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.

ridiculous-rentsRents (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.potter-minimum-wage

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.

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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.i_rented_housing_bubble

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.

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