by the U.S. Government Accountability Office found that affordable housing projects in California had an average of six different funding sources, which contribute to a project’s “soft costs,” which includes things like legal fees, consultants, and appraisals. In California, soft costs added around 14% to the total cost of construction, compared to 7% nationwide. Another report from the Terner Center found that, on average, each additional source of funding on a project added $6,400 per unit in total development costs.
• Development fees, which cities impose on developers to pay for things like street lighting, sidewalk improvements or sewage upgrades, also contribute to higher costs for housing. The same Terner Center report found that development fees on affordable housing developments added about $16,600 per unit.