Oct282016
A larger supply of housing is the best form of rent control
Rent control would be unnecessary if politicians allowed developers to build enough housing to meet the demands of our growing population.
Rents (and resale prices) spiral out of control in California, pressuring family budgets all across the state. Many people believe the solution is to put an artificial cap on rents, but this band-aid approach accomplishes very little and creates other problems.
The dilemma of high housing costs in Silicon Valley, and in all of California for that matter, finds root in the lack of housing supply. The extreme shortage of housing relative to job growth forces employees to compete for housing, driving up rents and resale prices. Dramatically rising rents naturally flows from such circumstances. Short of approving more construction, legislators can’t pass laws preventing the social problems created by the housing shortage.
Without rent control, the competition for housing causes rents to rise until only the highest wage earners can afford it. The market allocates housing with the highest wage earners choosing first, and everyone else fighting for the leftovers. It’s a situation that appeals to no one, even the high wage earners because they still must spend enormous sums on rent.
Regulating rent resonates with a common-sense appeal. If rents rise faster than incomes, just put a cap on rent increases, and the problem is solved, right? While regulating rent growth might benefit some renters in the short run, in the long run, this policy creates problems of its own.
First, rent control traps people in rental housing because they prefer to keep the subsidy they must surrender when they move. This limits their social mobility and prevents them from moving to take jobs or sentences them to brutal commutes if they accept a job elsewhere.
Second, rent control reduces an owner’s incentive to invest in the property or perform routine maintenance. Without rent controls, landlords often renovate their properties to attract tenants willing to pay higher rent. With rent control, they lack this incentive.
Plus, with rent capped, a landlord’s incentive is to spend as little as possible on maintenance, particularly for long-term tenants who may be well under market. If a landlord allows the property to deteriorate, it prompts the renter to leave, which allows the landlord to raise the rent to market for the new tenant.
Third, like all housing subsidies, it capriciously rewards those who obtain the subsidy at the expense of those who do not. When a tenant occupies a property for $2,000 per month that another renter would pay $3,000 per month to rent, the subsidized renter enjoys a nice place while the non-subsidized renter pays more to obtain less, hardly a just outcome.
With all these problems, it’s surprising that rent controls are considered at all, but politicians find it less painful to embrace rent control than to approve more housing supply, so rather than address the real disease, they give the public aspirin and hope the headache goes away.
A New Real-Estate War in Silicon Valley
Soaring apartment costs in Silicon Valley are fueling popular support for an idea bitterly opposed by many landlords in America’s technology capital: rent controls
By ELIOT BROWN, Updated Oct. 20, 2016
Soaring apartment costs in Silicon Valley are fueling popular support for an idea bitterly opposed by many landlords in America’s technology capital: rent controls.
Voters in five small and midsize cities in the Bay Area are set to decide Nov. 8 on whether to enact various forms of rent regulation that would keep rent increases for existing tenants pegged near the rate of inflation.
Tenant organizations, unions and church groups are knocking on thousands of doors in an effort to drum up support for measures designed to protect apartment dwellers from runaway rents.
On the other side, landlords and real-state agents are pouring money into mailers and television ads in a vigorous effort to battle the initiatives.
“We’re taking it very seriously,” said Thomas Bannon, chief executive of the California Apartment Association, a landlords group. “We are engaged in some pretty aggressive campaigning to get the word out as to why rent control is not the answer.”
In all, the proposals’ opponents have raised more than $1.8 million against the measures in the five cities, according to campaign finance records, largely from groups like the National Association of Realtors and an array of landlords including apartment giantEquity Residential. That far outstrips the roughly $200,000 reported raised by various groups supporting rent control.
In a recent post I talked about the challenges with ballot initiatives in California. Whenever big money is on the “no” the proposition generally fails. In this instance, the “no” outspends the “yes” by a factor of nine. I would be shocked if these measures passed.
Community organizers and unions won efforts this year to put measures on the ballot box in five municipalities scattered across Silicon Valley and near Oakland in the East Bay: Google Inc.’s home of Mountain View, Burlingame, San Mateo, Alameda and Richmond.
While the largest cities in the area—San Jose, San Francisco and Oakland, have had such controls for decades, the fact that midsize suburbs now are pondering these market controls shows how the region is struggling to manage its rapid growth in prosperity.
Yet they fail to address the real problem: the lack of supply.
At the root of the issue is that there isn’t nearly enough housing for all the new jobs. Between 2008 and 2015, the four counties that make up the heart of the region added 400,000 jobs, while permits were issued for just 86,000 new housing units.
Which is why I believe we need a California Housing Commission.
Many service workers and teachers have had to move far away from their workplaces, a problem that landlords, tenants and policy makers all agree has no an easy answer.
Actually, no, there is an easy answer; it’s just not politically feasible at this time.
Economists widely criticize [rent control] laws because of inefficiencies they produce: Tenants generally get to keep their rents steady regardless of income, allowing some wealthy residents to get choice apartments for low rent as long as they remain in them for years.
“It’s not necessarily helping those that need it most,” said Christopher Palmer, an economist at University of California Berkeley’s Haas School of Business, who has studied rent control. Property improvements and overall property values also tend to be held back by such regulations, he said.
These ballot initiatives attempt to legislate away the free market. Legislators don’t allow more housing supply, the market’s natural reaction to rising costs, and they don’t allow rent increases, the market’s natural reaction to a shortage of supply. They also don’t want evictions by landlords who want to get market rate for their properties. The problems multiply because legislators refuse to address the root cause: the lack of supply.
How long before San Francisco simply tells landlords how much they can rent property for? Aren’t we there already? And then when landlords are unwilling to rent for the government-mandated rate, how long before San Francisco forces them to rent the property? Isn’t that the next logical step? What do the landlords really own at that point? They must rent the property, and they must rent it at a government-mandated rate. Isn’t that communism?
How long before San Francisco’s rental market is a government-owned and controlled disaster like the old Soviet Union? That’s where it’s headed.
Which party is the “smart money” in this transaction?
Blackstone Cashes In on China’s Overseas Shopping Binge
Blackstone Group LP has emerged as a big beneficiary of China’s global shopping spree by unloading billions of dollars worth of holdings to Chinese buyers.
In its latest such sale, the private-equity and real-estate giant on Monday agreed to sell a 25% stake in Hilton Worldwide Holdings Inc. to Chinese conglomerate HNA Group for $6.5 billion. That was the latest notch on Blackstone’s belt after flipping Strategic Hotels & Resorts Inc. to China’s Anbang Insurance Group Co. for $5.5 billion earlier this year, and guiding the sale of New York’s marquee Waldorf Astoria to Anbang for a record-breaking $1.95 billion in 2014.
During the past three years, as Chinese companies have plowed increasing amounts of money into assets abroad, New York-based Blackstone or a portfolio company have sold at least $16 billion in hotels, office buildings and other overseas real-estate assets to Chinese buyers, according to Dealogic and research by The Wall Street Journal.
Behind the stream of deals—many of which have earned fat returns—are Blackstone Chief Executive Stephen Schwarzman and real-estate head Jonathan Gray, who has personally led negotiations with Chinese buyers. Mr. Gray was deeply involved in the sale of the Hilton stake to HNA, which was done at three times Blackstone’s original price nine years earlier. He was also instrumental in selling Hilton’s Waldorf Astoria, which Blackstone’s property fund controlled, in a deal that set a record for the highest price for a U.S. hotel.
Blackstone earned about $500 million on its investment in Strategic Hotels, which it held for less than a year, according to a person familiar with the situation.
“As the second largest economy in the world, it’s no surprise that China is making more outbound investments,” said Christine Anderson, spokeswoman for Blackstone. “Given the nature of our business and quality of the assets we own, it’s also no surprise that they would be acquiring from us.”
America Is Building More Three-Car Garages Than One-Bedroom Apartments
Inventory has been a major theme of U.S. housing markets in recent years, as a shortage of homes for sale has pushed prices higher and low vacancy rates have increased rents. So it might be surprising to hear that Americans are building plenty of housing—for their cars.
Twenty-four percent of new homes completed in 2015 included a garage with room for three or more cars, according to census data highlighted in a blog post last week by Robert Dietz, chief economist for the National Association of Home Builders. That’s the highest share since the Census Bureau started keeping track of large garages in 1992. In every year since the Census has kept track, U.S. homebuilders have built more three-car garages than one-bedroom apartments.
Thousands of NYC Landlords Who Ignored Rent Caps Got Tax Breaks They Didn’t Qualify For
Decades ago, New York’s political leaders concluded that people like Ortiz and her family would be pushed out of New York City if they didn’t spur the construction of more housing. And so lawmakers created a program that offered developers of new apartment buildings a break on their property taxes for as long as 25 years. In exchange, landlords were supposed to limit rent increases to modest amounts set by New York City — a process known as rent stabilization.
In the years that followed, city officials have allowed that well-intentioned plan to morph into something unimaginable to its proponents: A $1.4 billion dollar-a-year giveaway that requires nothing from the vast majority of landlords whose taxes are lowered.
To benefit from the program, known as 421-a, developers must go through a rigorous process involving multiple city and state agencies. They fill out an application in which they promise to register their apartments for rent stabilization. Once construction is complete, city housing officials verify that they’ve registered and issue a certificate of approval. That certificate is supposed to be filed with the city’s finance arm for the owner to get the tax break.
A ProPublica analysis shows that these procedures have been routinely, consistently ignored. Nearly two-thirds of the almost 6,400 rental properties paying reduced property taxes do not have an approved application on file, the most basic step for enforcing the rules. Collectively, these landlords save about $300 million a year in property taxes without showing they’ve qualified for the tax break, ProPublica estimates. Some landlords have pocketed the tax break for more than two decades while waiting for housing officials to approve them for benefits they are already receiving.
Out With the Poor, In With the Rich: The Landlord’s Guide to Gentrifying NYC
In the summer of 2002, Sheikh Hamad bin Khalifa Al Thani, the emir of Qatar, bought a couple of adjoined Beaux Arts town houses on East 72nd Street just off Central Park. He paid $26 million for the pair—a vast markup, it might have seemed, from a comparable purchase made earlier in the year. That March, a Manhattan landlord named Steve Croman had scooped up a six-story, 19,000-square-foot manse across the street for only $5.5 million. Croman’s town house came with a problem: It wasn’t a private home, but an apartment building of 23 below-market units, classified by New York state as rent-stabilized. That meant he could charge his new tenants only gradual, minor upticks in rent. But what might have appeared to be a dead-end investment was in fact an audacious, buy-low proposition. If Croman could get his tenants out, the building’s value would soar.
Croman’s plan revolved around a little-used clause of the state rent-stabilization code that allows a landlord to evict tenants if he claims a building as a personal home. Almost immediately after buying the property, he served residents with lease termination notices and approached them with buyout offers. Alarmed, the tenants, who were paying as little as $844 a month in a neighborhood where studios tended to rent for three times as much, lawyered up and agitated to stay. Samuel Himmelstein, an attorney who represented several of them, argued at the time that the personal-use clause was meant to cover a few apartments at most. “I’ve never seen anything on this scale,” he told the New York Times.
As legal proceedings unfolded, 12-14 E. 72nd St. became less and less livable—a tactic, tenants were certain, to get them to capitulate and accept buyouts. Bob Leighton, a criminal defense attorney who lived in the building for 35 years, says Croman tried something new practically every day: “He would remove the washing machines. He tried to close the front door, make everybody go through the basement. He got rid of the super, then had a part-time super who did nothing.” Another former tenant forwarded me a 15,000-word document detailing four years of tribulations: No hot water. No cold water. Rodents. Severed phone lines. Holes in ceilings. A fire. “He was taking the building apart, bit by bit,” says Malcolm Kirk, a photographer who paid less than $1,000 a month for a third-floor studio he shared with his wife.
By the late 2000s, Croman had the place to himself.
Homeownership Rate Edges Up
According to the Census Bureau’s Housing Vacancy Survey (HVS), the U.S. homeownership rate rose to 63.5% in the third quarter 2016, reversing the downward trend of homeownership rate nationwide. It is 60 basis points higher than the rate in the second quarter 2016, which is largely driven by the increase in the millennial and 65+ homeownership rates.
Compared to the peak at the end of 2004, the homeownership rate has steadily decreased by 5.7 percentage points and remains below the 25-year average rate of 66.2%.
[Notice the tiny uptick at the bottom of the long downtrend.]
Rent control will always be part of supply.
This has been the case for decades and will continue to be the case.
It has a very small impact for the small number of renters who get the lucky roll of the dice for rent control… and that small supply is off market essentially.
400,000 jobs created in the bay area… that’s really all you need to know
Sometimes saying nothing is the astute thing to do.
http://sanfrancisco.cbslocal.com/tag/layoffs/
That’s part of what you need to know. The other part is that they approved less than 100,000 housing units to accommodate those 400,000 workers.
You will never be able to accommodate that much housing.
El O there are always layoffs in the bay area and hiring…. often simultaneous…. out with the old in with the new.
Perhaps they can’t accommodate enough supply to meet all their needs, but they aren’t making much of an effort.
In many metros, they allow housing to be built to accommodate the demand created by job growth, so even cities like Atlanta that produces new jobs at rates similar to Silicon Valley, their house prices are far more affordable because the supply keeps pace with demand.
Your phrasing implies that city leaders wouldn’t approve more housing permits. Could it be that builders simply didn’t want to build in the aftermath of the housing crash? (Builders often suffer from recency bias; Not a lot of forward thinking going on in that industry.) I believe an economist once coined a term for this… the normal Real Estate Cycle.
Buiders are certainly not building everywhere. There is plenty of finished lots and land available in Hemet, but the builders won’t touch it. The main problem today is that where the supply is needed most, the builders can’t get permission to build.
For anyone heavily leveraged, the noose continues to tighten…
That chart is certainly unwelcome news to companies operating on cheap debt. It also doesn’t bode well for those few people still using ARMs — assuming that pushes up mortgage rates, which isn’t certain.
Homeowners slide and renters rise
For five hundred twenty-five thousand six hundred minutes each year, people have to live somewhere. And it looks like renting is becoming more popular.
The graph clearly shows the U.S. homeownership rate has steadily declined and that the rental vacancy rate has declined right along with it. So the two trends seem closely related, especially recently. But does a decline in homeownership mean homeowners are moving out of houses and into apartments? Not necessarily. So what is going on? At least two things. 1. The financial crisis: The recent economic downturn left many households wary of investing (or reinvesting) in a home. 2. Kids today: The younger generation seem less interested in living in the suburbs. In quite a few cities, St. Louis included, they seem to prefer to live where they work and spend leisure time. Urban commercial buildings are being converted to apartments to accommodate this increased flow of renters. The rental vacancy rate has still been declining, which means the pace of rental property construction hasn’t been fast enough to keep the rental vacancy rate steady. Be sure to check back with the FRED Blog in a few years to see where all this stabilizes.
The comments below this story are hilarious.
Man Nabbed In Police Sting Arranged To Pay Hooker With McDonald’s Quarter Pounder And Fries
A Wyoming man who arranged to pay a prostitute with a McDonald’s Quarter Pounder and French fries was arrested when he showed up for the illicit encounter, food in hand, only to discover that he had been snared in a police sting.
As part of an undercover operation, cops in Casper placed a Backpage.com ad in the guise of a hooker trolling for clients.
Investigators charge that David Mangus, 22, answered the ad and arranged last week to meet the purported prostitute for sex. But instead of paying cash in return for oral and vaginal sex, cops say, Mangus worked out a deal to provide the hooker with food instead.
Specifically, a McDonald’s Quarter Pounder with cheese and a medium size order of French fries.
How is your objection to rent control (communist subsidy of long-time renters, reducing new renter’s ability to get housing, etc) any different than proposition 13?
So if the subsidy is for the less-well-off renter, it is communism,
but if it is for the ‘worthy’ house buyer, it is OK?
The biggest difference is that the long-time homeowner will still maintain the property whereas the landlord of the long-time renter with rent control won’t. I’m not a big fan of Proposition 13 either, particularly for the way it favors commercial property owners. In fact, Proposition 13 was the first band-aid we applied to the problem of a shortage of housing, and it’s distorted the market too. The bubble of the 1970s that spawned Proposition 13 was caused largely by the inability of builders to bring new product to market to curb the price increases.