The McKinsey Global Institute estimates that California would have to build 3.5 million more homes by 2025 to keep up with population growth.

California ranks 49th out of all 50 states by housing units per capita, according to a new report released by the McKinsey Global Institute, and the existing housing so expensive that the state of California loses an average of $3,500 in economic output per person per year to housing costs. McKinsey estimates that the state would need to build 3.5 million homes by 2025 to keep up with growth – and recommends withholding tax dollars from cities that don’t meet building goals, in order to incentivize growth.

This report comes after the failure of a proposal by California Governor Jerry Brown that would have allowed builders to bypass some local approvals. The report recommends that builders should be allowed to appeal to higher authorities if their projects are denied locally.

Michael Stretch, CEO of the North State Building Industry Association, said the report rightfully points out California’s dire housing situation, but added that he prefers collaborative policies to penalties when it comes to enticing communities to embrace building.

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