Why Gen Y or Millennials Will Never Own a Home in Los Angeles
Jessica and Jason are hypothetical Gen Ys or Millennials, born between 1981 and 2000. Because of Los Angeles’s low real estate affordability, Jessica and Jason will never own a home in Los Angeles. Here’s why.
The Los Angeles real estate market is no longer local. It’s not even regional. It’s global. The recent recession brought much pain to many Angelenos, but in some areas of the city, there was no recession at all. Housing prices actually rose through the latest recession years.
Los Angeles enjoys the dubious distinction of being #10 among the world’s most unaffordable cities, along with Hong Kong, Vancouver, Sydney, San Jose, San Francisco, Melbourne, London, San Diego and Auckland. The median price home in Los Angeles costs eight times the median household income. How could this happen?
The early 1990s recession was like a tide that left all boats on shore. Even housing prices in bellwether Beverly Hills were slashed in half from 1990 to 1995.
This widespread drop in housing values enabled many locals to buy into that era’s temporarily price-depressed inventory in neighborhoods like Los Feliz and Hancock Park. The silver lining of the 1990s recession was that this new group became homeowners.
The recession of the last 10 years afforded no such opportunity for locals.
Why? Foreign investment, mainly from China, artificially inflated prices in prime Westside and San Gabriel Valley markets.
This massive infusing of offshore capital into prime areas of Los Angeles had a ripple effect through adjacent markets, which, like a domino, in turn affected their adjacent markets.
Local buyers were priced out of neighborhoods they once thought affordable. Homeowners decided not to move unless they absolutely had to, thus strangling supply.
Not even the lowest interest rates in decades could enable first-time buyers to qualify for loans on purchase prices inflated by fiercely competitive bidding. Lucky first-time buyers among the Millennials could borrow from the Bank of Mom and Dad.
But most priced-out Millennials are doomed to live in apartments with rents that are rapidly inflating, despite rent control. They are among the 53% of 4 million Angelenos who are tenants.
Developers will not build “affordable” rental units voluntarily and no amount of government enticement will ever produce enough new affordable rental units to satisfy demand.
A side effect of Chinese real estate investment is Los Angeles has one of the lowest rental vacancy rates in the United States. Tenant competition for rentals has forced rents ever higher. And because Angelenos can’t afford to move to locations closer to their jobs, traffic is worse than ever.
What to do?
The sole realistic solution to ameliorating housing affordability in Los Angeles is to do what other cities in the same predicament around the world have done: to tax foreign investment in local real estate.
Vancouver, British Columbia, recently adopted a 15% tax on such investment. As a result, that city’s affordability problem is already easing. London has had a similar law in effect, as well.
But who will pay such a tax? Offshore investors will. Most of these investors are driven by two factors: speculation and visas.
A look at aerial views on Google Earth of zip code 90077—which includes the neighborhoods of Brentwood, Bel-Air and Beverly Glen—reveals what these offshore investors are building. The median foreign investor in the ultra luxury residential real estate market owns a shocking 19 houses. They are not building oversized “homes” to live in them.
This local building boom enables parking dirty off shore money in a safe haven. Los Angeles has become a kind of Monaco for the world’s rich: a sunny place for shady people.
The other reason real estate investors come to the U.S. is to acquire green cards by investing between $500,000 and $1 million in the U.S. as an “alien entrepreneur.”
Such a person need not actually reside in the U.S. to become a “permanent resident.” The “entrepreneur’s” spouse and unmarried children under 21 also get green cards as “permanent residents.”
Local residential real estate purchases facilitate the acquisition of these visas, of which the U.S. government issues about 10,000 per year.
Another ploy favored by Chinese investors is to avoid payment of transfer taxes by hiding the true property ownership and transfers of ownership within corporations and trusts. State and local tax withholding is also avoided by claiming spouses or student children as permanent residents.
In short, foreign speculation in local real estate is the root of our housing affordability problem.
Until this speculation is curtailed, Jessica, Jason and their generational peers are likely to remain renters in their hometown.
If we Angelenos want to become proactive in tackling this problem, we will have to discourage speculation that erodes the American dream of owning a home of one’s own. All we need is popular demand, political leadership and will.
Richard Stanley is a real estate broker with Coldwell Banker/Los Feliz. He specializes in estate properties.