We Can't Reduce Housing Costs by Wishing for Rent Control
A new California ballot initiative proposal combines wishful thinking with the heavy hand of government.
The term "magical thinking" describes people who believe, as one psychology related website puts it, "that one's own thoughts, wishes or desires can influence the external world." It's the idea that if we wish for something hard enough it might actually come true. It's become a fixture in California's political world, especially as it relates to the problem of high housing prices.
For example, a group of community activists has proposed an initiative for the November 2018 statewide ballot called the "Affordable Housing Act." It would vastly expand the ability of municipal governments to impose rent-control ordinances by repealing a 1995 law, known as the Costa-Hawkins Act, that essentially bans local rent caps (and vacancy controls) on newer buildings and single-family homes. Its repeal would lead to a flurry of local controls on rent prices.
Sure, the initiative's drafters make some good points. Housing prices have indeed skyrocketed, median rents are higher in California than other states, and many Californians spend too much of their family budgets on housing. As a result, they add, "three times as many Californians are living in overcrowded apartments" as in the nation at large. This leads to the state's sky-high poverty and homelessness rates.
But their proposal combines wishful thinking with the heavy hand of government. Policy makers cannot fix the above-mentioned problems by waving a magic wand and limiting rent prices—not without distorting the marketplace, stealing people's private property and exacerbating the very problem the drafters are trying to solve. Price controls of any type are doomed to fail, which is clear from any number of historical examples.
The most telling example is San Francisco, which has some of the toughest rent-control and tenants'-rights laws in the country. The city has a full-on housing crisis, with rent prices that are unfathomable. Yet around 5 percent of the city's rental stock sits vacant, with landlords preferring to keep units empty rather than receiving significant income renting them out.
That might seem counterintuitive, but it makes perfect sense. Once a San Francisco property owner leases out a house or apartment, that owner loses much control of the property thanks to the city's rent ordinances. The government limits rent prices and the owners' ability to evict tenants. Once you allow someone to move in, you might never be able to get them out.
Rather than loosen up these rules, city officials want to tax owners who have vacant units, thus leading to the latest counterproductive cat-and-mouse game. Owners will shift their units to short-term vacation rentals, or convert them to condos or sell them to overseas buyers. These are just a handful of the unforeseen consequences of rent-control laws.
By not allowing rents to reflect the market rate, these rent-control rules deplete the overall supply. Punishing owners makes investors less willing to buy, build and renovate rental properties. Further taxes and penalties make it even less appealing to get into the apartment business. Who wants to build them if you might be locked into a money-losing situation? Rent control ends up driving up housing prices.
Rent control also erodes the quality of rental housing. A landlord who is not making a sufficient amount of money on the rentals isn't going to upgrade the units' kitchens or bathrooms. As a 2012 New York Times column explained, many landlords actually are middle-income people who invested in rental properties. They end up subsidizing the rents for wealthy people, who can squat indefinitely in underpriced apartments in prime locations.
As a landlord myself, but in non-rent-controlled cities, I have every reason to keep my tenants happy and vice versa. I charge the most rent the market will bear, and tenants shop around for the best deal. The marketplace helps assure a mutually beneficial situation. But if I were forced to charge half or two-thirds of the going rent, then it would create an antagonistic situation. I'd want the tenants to leave—and would get out of the business and find an alternative use for the property. I've got better things to do than subsidize the lifestyle of strangers.
To understand the nature of rent control, consider how a similar price control would work in your business. Let's say you sell cars and the government limits sales prices to below market rates. Profits would evaporate and there soon would be too few available cars to satisfy the demands of buyers. Dealers would leave the business or find new ways to hike prices (this one only comes with $5,000 aftermarket wheels) and car lots would be like war zones.
Yes, the rent is too damn high, which even is the name of a political party in rent-controlled New York. But the best way to lower rents is by encouraging people to build or offer more housing units. This isn't magic, but it's better than wishing that a voter initiative will fix things.
This column first appeared in the Orange County Register.