Curbs Could Fuel Sharp Rise in New Home Prices
The widespread movement to curb urban growth in California will cause sharp double-digit inflation in new home prices in 1989 and 1990, according to UCLA’s latest quarterly business forecast released Thursday.
Californians will have an even harder time affording the housing because wages are not expected to keep pace with increases in housing prices, the study said.
“Home price inflation may already be heating up,” the forecast said. “The average price of a new home in the state (really the average of prices in the San Francisco and Los Angeles areas) rose at a 20% annual rate in the first quarter of 1988, after slumping in the fourth quarter, probably because of the stock market crash.”
David Hensley, director of the California segment of the project, published by the John E. Anderson Graduate School of Management at UCLA, said continuing public pressure to control residential construction through “slow-growth” initiatives is expected to result in self-imposed or mandated curbs on development.
New single-family home construction is expected to drop to 100,000 units by 1990, the lowest rate since 1983, according to UCLA. That slowdown is expected to push up new home prices and rents faster.
UCLA is predicting new home prices will rise 12.1% in 1989 and 13.4% in 1990 before adjusting for inflation. That reverses the trend of the early 1980s when California new home prices fell relative to the national average.
The increases are not expected to trigger the highly speculative housing activity that occurred in California in the late 1970s when new home prices rose 10 percentage points above the general inflation rate.
UCLA’s projections for double-digit increases in 1989 and 1990 show a spread of only 7 or 8 percentage points above the estimated rate of inflation.
Home prices for all of 1988 are expected to increase only 9.5% because of adequate supplies of new homes. Hensley said builders may be rushing to construct their homes before the end of the year in anticipation that some slow-growth initiatives will pass during the November election.
“Permit activity may be artificially high because builders are borrowing from the future. . . . It (permit activity) is much higher than nationwide because the slow-growth movement is really a California thing. Builders are anticipating and rushing forward before the restrictions bite and they see construction drop off.”
Hensley said the lack of affordable housing, already a frustrating problem for would-be buyers, will be even more troublesome because wage increases are not expected to keep pace with the hikes in home prices. Personal income will rise 8.4% this year and 7.8% in 1989 and 1990. Real income gain, after discounting for inflation, will fall to 2.8% from the average 4.5%.
