Why is California so expensive to live in? We took a look behind the headlines to uncover the real reasons and root causes that drive its high costs in 2022.
It would be easy to just say that California is expensive to live in because it is a beautiful place to settle in, but we wanted to find out the underlying causes that make it so costly.
Therefore, we can then determine if these elevated costs are sustainable beyond 2022 and if there are certain actions that you can take to reduce your exposure to these potential costs.
We focused our research on a few key areas that dictate the cost of living in California, including housing costs, prices of everyday items like food and gas, and taxes. We also made sure to find the latest data that is applicable for life in 2022 and after.
Let’s find out why California is so expensive to live in so that you understand exactly why and also can determine if it is the right state for you to move to or not.
To understand why California is so expensive, we have to first understand what California represents and what it offers as a state. It is a unique state that features many desirable aspects that attracts a significant number of people. It also offers so many great cities to live in.
Geographically, it offers a wide range of natural landscapes, such as large mountain ranges, vast deserts, lush forests, and direct access to the ocean and beaches.
In fact, California has 840 miles of coastline, which makes it very attractive to people who want to live by the beach.
There is also excellent weather for many parts of the state throughout the whole year, which makes it very enticing for folks who are looking to escape their cold, sunless locations.
To preserve the natural beauty of the state, California has also become quite aggressive in enacting stricter environmental regulations than virtually any other state in the US. For example, their regulations on issues ranging from car emissions to a ban on plastics is much more stringent than the federal standards.
However, to pay for these extra regulations, the money has to come from somewhere. Therefore, California has some of the highest state taxes in the nation, which we will detail later on.
California is also the home to several world-class cities like Los Angeles, San Francisco, and San Diego.
On top of that, they offer some of the best universities on the planet like Stanford University, the California Institute of Technology, and The University of California, which attracts many young minds who then stay and enter the workforce in California.
1. Why Is California So Expensive To Live In? Low Supply and High Demand
Now that you understand what makes California so desirable, we can now address the first issue that also makes it so costly. Why is California so expensive? Pure supply and demand.
Despite its huge size, California still does not have enough space in its desirable areas to meet the overwhelming demand. It is estimated that there is as much as a 30% lower supply of housing units compared to the demand in California.
An example of how this plays out is with the tech boom. Most recently, many tech companies like Google, Apple, and Facebook have established their headquarters in California, where they can have access to highly skilled labor from the top universities in the area.
These tech companies have been able to make higher profits in today’s digital age, which then allows them to offer higher salaries to retain and attract new workers. For example, the median salary at Google is a staggering $250,000 per year.
This extra flow of money into areas like San Francisco and Silicon Valley then can inflate the price of everything in the city, from rent to groceries.
In turn, more professionals want to move to California to secure a high-paying job, but the cities do not continue to grow at the same pace, which leads to an imbalance of supply and demand.
2. Why Is California So Expensive To Live In? Housing
Another major reason why California is so expensive has to do with housing. Of course, you have probably heard some of the numbers before. According to the latest data from Bloomberg, the median home price in California is currently $800,000, which is more than double the national average of about $350,000.
But why is that the case?
Our example above shows where the money is coming from, but are there any other underlying reasons that are pushing prices even further?
As it turns out, there are other factors that make California’s housing prices even more expensive.
Cost of Land
The low supply of physical land makes it more expensive to purchase than other states. On average, the cost of land made up 12% of all costs for new projects in California compared to just 5% in all other states.
Cost of Labor
There has been a general shortage in labor since the Great Depression of 2008 forced many workers out of the state, many of whom have not returned. Building permits in California rose by 430% from 2008 to 2018, but the number of workers only increased by 32%.
California has many strict building codes that are related to affordable housing, which includes density laws that may make it less profitable for construction companies.
All of these factors add up to construction projects that cost more than anywhere else in the nation. The U.S. Government Accountability Office found that the average housing unit cost $326,000 to build in California, which is almost three times as much as the cost in Texas, which was only $126,000.
If housing units cost over $300,000 to build, you can only imagine what they need to be priced at for the construction company to make a profit in California.
3. Why Is California So Expensive To Live In? Cost of Living
Higher wages tend to lead to higher costs for all other aspects of living. When you have a city like San Francisco with thousands of workers earning six-figure salaries, you can understand how milk prices can then reach $5.00 per gallon.
But, it’s not just high wages that impact the high cost of living in California. Let’s break down some of the major categories of living costs and see why they are elevated.
Food is generally not much pricier in California, coming in at only 5% more than the national average. But, in high-cost areas like San Francisco and Los Angeles, the stores and restaurants that sell food also have to pay higher rents. So, stores in these places may pass these costs onto their foods, making them even more expensive than normal.
The average annual cost of car insurance in California is about $2,065, which is the 6th highest in the US. Why is car insurance so expensive in California? It may have to do with the behavior of the drivers in the state.
First, it may depend on the number of miles driven. California is a huge state and their residents drive a bit more miles than the average driver in the US per year. More miles means more chances of accidents, which means higher car insurance rates.
Secondly, there are many heavily populated cities across California, which also tend to have more accidents.
Why is gas so expensive in California? Due to the state’s focus on environmental protection, Californians pay the most taxes and fees on gas. There are extra state and local taxes and fees that can add up to almost $1.20 before the cost of the gas itself.
On top of that, California is quite a far way from refineries in the Gulf Coast, so there are extra transportation costs as well.
4. Why Is California So Expensive To Live In? Taxes
California is by far the largest state in the US with almost 40 million residents. That is more than Belgium, Greece, Portugal, and Switzerland combined.
To maintain the infrastructure and services for a state with a population that is larger than most countries, California needs to rely on higher taxes to keep up their public works.
Additionally, their progressive stance on environmental concerns further contribute to these higher tax rates. After all, the money for these programs needs to come from somewhere.
When you add it all up, Californians are subjected to the highest state income taxes (13.3%) and the highest base sales tax (7.25%) in the nation.
Summary – Why Is California Expensive To Live In?
We hope that this overview has provided you with a good idea why California is so expensive to live in 2022. On the surface, it is a simple case of supply and demand for this desirable state.
But, when you dig deeper, you realize all the other different reasons in the feedback loop that help to keep costs high in California.