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The San Francisco Bay Area is an interesting place. Housing prices are through the roof (hehe) and increasing by an average of 5-20% per year for the past 20 years. This is largely driven by an increase in land values, as the SF Bay Area has very high incomes and rapid hiring, but geographically constrained area for settlement, leading to a supply and demand issue that has been driving up home prices to astronomical levels.

Interestingly, nearly all homes in the Bay Area are one-story, as opposed to the two-story homes so common elsewhere. I'm trying to square this with the relevant economic factors and I'm coming up just a bit short. Why would a land-dominant housing market lead to below-average construction of larger houses, when the relative cost of building a second floor is lower than it would be in a market where land is cheaper?

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Areas such as San Francisco Bay Area have very strict zoning laws. In fact as this source shows in San Francisco Bay Area many houses are restricted to be single family houses. The source focuses mainly on Berkeley and Oakland but discusses also the situation of the wider area.

Adding an extra story just for your own family might not be economical even if there is housing shortage. Furthermore, there might be further restrictions on any such buildings (e.g. neighbors complaining to the zoning board that second story blocks their view/sun). Lastly, the housing shortage and exorbitant housing prices in cities such as San Francisco can actually itself be attributed (among other things) to the zoning laws themselves in the first place (see for example The Impact of Zoning on Housing Affordability Edward L. Glaeser, Joseph Gyourko).

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  • $\begingroup$ And of course nobody who owns a house wants houses to be cheaper. $\endgroup$
    – user253751
    Jul 10, 2020 at 18:14
  • $\begingroup$ @user253751 that in itself would not explain it unless you can argue that all house owners are able to collude (which for such numerous group would be extremely difficult). Homeowners are basically locked in a prisoner's dilemma type of situation, if they all dont build prices of their assets stay high but if someone else builds they those other ones will still get good prices and your home value still drops. Given that the dominant strategy would be for both to build even if it hurts their home values. Thats why some legal restrictions are essential. $\endgroup$
    – 1muflon1 ♦
    Jul 10, 2020 at 18:39
  • $\begingroup$ Part of the dominant strategy is to vote for things that make it hard for other people to build, such as stupid zoning laws (I am not saying zoning laws are inherently stupid by their nature, just that some particular zoning laws are stupid) $\endgroup$
    – user253751
    Jul 11, 2020 at 12:39
  • $\begingroup$ @user253751 I agree but my understanding is that once you go to political process you are making a collective choice not an individual choice. That’s why these kind of gov policies are examined through collective choice models. When society is making collective choice is any particular individual responsible? $\endgroup$
    – 1muflon1 ♦
    Jul 11, 2020 at 12:44

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