How California economy’s global standing impacts real estate

Source: FT Journal | Author: Carrie B. Reyes
California Economy

December 14, 2016—Things are looking up in California. Our state’s super-sized economy is on a roll compared to the rest of the nation. Its economic maturity and independence is represented in the immense gross domestic product (GDP) produced in the Golden State.

GDP is the market value of the goods and services produced in a given region. With the exception of new construction, real estate sales are excluded from this measure.

California is the sixth largest economy in the world as of 2015, according to the International Monetary Fund (IMF). It makes up over 13% of total U.S. GDP.

* There are different ways to measure annual GDP and GDP growth. This table reports growth in constant dollars for each nation listed, adjusted by the World Bank to 2010 dollars, and chained, or real dollars for California, adjusted by the BEA to 2009 dollars. Both are ways to account for inflation.

California’s economy grew at a faster rate than most of the wealthiest nations on this list, only behind China in 2015. Its economy grew 4.1% in 2015, according to the BEA. In contrast, U.S. GDP growth has been continually sluggish throughout the elongated recovery from the 2008 financial crisis and

Great Recession, averaging just 1% per year from 2009-2016, and as high as 2.4% in 2015.

For reference, the state with the second-highest GDP is Texas, with a GDP of $1.6 trillion in 2015. Annual growth was 3.8% in this state in 2015, according to the BEA.

 

California’s high cost of living chips away at GDP growth

However, as the Los Angeles Times points out, when considering the cost of living, California slips from sixth place to eleventh. In other words, while GDP is higher here than in, say, France — it’s so expensive to live here that California’s high GDP actually buys fewer goods and services here than France’s lower GDP buys in France. This dynamic is called purchasing power parity. Compared to using market exchange rates, purchasing power parity more directly measures how GDP impacts the wellbeing of these regions’ residents.

In addition to cost of living, California residents’ wellbeing can be measured by:

  • how much wealth they hold (for homeowners, most of this wealth is stored in their home);
  • how much debt they owe (again, for mortgaged homeowners, most of this debt is leveraged in their home); and
  • their current level of employment income.

While California’s employment market recovered the number of jobs it lost to the 2008 recession by the end of 2014 and continues to grow today, the other two measures of economic strength offer mixed signals.

The primary issue is California’s expensive housing market. High and rapidly increasing rents and home values are beyond reasonable reach for most Californians, though there is evidence both are slowing down in the tail end of 2016.

Average California home prices have increased 9% over a year earlier in the high tier, 6% in the mid tier and 5% in the low tier, according to the Case-Shiller home price index. Rents have increased 5.2% over a year earlier, according to Zillow’s rental index.

Meanwhile, the average California household income increased 4% in 2015 to $64,500, according to the U.S. Census, following several years of sub-3% income growth. Therefore, housing costs have quickly outpaced resident incomes.

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