San Francisco 'Values' Pricing Poor Out of the City

Rent control is killing the city's stock of apartments.

SACRAMENTO — People use the term "San Francisco values" to refer, proudly or facetiously, to the occasionally oddball politics and culture in the City by the Bay. While many San Francisco debates—i.e., over Happy Meal bans or limits on nude dining—are unique, the latest brouhaha could have implications for the state.

With the area economy rebounding, San Francisco is in the midst of a housing crisis as many residents are evicted from their apartments. "It is a situation rooted in limited housing stock and surge in demand that has pushed the median rent up from $2,968 in 2010 to $3,414 this year…," reported the San Francisco Chronicle.

The median home price has soared to nearly $900,000, which helps explain why nearly two-thirds of the city's residents are renters. So the rent hikes are particularly acute—and have put the city's tough rent-control laws in the spotlight. As property values have rebounded, an increasing number of San Francisco owners are getting out of the rental business and cashing out their properties to turn them into co-ops.

While the city's rent-control ordinance places strict limits on the ability of landlords to increase rents, a state law called the Ellis Act allows property owners to take their property off the rental market after providing tenants with a 120-day notice (and much longer for elderly or disabled tenants).

Following a 170 percent increase in such evictions, some Bay Area legislators are calling for changes to the state law. And San Francisco tenant activists recently proposed new regulatory and financial burdens on property owners who want to sell or move into their own properties.

"Speculative investments in housing has resulted in the loss of thousands of affordable apartments through conversions and demolitions," according to a recent statement from a tenants' rights coalition. Yet landlords ask whether further regulating and even prosecuting them in some instances, as the tenant groups propose, is the best way to encourage more people to get into the rental-housing business, which is what's needed to increase supply and reduce rents. It's an old economic rule that you get less of whatever you punish.

"I've recently joined the ranks of San Francisco landlords who have decided that it's better to keep an apartment empty than lease it to tenants," wrote Scott James in a June column in the New York Times detailing his difficult time evicting a terrible tenant. "San Francisco's anti-landlord housing laws and political climate make it untenable." Frustrated landlords have left more than 10,000 units vacant, he argued. And Janan New, executive director of the San Francisco Apartment Association, told me the city has created 52,000 new jobs last year but has only build 126 new housing units.

Advocates for rent control say that these policies are necessary to keep landlords from raising prices beyond the ability of people to afford them. But rent-control critics note that the rules actually increase rent prices, especially over the long term, by dampening the supply of apartments.

In cities where the market reigns, people tend to be mobile, but in places such as San Francisco tenants stay put in their apartments given that they don't want to leave their rent-controlled units. So few apartments become available. Restrictions on rent prices diminish the incentive of landlords to improve the buildings, thus leading to more substandard buildings, rent-control critics argue.

It's not just conservatives who say so. "History has shown that the best intentioned plans of protecting tenants through rent control don't necessarily help the low-income residents who need it most – and can actually aggravate a housing shortage, which drives up prices for those desperate to find a place to live," opined the liberal-oriented San Francisco Chronicle.

San Francisco is a sought-after city on a tiny peninsula, which leads to a tight supply. "But the biggest problem with the Bay Area is 75 percent of the land area is off limits to development so you can't build your way out of this," said Lawrence McQuillan, senior fellow at the libertarian Independent Institute in Oakland. Even for cities without rent control, such as San Diego, these basic "supply and demand" lessons are useful for anyone whose "values" include affordable housing.