A commenter on my earlier post writes,
In San Francisco, over 70% of rental units are rent-controlled. This allows a lot of low-income people to live there, pushing down the median income. Meanwhile, there are no price controls for home sales, and these are pushed up by the shortage of market-rate units.
If you excluded everyone in a rent-controlled unit, I think the price-income ratio would look more reasonable.
Arithmetically, this explanation works. The median income would be artificially low relative to the median house price. But what about the economics?
I expect rent control, along with building restrictions, to lower the quality and quantity of housing services supplied. It also creates a big incentive for owners to convert rental properties into homes for sale. Over a long enough run, these supply effects tend to push up rents. I am a bit reluctant to believe that rent control achieves an equilibrium in which housing is affordable for renters and not for buyers. I am more inclined to side with the view that rent control backfires in the long run, leading to high rents.
Of course, one can argue that there will still be a gap between prices and rents, particularly if conversion of rental units is impeded by regulation. In that case, the only option available to property owners would be to limit maintenance. If the quality of rental units has tended to deteriorate, then that would support the commenter’s explanation.
Incidentally, another commenter suggested that the ratio of wealth to income might be high in cities with a high ratio of house prices to income. This would be very plausible if we were talking about average ratios. It is somewhat less plausible for median ratios, because median wealth tends to be pretty low.
“Growth seems to have slowed a bit in the fourth quarter of 2014, but it picked right back up after the new year with a 3.7 percent increase in one quarter. And, of course, the most depressing statistic of all dates back to 2011, before the current rental market madness had really begun. The Zillow Rent Index for San Francisco back then was just $2,624, a full 59 percent lower than it is today.”
http://sf.curbed.com/archives/2015/04/22/san_francisco_rents_hit_an_alltime_high_no_sign_of_letting_up.php
And then there are the fights over Airbnb — in addition to condo-conversions, owners also have an incentive to use units for short-term rentals that evade rent-control:
http://archives.sfexaminer.com/sanfrancisco/sf-report-says-units-rented-for-short-term-reduce-long-term-housing/Content?oid=2929888
SF is clearly not in a stable equilibrium consisting of high purchase prices for the wealthy and moderate controlled rents for everyone else.
I think your intuition about the long run is correct. The American Community Survey suggests that median rents are high in the big cities. In fact, I attribute the majority of price pressures on homes to be from rent inflation coming out of supply constraints in just a handful of cities.
http://idiosyncraticwhisk.blogspot.com/2015/05/housing-tax-policy-series-part-35.html
http://idiosyncraticwhisk.blogspot.com/2015/06/housing-tax-policy-series-part-36-we.html
Here’s one more:
http://idiosyncraticwhisk.blogspot.com/2015/06/housing-tax-policy-series-part-38-world.html
These are dynamic. Rents lag prices and rise to sort those with the income and desire to afford them. The cost of living is always higher in flourishing urban areas, only made up partially by the higher level of income and opportunities there or they would grow without bound. This balances growth between urban and lesser dense areas.