The Cause of Rental Price Increase in San Francisco Bay Area
Rental Price Increase in San Francisco Bay Area
Introduction
Moving to a new place normally means finding the most comfortable yet the most cost friendly apartment in the neighborhood as near as possible to the place of work. However, the first thing that comes into question in the moving-in process is the price of the rent that one should cut from his monthly paycheck. Cost of rent is a major concern in the San Francisco Bay area due to its staggering price. It became an apparent issue when apartment hunters are faced with over-the-top rental rates in the area. In order to understand the reason why rental price in the Bay area is so high, there is a need to get to the bottom of the issue and determine the cause of the increase. This problem will be discussed by examining the factors that contributes to the increase in rental price including the macro-level attributions. It can be safe to assume that the reason for rental price increase is the overwhelming demand for rental space intensified by the scarcity of supply of available units.
The Existing Problem
The recent U.S. Census Bureau reveals that between 2007 and 2011, the median housing income necessary to afford an apartment rent should be at least $72,947 a year in which 30% will be spent for rental payment (Sankin, 2013). However, that median income is far beyond what a person must earn in order to afford rent in SF Bay area because an apartment unit in the area has a mind-boggling price tag of $2,741 a month (Sankin, 2013). It is reasonable to assume that one should be earning at least $100,000 a year in order to afford such a rent. This dilemma represents the reality of staggering rental rate in SF Bay area. This problem faces people returning to the area after getting away from the Silicon Valley proper.
The rent for apartments has risen by an average of 7.6 percent for all types of apartments and sizes over the last years. In addition, some apartments have found to increase their rent price by 100%, while others have had their prices increase by a margin closer to 100 percent (Gabriel, 2012). Over the last twenty years, the demand for new apartments has been at an average of 3000 to 5000 per year. This implies that at least 60,000 new apartments were supposed to have been built for the last twenty. The supply of new apartments over the same period has however been at 1,500 new units per year, with 2011 recording the lowest supply in new apartments in San Francisco and Bay areas. In 2011, only 269 apartments were constructed. Looking at this statistics, it follows that there is an existing demand of at least 30,000 new apartments in 2011, yet only 269 units were constructed. It follows that even with other factors holding constant between 2011 and 2013, the demand was already greater than the supply in 2011. And there was a need to at least double the number of new apartments that had been constructed between 1991 and 2011 in San Francisco (Metcalf, 2012).
The Why Question
The greatest mystery here is why the rent is ridiculously high and what are main factors that contributes to the increase? Sarah Bridge, the founder of Real Facts stated “I easily counted 17 people waiting in line to see what was basically a studio - although advertised as a one-bedroom - on Fell Street last week, you know how busy Fell is. That apartment had single-paned windows so all the sound came up, and it was the tiniest little thing” (Said, 2013). Based on the statement, it appears that there is a fierce competition between apartment hunters. Such competition can only be triggered by a relatively high market demand with so little supply. From an economic perspective, demand, supply, and market equilibrium are connected together in such a way that a single change in any of the three constitutes a profound effect on the other two.
Under the principles of supply and demand, when the demand goes up, but with sufficient supply it is referred to as a perfectly competitive market because the market has may buyers and sellers. If the demand is high, but there is a scarcity in supply, the price curve shifts into higher gear (O’Sullivan, 2012). That is what happening in the SF Bay area apartment price. The demand overwhelms the supply and results a very tight competition between apartment hunters leading to an increase in price. Another possibility that justifies the high rental rate in SF Bay Area is that the place is considered as a hot spot in terms of rent appreciation. High appreciation combined with limited supply and staggering demand results to significant movement in the price curve because of housing demand’s price elasticity. Price of housing and rent in this matter has an elasticity rate of -0.5, which means housing is not responsive to price changes (Hanushek & Quigley, 1980). In fact, it is inelastic in a sense that despite the large change in price, the demand remains high.
The How Question
It is apparent that the increase in demand for rental spaces in SF Bay area paired with the crawling phase of developing new units results to dwindling of the supply, which in effect skyrocketed the rental price in the area. However, there is an existing question relates to why there is a sudden increase in demand and that is “what is the root cause of the increase?” Some may argue that the shift in demand and supply is the cause of the price increase, but it is just one of the stories, there is another cause that fueled the demand and price increase. The San Francisco Bay area is regarded as the heart of technological community as major companies such as Google, Apple and Facebook have found their nest in the Silicon Valley, which is just around the corner of the Bay area. Experts believe that the tech boom have contributed to the increase in the number of people demanding for a place of residence in the Bay area.
Apart from the three tech giants, other companies have also found their way into the Bay area such as Yelp, Airbnb, Twitter, Pinterest and Square. These emergences of large companies are attributed to the increase of capitalism activities in the location. In addition, these companies continued to grow over time and corporate expansion manifests in the growing employment rate. Between 2010 and 2012, San Francisco had reached a total of 41,000 jobs (Metcalf, 2012). These new employment translates to thousands of people hired to work in the aforementioned companies and along with their relocation is the hunt for available place to stay. However, the construction phase for new units will not be able to pick until the next couple of years. Due to the jump in population and demand for residential space for rent, the value of residential spaces have dramatically increased. A leasing agent from McGuire Real Estate/Urban Bay Properties stated, "All those properties that were rentals and couldn't sell because they were underwater are now moving into the sales market” (Said, 2013). This indicates that the scarcity in supply of available units and with the apparent increase in the number of people wanting to rent a space in the Bay area triggers a domino effect that spawns a massive competition.
The assumptions of the tech boom, as a major causal factor to the increase of the high rent price in the SF Bay area is a shared idea by most of the residents and real estate experts in the area. Personal accounts of dismay regarding the incredibly high price of the rent in the location justify a real problem that tenants are facing. On one occasion, a couple was forced to increase their rent budget by 40% or equivalent to $3,500 after deciding to move to the Bay area. It took them weeks before landing to a 2-bedroom apartment due to the high monthly rate imposed by most landlords (Ovide, 2012). In addition, the number of people bidding for a single unit is immense where 17 to 20 people are bidding for a single available unit. Such scenario justifies the determined reason and cause of high rent price in the Bay area, that the influx of available rental units along with high demand is attributed to price increase. Meanwhile, tech boom is highly considered as the cause of increase on the demand.
Analysis and Recommended Solution
Based on the determined factors of increase in rental price, it is apparent that economic principles play a significant role on the issue. For instance, supply and demand had a significant effect both on the macro and micro level. On the tenets of macro economy, aggregate demand is represented by the total demand of goods in the market, in this case demand for rental units. It appears that the current number of rental units available in the market is not sufficient to sustain demand, although future urbanization plans offers more available units to support the demand. On the other hand, aggregate supply, which is represented by the number of supply produced within the predefined period of time. In terms of the produced units in SF Bay area, the future plan for more units is still weak to match the aggregate demand. At such level of unbalanced aggregates, the resulting problem manifests in a nearly uncontrollable increase in price, which transcends down to the micro level where the household economy is largely affected by the increase.
There is one probable solution that can be recommended to reduce the price of rent if not to totally alleviate the economic side of the problem. For example, state legislators should pass a law to control price hike by putting a ceiling price based on floor area. There should be a minimum and maximum rate imposed per quae foot. The prevailing law in the SF Bay area is still based on the 1979 Rent Control Ordinance. According to the prevailing ordinance, annual increase on rent price is allowable at a maximum of 1.9%. However, given the inflation adjustments from the time the ordinance was implemented until today, it appears that the rent prize already went out of proportion to household income. Therefore, the current ordinance should be ratified to align with the current state of housing and real estate conditions.
Conclusion
The often seen as outrageously high rent price in the SF Bay area is a conclusive effect of an economic problem that has not been resolved at the time of its conception. The increase in demand and short of supply is a manifestation of an economic decision where consequential effects are overlooked in the process. It is clear that the reason why rent price is high in the area is because of short of supply and high demand fueled by a tech boom that overwhelmed the SF Bay area with people looking for a place to stay near their work place.
References
Hanushek, E. A., & Quigley, J. M. (1980). What is the price elasticity of housing demand? The Review of Economics and Statistics, 62(3), 449-454. Retrieved from http://urbanpolicy.berkeley.edu/pdf/HQ_REStat80.pdf
Metcalf, G. (2012, December). In San Francisco, the Boom Is Back. Retrieved August 10, 2013, from http://www.spur.org/publications/library/article/san-francisco-boom-back
O'Sullivan, J. (2012). Demand, Supply, and Market Equilibrium. Applied concepts, 48-77. Retrieved from http://www.prenhall.com/behindthebook/0132447029/pdf/O'Sullivan_CH03.pdf
Ovide, S. (2012, June 26). Tech Boom Hits San Francisco Rental Prices - WSJ.com. Retrieved August 10, 2013, from http://online.wsj.com/article/SB10001424052702303296604577450760765114108.html
Said, C. (2013, May 1). Rents in Bay Area keep rising - San Francisco Chronicle. Retrieved August 10, 2013, from http://www.sfchronicle.com/realestate/article/Rents-in-Bay-Area-keep-rising-4477696.php
Sankin, A. (2013, January 31). San Francisco Rent Increases Finally Level Off, Still Insanely Expensive. Retrieved August 10, 2013, from http://www.huffingtonpost.com/2013/01/31/san-francisco-rent_n_2592561.html
