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Rent Control Feeds Inequality in San Francisco

San Francisco is famously America's most expensive city.

San Francisco is famously America's most expensive city. That means there's all kinds of political agitation for rent regulations and other affordable housing mandates. But a new study from the National Bureau of Economic Research finds that the city's rent control laws help a certain set of haves while costing a larger set of have-nots.

In 1994, the City by the Bay imposed rent regulations via ballot initiative on "small multifamily housing built prior to 1980." This allowed Stanford researchers to compare units constructed before and after that year. As might be expected, rent control helped keep people where they already were, with "the beneficiaries of rent control…between 10 and 20 [percent] more likely to remain at their 1994 address relative to the control group." The longer you've been stationary and the older you are, the stronger that effect.

That's the sort of result fans want to see—keeping people in their homes!—but the economists also find that for shorter-term tenants, "the impact of rent control can be negative." Since the policy allows rents to reset to higher rates when people move out, many landlords have an incentive to do whatever they can to get rid of their residents. Rent-controlled buildings were 10 percent more likely to convert to condos or another legal form that allows for booting tenants.

Rent control in this case (and most cases) is politically appealing, as the winners are concentrated and visible, while the losers are widely dispersed and also not likely to recognize the law as the architect of their sorrow. The study concludes that "rent control offered large benefits to impacted tenants during the 1995–2012 period, averaging between $2300 and $6600 per person each year, with aggregate benefits totaling over $214 million annually and $2.9 billion present discounted value terms."

But because of the supply restrictions that followed—when rents are held down artificially, the incentive to be a landlord fades; this study found San Francisco's rent control reduced the rental housing stock by 15 percent—the rest of the city faced a rent increase of 5.1 percent. That's the equivalent of $2.9 billion in additional costs to other tenants—a total wash in direct costs and benefits to residents inside or outside rent control's "protection." The overall effect, the researchers found, was more gentrification and "a higher level of income inequality in the city overall."

The authors, for some reason still amenable to public action on the problem of San Francisco housing costs being too high, suggest government social insurance against large rent increases as a less costly solution than rent control.

Photo Credit: beastfromeast/iStock

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  • Scarecrow Repair & Chippering||

    "Government social insurance"???

    Over and over and over again, politicians perceive some favored group's loss in the market as an excuse to exclaim "Market Failure" and diddle the market, gaining temporary favors in the vote market and screwing everybody else. Years later, when their disruptions have shifted "market failure" to some other group's disadvantage, the next generation of politicians sees another excuse to curry favor somewhere else.

    Over and over again, they think of new ways to emulate working markets, poorly.

    Over and over again, a press seeking new ways to excite the public swallows this nonsense, thinking that if they can be the cheerleaders, they will be the last market to be ruined.

  • creech||

    Over and over again, since 1776.

  • Rhywun||

    "Government social insurance"???

    To be rated by your "social credit score", no doubt. Isn't socialism fun?

  • BYODB||

    Not to worry, just put blackface on and claim that you identify as an African American woman. Instant higher social credit score, right? After all, empiricism is a construct to trap people in a false reality.

    /sarc

  • Rich||

    That's the equivalent of $2.9 billion in additional costs to other tenants

    No problem. Those people can afford to live in America's most expensive city.

  • John||

    Giving artificially cheap rent to existing tenants in a wealthy area creates inequality. Well, knock me over with a feather.

  • BYODB||

    Thing is, and I'm sure you probably know this, it doesn't 'create' inequality it simply sets what inequality already exists in stone and then inflation does the rest.

  • John||

    And having known people who lived in rent control flats in New York City, I am told nothing makes a landlord responsive about maintenance issues and the general welfare of the property than it being illegal for him to ever raise the rent. This idiocy isn't even that great for the people who are lucky enough to benefit. Sure, you get to live in whatever expensive city as some obscenely low rent, but the truism that you get what you pay for remains in effect.

  • Rhywun||

    In NYC they make up for it by charging newcomers way over market rate, since regulated rent increases are actually based on an artificially inflated "market rate" set by the city. Landlords are free to raise the rent every year as much as they want below that inflated rate.

  • John||

    It is a system that manages to screw everyone, except for the few people who have fabulous rent controls and the big crony landlords who own enough properties to take advantage of what you are talking about. The people who really get fucked by it are small time landlords who own a few properties and have some rent controlled.

  • Rhywun||

    Yeah, the bigger the building the better because you can get a wider mix of rents. If you get enough suckers into the scheme (like me) you can maintain the building nicely. I'm looking to get out and never again move into a building with more than six units. I can save four or five hundred bucks a month right now since the real market rates have been flat the last couple years.

  • Rich||

    That's the sort of result fans want to see—keeping people in their homes!

    "Of course, you'll also be quartering soldiers. You understand."

  • Rich||

    Hey, if "rent control offered large benefits to impacted tenants" why don't we *all* demand "gasoline price control"?

  • John||

    My favorite rent control story is that Mia Farrow's 12 room apartment on Central Park, the one used in Hanah and Her Sisters, was and still is as far as I know a rent control that she pays something like $1,200 a month for. Rent control is all about helping the poor and less fortunate you know.

  • Longtobefree||

    My favorite rent control story is a relative that worked in NYC for his entire career. He had a really nice apartment a block and a half from Central Park, and a block from the subway. He stayed there after retirement, and after his partner died. I don't know what the rent was, but it was cheap. He turned down many offers to move out for significant amounts, as the landlord for some reason was turning the building condo. When he got old and feeble enough, he moved back to where the family was concentrated. He got the landlord to pay for his entire move, and the 'initiation fee' to the assisted living facility, just to get him out. Then the unit, the last one not turned condo, sold for 'a seven figure sum'.
    So success in life consists of simply being in the right place at the right time when a city decides to abuse authority.

  • John||

    Didn't they make rent controls inheritable at one point? Rent control basically gave the tenants free ownership in part of their apartments. I can't imagine how much that apartment went for, especially at the height of the boom in the mid 00s. If you like big cities, that was literally one of the most desirable apartments in the world. And your friend is living there for a few thousand dollars a month.

  • Sevo||

    John|5.25.18 @ 9:36AM|#
    "Didn't they make rent controls inheritable at one point?"

    In SF, the "Rent Board" (nice Orwellian tag) tried to do so by a work-around. An offspring had stayed in his parents' unit until they died, and (ooops), the landlord took rent checks in his name, which his lawyer claimed made him the new 'master tenant' (the language gets weird when you are trying to screw people out of what they've earned).
    Judge didn't go for it, but now every lease states clearly that rent will be accepted from "X" only; anyone else claiming to pay the rent is a 'sub tenant' and rent will not be accepted.

  • Longtobefree||

    Yeah, that worked out real well in the seventies.
    In case you are under sixty years old, when the oil embargo was in place, there were NO gas lines at all until the federal government imposed price controls. The lines started the next day.

  • Chipper Jones||

    Feature, not bug.

  • Citizen X||

    Look, if poor people want laws in place that benefit them, they can either join the political class or donate large sums of money to it, just like everyone else.

  • Dread Pirate Roberts||

    Here's an article from Paul Krugman explaining the stupidity of rent control in San Francisco. Yes, that Paul Krugman. I love pointing people there when they tell me how necessary rent control is.

    https://nyti.ms/2s9Yr7u

  • georgeliberte||

    Prop 13 works as a form of rent control, especially when inherited, leaving people in houses they cannot actually afford without imposing subsidy costs on everyone else.

  • Sevo||

    georgeliberte|5.25.18 @ 3:27PM|#
    "Prop 13 works as a form of rent control, especially when inherited, leaving people in houses they cannot actually afford without imposing subsidy costs on everyone else."

    You bet! CA taxes are too low!

  • JFree||

    No they aren't too low. They are distorted and cronyist.

    And yes - Prop13 is 100% exactly like rent control. A dozen years or so ago, Warren Buffet said he paid property taxes of $14,500 on his 500k home in Omaha (which seems very high to me and a bit suspicious actually) - and $2,200 in prop taxes on his $4 million home in CA.

    The same distortions apply to two next door neighbors - one zip code in LA. One long-term owner can pay less than 200/$100k of market value while their recent next-door neighbor pays $800+/100k of market value. And the new owners will pay 100% of any marginal increase in taxes. While the old owner demands an outrageous price on his property BECAUSE he wants to capitalize that subsidy. And its the long-time owners who make sure new housing can't be built either and that zoning gets more restrictive - because lower density helps drive their home value - and the prop tax subsidy - even higher.

    That nonsense is why 16% of houses changed hands in 1977 - while fewer than 6% change hands per year now. CA is just a giant example of constipated feudalism.

  • Sevo||

    "And yes - Prop13 is 100% exactly like rent control."

    Once again proving JFree is a fucking ignoramus.
    Tell us exactly how taxes are the same as rents, you idiot.

  • JFree||

    Henry George ran for NY mayor 130 years ago - long before 'rent control'. The SF rent control spec targets Prop13 beneficiaries (pre-1980 units). Gotta be blind not to see the link between two forms of rent for monopoly control/use of land.

    From his nomination speech:
    Why should there be such abject poverty and destitution in this city on the one side and such wealth on the other? There is one great fact that stares in the face anyone who chooses to look at it. That fact is that the vast majority of men and women and children in New York have no legal right to live here at all...

    There is plenty of room on this island... miles and miles and miles of land all around this nucleus. Why cannot we take that and build houses upon it for our accommodation? Simply because it is held by dogs in the manger who will not use it themselves, nor allow anybody else to use it, unless they pay an enormous price for it...When what is called real estate advances it is the land that is getting more valuable; it is not the houses....

    what do we propose to do about it? We propose, in the first place, as our platform indicates, to make the buildings cheaper by taking the tax off buildings. We propose to put that tax on land exclusive of improvements, so that a man who is holding land vacant will have to pay as much for it as if he was using it.

  • Ben of Houston||

    According to this web search, Omaha as 2.09% property tax rate, so he's either conflating two bills or exaggerating.

    https://smartasset.com/taxes/ nebraska-property-tax-calculator#GgReMFleC4

  • Social Justice is neither||

    I loved Matt Gonzales on his SF mayoral bid touting support for rent control as a good thing for "the poor, the elderly and the disabled." Since he lived in rent controlled housing, I had to ask which one was he as a late 30s/early 40s, lawyer and trust fund baby?

  • Dread Pirate Roberts||

    I remember his mayoral run too. All that mattered to SF lefties is that his last name is "Gonzales".

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