Why is California so expensive?

Why is California so expensive: 17 reasons

So why is California so expensive?

The Golden State is known for its high cost of living, with residents paying more for housing, gas, and services than in many other places across the country. It was named one of the most expensive states in America, only behind New York and Hawaii.

But while living in California isn’t cheap, let’s look at some of the upsides. 😊

Most of the state boasts year-round sunshine and superb recreational opportunities. It also has a lot of topographic and climatic diversity with vast deserts, palm-fringed beaches, redwood forests, and snow-capped peaks of the Sierra Nevada. California is one of the few places in the country where you can go hiking, surfing, and snowboarding in one day! 

Why is California so expensive? It's combination of high housing costs, taxes and regulations and higher than average salaries.

California’s 840-mile Pacific coastline is one of the most beautiful parts of the United States. 

While it’s easy to say that California is a great place to settle in, and worth paying for, let’s take a look at some of the underlying factors that contribute to the high cost of living in California. The Golden State is a desirable place to live, but you also need to account for your daily expenses which could take a big chunk of your budget. 

This blog post goes over a few key components that contribute to the high cost of living in California like housing, services and food. Let’s take a look at why California is so expensive to live in, so you know what to expect and can make a sound decision on whether it’s the right place for you. 

What is San Diego known for?

Why is California so expensive? Housing 

Why is California so expensive? One of the top reasons is the housing scarcity coupled with high demand.

1. High demand and low supply of housing 

One of the upsides of moving to California is that you are going to live in a very desirable location. The downside is that California has one of the worst housing shortages in the country. The supply of available housing in California simply doesn’t meet the demand due to a combination of factors like restrictive building policies and a fast-growing population. 

The state median housing price is almost double the national average. Housing Underproduction in the U.S. says California’s housing shortfall is close to 1 million units. While there are a lot of high-paying jobs in major California cities, there’s not enough housing for everyone who wants to live here. 

California’s Inland Empire, the stretch between the border of Los Angeles County to Arizona and Nevada, has become one of the fastest growing regions in the state as more people who can’t afford coastal real estate markets migrate there in search of cheaper homes. 

2. Expensive housing costs 

California’s housing costs are often cited as the main reason for people leaving the state.

Expensive housing costs in coastal metropolitan areas keep many would-be homeowners in California at bay. California home prices increased in recent years, even though the growth rate has slowed down in recent years. September’s 2022 statewide median home price was $821,680. It’s the fourth consecutive month with single-digit yearly growth, with a 1.6 percent gain year over year. 

3. High rent prices

The rent is equally expensive in California. 

The state has the 4th highest rent out of 56 states and territories. The Fair Market Rent in California is $2,274 for a 2-bedroom apartment in Oakland-Fremont, CA HUD Metro FMR Area. For FY 2022, the Oakland-Fremont, HUD Metro area rent for a studio or efficiency is $1,538 per month and $3,578 per month to rent a house or an apartment with four bedrooms. 

The average Fair Market Rent for a 2-bedroom home in California is $2,274 per month.

4. High cost of land 

So why is housing so expensive in California?

One of the chief factors behind the shortage of housing in California is the lack of available land. While California is the third biggest state in America by land after Texas and Alaska, it has limited areas available for development due to its topographic features. Major urban areas like Los Angeles already have a high housing density, and the land often costs a premium.

5. Strict building codes 

California has many strict building codes which have to do with density and environmental policies. These regulations create more red tape and contribute to high costs for construction companies. 

When you add the scarcity of available land and high wages for union workers, it’s no surprise that California construction projects often cost more than in most places in the United States. 

The U.S. Government Accountability Office found that the average housing unit cost $326,000 to build in California – almost three times as much as the cost in Texas, which was only $126,000. 

Why is California so expensive: taxes and regulations

Why is California so expensive? It has strict building codes, regulations and high labor cost which contributes to the high cost of housing.

6. Regulations 

California has the most regulations than any other state in the country. 

California has enacted some of the strictest environmental rules in the country ranging from banning plastic bags in stores to banning the sale of new gas-powered cars by 2035. Taxpayers often pay for some of these regulations, which means California has some of the highest state taxes in the country. 

7. High state income tax

While California gets a bit of a break in property taxes, they pay the highest state income taxes in the United States. 

For tax returns filed in 2022, California state tax rates run from 1% to 12.3%. California also levies a 7.25 percent general sales and use tax, which is the highest statewide rate in the country. 

California state income tax ranges from 1% to 12.3%. The state has the highest top rate of 13.3% in the highest bracket for personal income tax rate. Residents in the bottom bracket only pay 1% of income state taxes.

8. High state sales tax 

California also has the highest state sales tax, at 7.25%. Counties and cities can also add their taxes to that amount, and it’s not uncommon to see some metropolitan areas have sales taxes above 9 percent.

On a positive note, California has an average effective property tax rate of just 0.79%, compared to the national average of 1.19%. It happened because of California’s Proposition 13, a state law that reduced property taxes by more than 50% and capped annual increases in assessed home values.

Why is California so expensive: cost of living 

California is one of the most expensive states in America only behind New York and Hawaii.

9. Expensive healthcare

California healthcare costs are high and rising. Many of the state’s residents with job-based health insurance are struggling because of the growing healthcare costs and increasing out-of-pocket costs. Prices are the main driver of the rising healthcare costs in California.

Since 2013, prices for inpatient, outpatient, professional services, and prescription drugs have been rising in California. California residents can expect to pay an average of $487 per person a month for a major medical individual health insurance plan. These prices vary depending on many factors, and premiums can be lower if you are in good health.

10. High car insurance cost 

Full coverage car insurance costs an average of $2,190 per year in California. The average cost for state minimum coverage is $619 per year. Nationally, full coverage costs $1,771 and minimum coverage costs $545 on average per year. 

11. Gas prices

Another question that comes up a lot when people ask about the cost of living in the golden state is: “Why is California gas so expensive?”

Gas prices in California are higher than in many states. As of March 2022, the gas tax in California amounted to 68 U.S. cents per gallon, compared with a total gas price of 5.79 U.S. dollars per gallon. There are a couple of reasons for that. 

California puts a big emphasis on regulating greenhouse emissions. Its cap-and-trade program requires industries, including fuel wholesalers to curb carbon emissions. Refineries in California follow a specific recipe to reduce emissions, which translates into the higher cost at the pump for drivers.

12. Groceries

The cost of food in California is also more expensive than in most of the country, although the state has so many farms. State residents pay 12 percent more for food than the national average.

A single adult should expect to spend an average of $3,468 per year on groceries, $228 more than the national average.

13. Utilities

Utility are also far from cheap in California. San Diego residents who are served by San Diego Gas & Electric, pay the highest electricity rates in the entire nation. On average, monthly utility bills in California are about 29 percent higher than the national average.

California also mandates energy companies to get a certain percentage of their electricity from renewable sources like solar and wind. Both of those sources are more expensive than your typical coal or gas.

Why is California so expensive: It’s home to many major companies 

California is home to many corporations that compete for top talent across the world.

14. Booming economy

California is the largest economy in the United States. The gross domestic product (GDP) of California was about 3.36 trillion U.S. dollars in 2021, which means that it contributed the most out of any state to the country’s GDP in that year.

If California were a country, it would boast the world’s fifth-largest economy!

California’s job market offers many opportunities. Some of the top industries in the state are agriculture, TV and movies, tourism, technology, service, and healthcare. 

15. California is a high-income state 

California has higher salaries than many other states, meaning many of its residents can afford to spend more.

The U.S. Census Bureau’s 2020 5-year American Community Survey shows that the median household income in California is $78,672. A median income includes single-earner households and single-income homes. It also does not take into account taxes and other deductions.

16. High labor costs

The high cost of labor plays a big role in operational costs for small and medium-sized businesses. California has higher wages than many other states, which translates into higher costs for employers who pass them on to consumers. Charging more helps employers to stay profitable and keep their businesses afloat.

17. Highly educated workers

Many major companies in California attract highly educated and skilled workers from all over the country and overseas, contributing to the state’s population growth and further exacerbating the housing shortage. 

Here’s a list of major companies headquartered in California: 

  • Wells Fargo
  • Apple
  • Oracle Corporation
  • Facebook
  • Intel
  • Alphabet
  • Cisco Systems
Best day trips from Los Angeles

How do people afford to live in California?

Depending on where you are in California, you might need to adjust your budget to afford to live here. Urban parts of the state are notorious for their high cost of living, and you might want to cut your expenses.

1. Walk as much as you can

If you live in a walkable part of Los Angeles like Santa Monica or San Francisco that has good public transportation, try to limit driving to save on gas. If you don’t own a car, you could save anywhere from $500 a month and up between gas expenses, maintenance, and car insurance.  

2. Learn to cook

California has a food scene like no other state, but eating out can add up. Visit local markets where you can produce from farmers at lower prices and cook your food at home.

3. Avoid consumer debt

Consumer debt is the last thing you want to have while living in an expensive place like California.

4. Live in less popular neighborhoods

California’s major cities like LA, San Francisco, and San Diego have some of the most desirable areas in the United States. But living there can cost you a pretty penny, particularly if you are close to the coast. If you choose less fancy neighborhoods away from the beach, you could save on housing.

5. Bring lunch to work

Bringing lunch to work can also help you eliminate some expenses. 

6. Take advantage of California’s outdoors

California is home to incredible national parks, monuments, beaches, and historic landmarks. While not all of them are free, some are. Get outdoors to enjoy California’s incredible scenery instead of spending time and money on high-ticket entertainment. 

Go to the beach California is home to some of the best beaches in the world, and most of them are completely free! 

7. Exercise outside

One of the biggest advantages of living in California is that you enjoy more than 300 days of sunshine, particularly in the southern part of the state. You don’t have to spend money on a gym membership and can get your dose of exercise outdoors. 

8. Buy used clothes

Big cities in California have tons of thrift stores where you can find amazing deals on gently used clothes. 

9. Start a side hustle

California’s high cost of living encourages a fair deal of entrepreneurship among its residents. You could start a side hustle to generate money if you have some talents. For example, you could create an online course, start tutoring or become a ride-share driver to generate extra income. 

Why is California so expensive: FAQs

Why is California so expensive? It's one of the most beautiful states, but the cost of living here is above average.

Why is California’s cost of living so expensive?

California’s cost of living is high because of the combination of factors that include high state income tax, expensive housing and gas prices, and some of the highest labor costs in America which translate to higher costs for consumers. 

How do people afford to live in California?

Being able to afford to live in California could require some creativity, especially if your income is below the state’s median. You could split your rent with roommates, and stay away from expensive housing markets like Los Angeles, San Diego, and San Francisco. Drive as little as you can, or get rid of your car altogether and cook your meals at home instead of eating out. 

Finally, start a side hustle, or get a second job to earn extra money. 

Is it expensive to live in California?

California is the third most expensive state in the United States, only behind New York and Hawaii. Residents of California pay some of the highest prices in the country for housing, gas, and services due to the high cost of labor in the state.

How much does it cost to live comfortably in California? 

You need at least $46,636 per year of take-home pay after taxes to meet the average cost of living in California. That translates into $3,886 per month. This amount of money covers expenses and doesn’t include savings that you could have in your bank account by the end of the day. 

What is the minimum wage in California? 

The minimum wage in California is $15 an hour. for employers with more than 25 employees and $14.00/hr for employers with less than 25 employees. On January 1, 2023, the statewide minimum wage, regardless of the size of the company is rising to $15.50 an hour.

What is the cheapest city to live in California?

California is known as a pricey place to live, but you can still manage to live cheaper in some of the inland areas of the country. Cities like Bakersfield, Fresno, Victorville, Barstow, Modesto, and Redding are some of the most affordable places to live in California. 

Best places to visit in California

Why is California so expensive: final thoughts

People flock to California despite its high cost of living. And there’s a reason behind that. California offers many things no other state can. Whether you want to enjoy the outdoors, eat fresh produce, or visit historic landmarks, the Golden State has a plethora of things to do. You could spend weeks exploring the state, and still only scratch the surface. 

California is the only state where you can live near the beach and be 30 minutes away from the mountains, and 40 minutes from the desert. How many other states offer that?