Why rent control works

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I shouldn't even bother to talk about this, because all it will do is stir up the trolls, but I'm getting sick of all the talk about rent control being a source of San Francisco's housing problem. The latest is an editorial in the Business Times, which I buy to read J.K. Dineen's stories about commercial real-estate, among other things. I should treat it like the Wall Street Journal; nobody takes the Journal's editorial page seriously.

But the BT is just putting in print the argument that I'm hearing from the neo-libertarians who seem to be more and more populous in this town. And it goes like this:

Rent control distorts the market, which should be controlled by supply and demand. When you have rent control, evil tenants can stay in one place a really long time, thus "reducing urban vitality by discouraging mobility." They can save their money for something other than rent. And it's deeply unfair to landlords, because, as the BT notes:

By artificially limiting the return a building’s owner can generate on his investment, it discourages him from spending to maintain or upgrade the city’s housing stock. Rent increases are ordained not by supply and demand but by the city’s rent board. Legally, controlled rents can only go up each year by a fraction of the inflation rate. The ability to recoup costs of improvement or maintenance are also tightly curtailed. Costs are subject to no such limitations, so generally as a rent-controlled landlord, the longer you do it, the further behind you get.

Actually, rents go up by the percentage of the inflation rate that's due to housing. The ability to recoup maintenance costs are not "tightly curtailed." But more important, this notion that landlords "get further behind" because they can't raise the rent assumes that most landlords -- and their bankers -- are idiots.

When you buy a piece of rental property, you typically have to prove to the bank that the rental income from the place is adequate to cover the mortgage, the taxes, the insurance, and upkeep, the same way a person buying a home has to prove that he or she has adequate income to pay the costs. When banks make loans the borrowers can't repay, you get the mortgage crisis we've seen -- but most of those units were single-family homes.

If I buy a rental property, the rent that's coming in TODAY is matched with the price I'm paying TODAY. If the rents are too low to cover the cost, I have no business buying the place. And the bank has no business loaning me the money.

In San Francisco, unless you're a complete moron, you buy rental property knowing, as the banker does, exactly what the current tenants are paying, and understanding, as the banker does, that the law won't let me raise those rents by more than a modest amount each year. You're making a profit at those rent levels; if not, you shouldn't buy the place.

Now: Under Prop. 13, your property taxes can't go up by much more than the rent goes up each year. And if you aren't a speculative gambler (if you are, you have no rights anyway), you almost certainly have a fixed-rate mortgage. So your biggest "costs" are just as constrained as the rents you get. Meanwhile, your property continues to appreciate in value as the tenants pay your mortgage and taxes.

I know a lot of landlords in San Francisco, and the honest ones all say that owning rental property is a great deal -- for the owner. There are probably some poor landlords who either (a) made bad business decisions or (b) were subject to some awful disaster and now find themselves unable to make ends meet. But they are not common.

Here's the bottom line: Rent control prevents landlords from making speculative profits when the housing market booms. It also allows non-wealthy people to live here, for long periods of time, and become part of the San Francisco community. Housing stability INCREASES "urban vitality." That's the point.

Real, effective rent control would include limits on rent increases when a property becomes vacant. Berkeley had that in the 1980s. It didn't cause urban blight or landlords abandoning buildings; instead, it helped create the Gourmet Ghetto and a thriving local business scene because tenants had more money to spend. It was a great success, until the state outlawed it.

Oh, and don't tell me it discourages new construction: All new construction, since 1979, is exempt from rent control in San Francisco.

Rent control is, I will admit, bad for people who see housing as a speculative commodity, to be traded with little regard for its function as a basic human right. But I see housing more as a regulated utility -- private owners have the right to a regular, acceptable return on investment, but not to excessive profits. Tenants have the right to live in the same place their entire lives, as long as they pay the (stable) rent and don't become a nuisance.

These are good things for a city. The only problem with San Francisco rent control is that it isn't strong enough.

Attack me, trolls. Or better, make a civil counter-argument that doesn't start with "The problem with Tim is ...." Cuz we all know about my problems.

 

 

Comments

Total government takeover of the fraudulent US mortgage market doesn't manipulate housing.

http://washingtonexaminer.com/federal-government-controlled-99.3-percent...

Federal government controlled 99.3 percent of mortgage market in 2012

Posted by Guest on May. 13, 2013 @ 1:26 pm

85 billion per month has no effect on housing.

http://www.bloomberg.com/news/2013-03-20/fed-keeps-85-billion-pace-of-bo...

Fed Maintains $85 Billion Pace of Monthly Asset Purchases

Posted by Guest on May. 13, 2013 @ 1:27 pm

I love this paragraph buried at the end:

"Rent control is, I will admit, bad for people who see housing as a speculative commodity, to be traded with little regard for its function as a basic human right. But I see housing more as a regulated utility -- private owners have the right to a regular, acceptable return on investment, but not to excessive profits. Tenants have the right to live in the same place their entire lives, as long as they pay the (stable) rent and don't become a nuisance."

Your mixing two concepts up--property and housing. Property has always been a speculative commodity. Unless, a person decides to reside in the property that they purchase, they are doing so because it is a good investment (i.e. a speculative commodity). To think that anyone purchases a property because are interested in a basic human right is silly.

Shelter may be a basic human right and housing policy may be a good social construct, but the right to live where you want to live is not a basic human right and never has been.

If you want to live some place forever you need to buy that property.

Posted by GuestMatt on May. 13, 2013 @ 1:52 pm

What Tim says in the paragraph you curiously say is "buried," actually makes spot-on, perfect sense. He's not confusing anything. I, and many like me, totally agree with him.

Posted by Dawg on May. 14, 2013 @ 1:37 pm

transactions between consenting adults to skew the outcome in favor of one class over the other based on nothing more than political prejudice, class warfare or envy.

Posted by Guest on May. 14, 2013 @ 1:49 pm

you're kidding, right?

Posted by Dawg on May. 14, 2013 @ 2:09 pm
Posted by Guest on May. 14, 2013 @ 2:23 pm

Rent control does not skew the transaction. It equalizes it. The landlord has Prop 13 as comparable protection. Both regulations are based on a belief in the need for stability.

The landlord also pays a purchase price with rent regulations in mind. So this is a balanced equation.

No reflective, financially literate person would ignore these facts.

Posted by Guest on May. 22, 2013 @ 10:10 am

The major cost is of course the mortgage, and the opportunity cost of any equity in the property.

Whether the purchase price "reflects" rent control depends on when the property was bought. If you'd bought a 2-4 unit 20 years ago, there was no RC on it at the time - that was retrospectively changed in 1994.

What matters ultimately is the ROI the LL gets on the value of the property versus what he could get elsewhere on the same sum. If rent control means that ROI is sub-optimal, then it makes more sense to Ellis and sell.

Posted by Guest on May. 22, 2013 @ 10:28 am

Property is a good investment because it doesn't follow the rules of capital investment. Most capital investments, you have to add value of some kind in order to increase the value. Property increases in value simply by aging. Often it is depreciating from a value point of view. But the property market conspires to increase the price. Investing in property is one of the most dishonest way of making money, and is part of the problem that causes inflation and leads to an economy that can't survive without constant growth.

Posted by treywedge on May. 14, 2013 @ 4:13 pm

anything else. Except for massive structures like churches and castles, they are useless within 100 years or so, unless you spend a stupid amount of maintenance.

anyway, much of that appreciation is of the land and not the building. And, as the saying goes, they're not building any more land.

Posted by Guest on May. 14, 2013 @ 5:25 pm

Agreed. You don't have a right to live in a place your entire life if you don't own it. If you want to have power over your domain find a way to make the money to buy one.

Posted by Guest on May. 15, 2013 @ 10:48 pm

when people live in a city and are entitled to stay there and not have people like this tell everyone else they don't have a right to live there unless, essentially, they can afford to buy property. as is all too common, the haves tell the have not's when they can or can't have, like housing, disgusting. rent control is NOT strong enough, so people like this need to get out of town and fast!

Posted by Guest on Jun. 30, 2013 @ 8:19 am

to be able to afford what you cannot afford.

I have a right to live in Aspen, but I do not have the means to do so.

Posted by anon on Jun. 30, 2013 @ 9:17 am

if you already lived there and have your whole community and life there you would think differently

Posted by Guest on Sep. 03, 2013 @ 11:16 pm

All you have to do is look at the attitude of BOMA, SFAA, Small Property Owners of San Francisco, and all the other landlord-advocacy groups toward rent control. They exist for the sole purpose of finding ways landlords can squeeze more money out of tenants. And they HATE rent control. That's really all you need to know.

All the libertarian crap they spew about how eating a shit sandwich is actually good for you -that's just a smokescreen. If rent control didn't work, landlords wouldn't spend all their time trashing it.

Posted by Greg on May. 13, 2013 @ 2:40 pm

You left out this part of the Op Ed:

"Professional economists famously disagree on almost everything — but a poll of them a few years back found that 93.5 percent concur that rent control restricts the supply and drives up the overall price of housing, among other ills."

I think these 95.3% of economists probably know more about economics than the Bay Guardian.

This is also a key point the Op Ed makes, which is true:

"By restricting the supply of market-rate housing, it drives up prices for those not lucky enough to be protected."

So if you're not in rent controlled housing, you're paying more than you otherwise would be.

Posted by The Commish on May. 13, 2013 @ 2:58 pm

"So if you're not in rent controlled housing, you're paying more than you otherwise would be."

Sure, and the answer is to strengthen rent-control laws so that more renters are protected by them.

Posted by Hortencia on May. 13, 2013 @ 3:10 pm

reveals that 100% of them think their clients (landlords) would extract more money from tenants if rent control was eliminated. They know their business. I trust them to know what's good for them (and thus bad for the rest of us). The rest is just bullshit. Money talks. Bullshit walks. 'nuff said.

Posted by Greg on May. 13, 2013 @ 3:17 pm

Probably true, just a poll of tenancy groups would result in 100% of them believing that landlords should be forced to provide housing services regardless of whether it was profitable or not.

That's the #1 problem with rent control in that it creates an adversarial relationship between the provider and receiver of services. If we had the same situation with food services (another basic human need) there would be all sorts of distortions in the marketplace.

Posted by Guest on May. 13, 2013 @ 3:38 pm

Farm and water subsidies distort the market for animal products. No one is crying that there is an adversarial relationship there.

Posted by Guest on May. 13, 2013 @ 4:22 pm

except as a temporary measure in wars and disasters.

Posted by Guest on May. 13, 2013 @ 4:46 pm

You are correct. We do subsidize animal products (and oil for that matter) but two (or three) wrongs don't make a right.

Posted by Guest on May. 13, 2013 @ 8:26 pm

funded by another group of society, but rather by the taxpayer in general.

I'd support a scheme like Section 8 housing vouchers on that basis. But not rent control which is effectively a form of imposed wealth redistribution (even though in some cases the recipient is wealthier than the donor).

Posted by Guest on May. 14, 2013 @ 9:43 am

No way you would support housing vouchers or subsidies except in theory as an argument against rent control.

How would you pay for your generosity? You never support taxation. Eliminating rent control would provide $0 that could be used for Section 8 susidies or vouchers.

Concern trolling 101.

Posted by Guest on May. 14, 2013 @ 9:56 am

altho it would lead to more income tax being taken in.

The reasons to abolish rent control are obvious - it creates distortions in the market that push up rents.

Posted by Guest on May. 14, 2013 @ 10:42 am

Sad, but true.

The majority would never support (pay for) a system that provided housing assistance to those who really need it. Instead we have Rent Control - the true cost of which is paid by new residents. I suppose we are fortunate that so many highly paid people want to move to San Francisco.

Posted by Guest on May. 14, 2013 @ 10:50 am

obviously some rents would go up. But the vacancy rate would also go up, partly because some of those tenants would move to Oakland, and partly because more landlords would be tempted tor ent out their untis rather than hoard them, sell them, BnB them, TIC them or whatever.

This was exactly the experience in Boston when they ditched RC. Some rents went up, some went down and it became easier to find a place.

Oh, and landlords started treated tenants as customers again, instead of as squatters

Posted by Guest on May. 13, 2013 @ 3:59 pm

housing bubble and subsequent financial crisis, so what do they know?

Posted by Guest on May. 13, 2013 @ 3:48 pm

High income people should not be receiving Rent Control benefits. Affordable housing programs should only be directed toward the poor, the elderly, and the disabled.

Posted by Guest on May. 13, 2013 @ 3:50 pm

It's a fairly high limit tho - 150K a year I believe.

Posted by Guest on May. 13, 2013 @ 4:04 pm

But not because it makes any sense to have a life sentence of a bunch of low-paying squatters. But rather because:

1) You can buy the building cheaply, because of the toxic inhabitants
2) Interest rates have been declining for 30 years, so you can refi at lower rates but do not have to lower the rents
3) Prop 13 - Thank God
4) Ellis - Thank God
5) You can deduct depreciation on your taxes, so can declare a loss even while making a profit
6) SF RE always goes up

None of that really has anything to do with having tenants, and often the most profitable thing to do with them is wait until they leave and then AirBnB, TIC or condo.

Posted by Guest on May. 13, 2013 @ 4:01 pm

>....."Tenants have the right to live in the same place their entire lives, as long as they pay the (stable) rent and don't become a nuisance."

Doesn't it come down to this? If you believe this, rent control is a good thing. If you're an economist, rent control is not.

I don't believe eveyone has the right to live in the same place forever - that's called buying a house and meeting your mortgage payments.

Posted by Guest on May. 13, 2013 @ 4:06 pm

themselves a free lunch at the expense of the minority.

If it had been put to the voters that taxes should be increased to pay rent subsidies to the poor, it would probably lose at the ballot, even though the cost would be far less, because more people would have to pay for the deal.

But the genius of selling rent control is that there are not that many landlords, and many of them do not live in SF, or are property companies, and either way - they don't vote.

So 60% of the voters basically say they want a free lunch at the expense of a few thousand landlords. Democratic, perhaps, but a "taking" from a minority nonetheless.

But in recognition of the fact that some small landlords could be greatly penalized if they are unlucky enough to have tenants who never leave, the Good Lord gave them the Ellis Act.

Posted by Guest on May. 13, 2013 @ 4:20 pm

There is no transfer of funds from city coffers to anyone, except for the relatively low cost of the Rent Board, much of whose budget is paid from fees paid by both landlords and tenants.

And if you really want to make a compelling argument, invoke the "Good Lord" again. Nothing better than relying on mythology to win an argument.

Posted by Guest on May. 13, 2013 @ 4:38 pm

It's a con perpetrated on the majority of voters who are tenants, and who think they are getting something for nothing.

Housing subsidies should be done via vouchers paid for by taxes and only given to the poor. Not a blanket subsidy for everyone.

But the people who ultimately pay for the cost of rent control are tenants, thru higher rents for vacant units, which they will discover when thet get Ellised.

Posted by Guest on May. 13, 2013 @ 4:50 pm

probably vote for punitive levels of income tax on the wealthy, because there are far more poor people. In most of America, voters have more sense.

Luckily, SF cannot legally have an income tax. A lifesaver.

Posted by anon on May. 13, 2013 @ 5:03 pm

Rent control costs the city of SF several hundred millions of $$$ in tax revenue.

A study of rent control in Berkeley showed it cost Berkeley more than $200 million in lost tax revenues in the 80s. Multiply by roughly 10, adjust for inflation, and you have billions of dollars of lost revenue.

Posted by Cedric on Sep. 25, 2013 @ 1:02 pm

this is simply a troll barrier

it is a signpost to indicate to the reader that other anonymous posters on this thread are beginning to purposely diminish the conversation into reactionary hyperbole and/or petty, mean spirited, personal attacks and irrelevant bickering

the barrier is put in place to signal that there is probably little point in reading more replies in the thread past this point

proceed at your own risk

Posted by troll barrier on Sep. 25, 2013 @ 1:10 pm

Rent Control in SF causes a very low rate of turnover because it rewards those who squat in a place for decades.

That means there are less vacancy for important workers who need to move here to meet economic demand. That in turns causes businesses to move elsewhere or hire elsewhere, harming SF's economy and it's tax base.

Essentially SF is trapped into housing thousands of people who cannot contribute economically while repelling those with a real value add.

Posted by Guest on Sep. 25, 2013 @ 1:18 pm

this is simply a troll barrier

it is a signpost to indicate to the reader that other anonymous posters on this thread are beginning to purposely diminish the conversation into reactionary hyperbole and/or petty, mean spirited, personal attacks and irrelevant bickering

the barrier is put in place to signal that there is probably little point in reading more replies in the thread past this point

proceed at your own risk

Posted by troll barrier on Sep. 25, 2013 @ 1:41 pm

Under Prop 13 your property taxes certainly CAN and DO increase far faster than someone's rent in a rent controlled unit. That statement is flat out wrong.

Posted by Lucretia Snapples on May. 13, 2013 @ 4:32 pm

and more if there are parcel taxes or you do improvements.

In fact, CA's take from property tax has increasded at an average of 7% a year since Prop 13 arrived, which of course also includes new build, sales and other factors that make the Prop13 limits largely irrelevant.

Posted by Guest on May. 13, 2013 @ 4:48 pm

because Prop 13 is very popular and impacts most Californians. Whereas rent control impacts almost no one in California because very few localities impose it and it's popular only amongst the small population which benefits from it.

Fact - under rent control rent has gone up an average of 1.5% per year since 2003. That's from the rent board itself. Boo hoo - 1.5% PER YEAR.

Posted by Lucretia Snapples on May. 13, 2013 @ 5:19 pm

I would like to ask the author his ownership history and experience of owning real estate in San Francisco and if he has ever been a landlord?

Posted by Guest on May. 13, 2013 @ 4:56 pm

being a landlord. The problem is that he hates landlords, and anyone else who builds a successful business.

Posted by anon on May. 13, 2013 @ 5:25 pm

Tim was lucky enough to score a condo. Most working class folks here can not because the supply is so tight. Even renters who would like to buy are stiffiulled by the ridiculous low conversion system in SF.

Posted by Guest on May. 14, 2013 @ 8:54 pm

He doesn't want TIC's to convert to condo's because they woud then be competition for his condo, and so potentially depress the value of his?

It's the Marcos self-serving argument all over again.

Posted by anon on May. 15, 2013 @ 6:47 am

I confess: I am in the category of landlords who made a poor business decision. Owning rental property in SF has been more expensive and difficult than I expected, and the simple reality of income vs expense has caught up with me. It is only a question of when - not if - I will exit the rental business.

I intend to offer a reasonable buyout or invoke my rights under the Ellis Act. If I were allowed a more realistic annual rental increase, I might have come to a different conclusion.

Posted by Guest on May. 13, 2013 @ 4:56 pm

Make as much as you can and laugh your way all the way to the bank. Remember - there's no defense against an Ellis eviction!!

Posted by Lucretia Snapples on May. 13, 2013 @ 5:21 pm

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