For more than half a century, California’s political class has issued dire warnings about a “housing affordability crisis.” Yet the more Sacramento and local governments intervene, the worse the problem becomes.
To a macroeconomist, this is a classic “interventionist spiral.” When central planners disrupt organic market signals, they create structural distortions. Rather than reversing course, politicians cover up the failure by blaming external scapegoats, using the crisis they created to justify doubling down on the next layer of state control.
California has effectively replaced the traditional public housing failures of the 20th century with a modern, corporatist regime where private enterprise exists in name only. The primary economic weapon is the California Environmental Quality Act (CEQA).
Originally meant to protect nature, CEQA has been weaponized into a tool of economic extortion. Because any entity can file an anonymous lawsuit challenging a project’s paperwork, the process becomes the punishment. The resulting multi-year delays, frozen construction loans and soaring carrying costs routinely crush local builders. Only Wall Street-backed mega-developers survive, creating a captive market for institutional capital.
When the state delivers housing via administrative fiat rather than letting an unfettered market expand supply, it generates staggering inefficiencies. Today, a single unit of subsidized “affordable” housing in coastal zones routinely breaches the $1 million mark, weighed down by layered subsidies, tax credits and mandated union wage shocks. Historical housing bonds regularly collapse under this weight, yielding a mere fraction of the units projected to voters.
Because the state cannot fund the trillions required to build enough subsidized units, it forces the private market to cross-subsidize the shortfall through the State Density Bonus Law. To clear institutional underwriting thresholds, developers must price the remaining market-rate units at an absolute premium.
The everyday housing consumer — the middle class earning too much for a subsidy but too little for luxury — is hit with a hidden, compounding tax. They pay an artificially inflated rent or mortgage to subsidize the unit next door. Combined with steep local regulatory burdens, such as San Diego’s $25-per-square-foot affordable housing in-lieu fees, this system wipes out the financial viability of mid-tier projects. The “missing middle” market is completely erased.
Faced with these hostile headwinds, private capital responds rationally: It leaves. The risk-adjusted returns for residential developers inside California have severely degraded compared to less regulated states like Texas. In those markets, developers respond nimbly to organic consumer demand without paying multimillion-dollar rents to the bureaucratic cartel.
The resulting California landscape is highly stratified: The wealthy afford hyper-inflated premium units, a tiny fraction of lottery winners get million-dollar subsidized apartments and the broad middle class is systematically priced out or forced to flee the state.
California’s housing apparatus fails because it suppresses the market mechanisms required to balance supply and demand. Until we dismantle this corporatist framework and allow property owners to build what consumers actually desire and can afford, the perpetual crisis will continue to serve its true purpose: expanding the power of the state at the expense of the California taxpayer.
Villani, a San Diego resident, is a macroeconomist who was deputy assistant secretary and chief economist of the U.S. Department of Housing and Urban Development from 1979 to 1982 and was chief economist of Freddie Mac from 1982 to 1985.