Why house prices in California and New York are so high.

There is a school of thought that this is largely down to planning restrictions around the most densely populated and/or desirable parts of California and New York, which in turn are the first and third most populous/popular states.

How much evidence is there for this (and how indeed do you measure the restrictiveness of planning and zoning laws?)..?

Let's download the stats from here and get crunching!

1. House prices vs earnings


As we see, there is a good correlation between average local earnings and house prices for the 714 counties (excl California and New York) for which we have data. The coefficient of correlation is 0.80, if you factor in the property taxes, the coefficient is even higher at 0.84.

A lot of California (red dots) and some parts of New York (green dots) are well above the trend line; most parts of New York are in the middle of the pack. The green dot in the top right corner is Manhattan 'island', of course.

2. House price-to earnings ratios vs earnings

Their evidence to show that housing is particularly expensive in those two states is that house prices are a high multiple of local average earnings, so let's do another chart:
As we see, the ratio of house prices-to-earnings is not a constant. In low wage areas ($40,000) the ratio is only 2.5; in high wage areas ($120,000) the ratio is 4.8, but the coefficient of correlation is quite low, only 0.46.

That's because this is a false comparison. You get a much more sensible figure if you use the first chart and compare house prices with the excess of earnings above the basic minimum household expenditure of (say) $20,000 - the trend line is now house price = [earnings - $20,000] x 4.2.

3. The coastal effect - California

We know that in the UK, there is a large premium attached to areas with a sea view. It's also nice being within driving distance of the coast, and because of the size and shape of Great Britain and Northern Ireland, three-quarters of it is within 25 miles of the nearest bit of coast or estuary and just about all of it is within 50 miles thereof.

Not so for the 48 main states! Only a per cent or two of the area is within 25 miles or even 50 miles of the coast. So we would expect the premium for being near a beach or even near the coast to be higher.

We can easily split Californian counties into 16 "coastal" counties and 24 "inland" counties and compare the two:

And we observe that having controlled for earnings, people are prepared to pay about $100,000 more to be nearer the sea, i.e. they are prepared to pay an extra $6,000 a year to for the benefit of coastal walks, surfing, sailing, fishing, sun bathing etc. If somebody inland spends an extra $6,000 a year on his inland hobbies, or extra gasoline for getting to the coast, then we would not count that as housing costs, would we? So I'm not sure that the extra $100,000 along the coast truly counts as housing costs either

4. The coastal effect - New York

New York state is triangular and has hardly any coastline whatsoever, just a few miles of beach, river and estuary at the southern tip (around Manhattan).

So I separated out the eight counties at the southern tip and contrasted them with the other 30 counties:

As we see here, the premium for a home in those areas is $150,000 to $200,000, much higher than in California because of the additional scarcity - less than a fifth of New York counties are 'coastal' as against over a third in California. And New York City is a huge economic and cultural draw as well, of course.

5. Strip out the coastal effect, and prices in California and New York are no different to anywhere else

Finally, I reworked the first chart comparing the rest of the USA with inland counties in California and New York, as we can see, there are only half a dozen outliers and the rest of them are slap bang in the middle of the pack: