This is probably the single biggest factor that's keeping me from moving out to CA. There's a lot of great companies out there and I think I could learn a lot but I also don't want to go broke.
Edit: How are people making it without a really high salary or living with three other people?
I call real estate the "evil sponge." As a region becomes more affluent, the price of real estate appreciates at least in step with this. Due to the leveraged debt financing of RE, the reality is often that price appreciation is a multiple of wage appreciation.
This takes pretty much all the surplus capital in a region -- among everyone but the rich -- and locks it up in an inert asset.
Think of it this way: a starter home in the Bay Area is about a million dollars. In SoCal -- not cheap by any means -- it's more like $400k. The average AngelList seed round is $400-$600k. So every single house in the Bay Area locks up the capital required to seed fund at least one new venture.
What could all those smart people in the Bay Area be doing if all their capital were not locked up by an inert asset?
What's worse is that there are idiots who cheer this on because it will supposedly exclude people they don't like (the poor, blacks, etc.) from their neighborhoods. I read a great book called Detroit: A Biography. It explained how RE hustlers used racism to fleece people: first they'd sell a neighborhood to white folks. Then they'd pay black people to walk around in it. Then they'd scare the white folks into selling below market, jack the price back up and sell it to blacks, and meanwhile sell a further-out more expensive neighborhood to those same white folks. Rinse and repeat. I suppose if you harbor these kinds of views it's kind of poetic when they're turned around and used to con you, but it harms everyone else too.
I was hoping the housing bubble crash would bring relief, but it's right back up there. Either the entire economy needs to inflate until RE is reasonable again -- which would give us $8 loaves of bread -- or real estate needs to fall over and burn. We need something like the 2008 housing crash with no recovery-- to unshackle the real economy from the rentier asset economy.
For instance - if I bought a house in the 1990s for 200K and it's now worth a million dollars, it isn't stealing $800K from anywhere. That's new wealth that I have that I can also put to work. (Even if I don't take a mortgage out on the house, I can invest more of my other money more aggressively, if I'm paying less mortgage, or know that I have a high value asset in my home)
I think it's more appropriate to look at the monthly rent differential.
Let's say that a 1BR in Palo Alto costs $2,500, and a similar one in Austin costs $1,000. [0] In that case, there is a $1,500 * 12 = $18,000 differential. Let's double it to include how much you have to make to have that much take-home income, and you have a $36,000 per year difference. If an angel-fed startup has 3 employees, then there is a ~100K per year of effective real estate tax. (Approximately 20-25% rather than 100%[1])
The trade-off is, how much more likely are you to succeed and scale based on being in SF vs Austin?
[0] I'm basing both #s on the very accurate "Approximate the first Google result" method.
[1] One can argue that everything is more expensive in the bay area, but total cost of living comparisons are tough to do. Is it % of spending or absolute dollars? Does it depend on public schools? Quality of goods?
It's not "stealing" 800k. That would be a bit too strong. But the problem is that your 800k comes via the fact that newer entrants to the market must now take out monster mortgages. It's not wealth created, but a draw on future wealth and an increase in the interest payments of younger workers.
It's sort of a generationally regressive tax. I personally suspect that policies that protect and encourage RE hyperinflation have been pursued as a way for the baby boomers to economically eat their children.
Rent prices are also quite tied to real estate prices, so when the latter appreciates rents go up too.
Over the long term, rent usually fixes to a certain % of "All in" housing costs. (Usually close to mortgage payments plus upkeep plus condo fees)
The difference is that rent is a short term costs, so for startups they're not eating the 30 year home ownership cost, just the monthly rental differences.
It is a generationally regressive tax only to the extent that parents die with no assets left. If they die with positive assets, then the value of their homes gets handed to their kids.
The CA system is painful for other reasons. At the outset, it's a tax by people with good credit on people with bad. (You can't get the tax benefits of home ownership unless you have good credit) The bigger issue is the nature of the taxation... Because tax increases on houses can't rise as fast as the homes themselves, new homeowners pay a penalty relative to the value of the house. (If you and I both both buy homes in the same neighborhood. You paid 500K 3 years ago, and I pay 1mm today, my tax burden will be almost double yours)
There is a reason that successful, fast-developing nations such as Singapore have enacted tight controls over the ability of a zero-value-add rentier class to extract all the value from a growing economy.
Have you seen Singapore real estate prices lately? The same 2-br condo (Parc Vista @ Boon Lay, never a particularl desirable location to begin with) I used to rent for $1000/mo back in ~2005 is going for ~$3500/mo now, the building hasn't gotten any newer in the meantime, and this is actually a bit cheaper than it was two years ago.
My company relocated to San Fran a few months ago, I had to quit because moving there from Dallas made no financial sense.
Even with a massive raise my monthly savings would be cut in half (or more), and spending in excess of a million dollars on a home is way too risky (look at all the people who went upside down during the last recession). Barring something incredibly unlikely, such as the equity I own actually being worth something, I would likely have to add an extra 10 years or more to my expected retirement age if I chose to live and work out there.
Everyone is renting. Ok, I have one friend thinking of buying a house in Oakland since he grew up in in NorCal and wants to stay here.
Almost everyone has roommates (if they're single), or lives somewhere less convenient (if they're not).
Some people are skating by on rent control (still jealous of my friend's room in the mission for 1k/month).
Some people are burning through their income to fund a nice place but most people are saving their money.
personally I'm not sure how long I'll stay in the bay, so I'm not looking at buying anything atm since prices do seem insane. Seems reasonable for me to save my money while I'm young and my costs are low, seeing what the future brings.
Edit: How are people making it without a really high salary or living with three other people?