Question to landlords: does rent control hurt your bottom line?
I understand the opportunity costs of rent control: if rents in your neighbourhood have gone up 50% this year you feel like a sucker if you can only raise them by 5%.
Similarly you might put off minor renovations (that don't require the tenant moving out) because you won't necessarily be able to charge more to make up for the cost (apart from selling the property).
But is it common to rent out a property below cost, assuming you can make it up later with rent increases? E.g. you just bought a property in Mountain View so your mortgage payments are high, plus the cost of all of the new appliances, and maybe it's an older house so labour and maintenance costs are higher than the $4k/mo you charge in rent.
Forget the cash flow of renting out a property for a second, and just consider selling it. If you have an apartment with a tenant paying below market rate, that property is worth less money to potential buyers because of the rent-controlled tenant they'd be stuck with.
And buying or building real estate for speculative purposes is extraordinarily common.
I'm a home owner in the Western world and I don't consider myself a real estate speculator. I "bought" my house because I really, really liked it and wanted it to be my home for a very, very long time. Buying the house gives that a better chance of happening, as my payments will remain consistent and I get certain protections as a homeowner I wouldn't otherwise have. Whether I make money on it or not is immaterial to me as I don't plan to sell. While I'd like the value of the home to go down (taxes), it hasn't influenced my decision to stay in it -- so far.
I think a lot of homeowners feel this way and aren't in way "speculators", but they're a non-vocal population.
By the way, I put "bought" in quotes because it often seems like I'm renting it from the state.
Meanwhile most Americans first home purchase, if they can even afford one, is not their forever home.
Due to all the handouts to banks through the mortgage industry that have in part caused house prices to go up like they have (ie. QE), many first time buyers have to leverage themselves to the hilt for their first underwhelming home in order to hopefully one day sell for enough to let them ladder up to a nice home.
People would much rather own their forever home and not have to worry about selling at some point like you, but that just isn't the reality for most. So speculation is almost forced in the sense that if you want to own your forever home at some point, you have to play the leverage game.
As a homeowner, I want speculators to drive up the prices in my neighborhood. I want them to snatch up and renovate the homes in disrepair and then rent them out at high prices to people richer than me. That would drive up my property value.
There's no need to shed tears for anyone. I fail to see why moral high ground be ceded to either side, honestly. These aren't tenements in 19th century New York. Renters know the deal when they sign leases.
"Question to landlords: does rent control hurt your bottom line?" Of course. If rent remains constant and every year the cost of other factors such as insurance, upkeep, salaries of employees, etc. go up, eventually, the bottom line will be negative.
This sounds like a left-wing/market-sceptic attempt to solve a very real problem.
I wonder what a more broad-based proposal would look like, one that also had some right-wing/market-friendly features. The left gets rent controls, and the right gets what? As-of-right construction? Relaxed zoning rules? Whatever it is, it would have to be pretty major for the right to put up with rent controls.
(By "the right" I mean pro-business democrats mostly, because we are taking about a very blue area of the country.)
I think the better framing in Silicon Valley might be established residents vs. newcomers. As you point out, most people around here are politically similar, and I think NIMBY-ism plays a much more important role than political alignment.
It's pretty useful to point out the contradiction between progressivism and the embrace of literal segregation laws that cause sprawl, cause traffic, and hurt our environment. The prevailing concern about property values during America's urbanization was the arrival of black families. Once racial restrictions were overturned, the best "race-neutral" tool to protect property values was just to exclude cheaper homes from neighborhoods and rely on economic disparities to segregate for you.
That is what exclusionary zoning is. You can make neighborhoods expensive on purpose by zoning for fewer people than want to live in a neighborhood so only the richest can live there. It was upheld by the Supreme Court in 1975. It's time to eliminate it near jobs.
Anyone who claims to care about affordability while supporting laws that make their neighborhood expensive on purpose is full of poop.
I think this is an important point to make. The degree to which people will abandon what seem like core principles when it comes to fighting change in their neighborhood, school district etc. is one of the unpleasant things about living in a left-leaning area like the Bay.
Abolish all local input into zoning and transit development, in favor of a pro-development Bay Area regional zoning and transit czar. That's the only thing that'd make enough of a difference to actually matter. Along with reforms that allow developers to up-zone existing lots by providing equivalent-or-better housing for tenants during and after construction. Basically a gigantic middle finger to NIMBYs - you got us into this affordability mess, so now we're building shit and you just have to deal with it.
Something like that would make residential construction available and cheap enough to fix the regional affordability issues. And that's the only thing that'd make up for enacting rent controls - making housing cheap enough that the controls are irrelevant.
As of right construction is probably the best solution, and it was recently proposed by the governor of California, who is a Democrat and is generally perceived to be very liberal.
The problem with the Bay Area is not just zoning -- it's the fact that even when land is zoned for housing, all kinds of local advocacy groups can prevent development by filing frivolous lawsuits and demanding further environmental reviews (even when thorough environmental reviews were already conducted).
As of right construction would prevent many of those kinds of lawsuits.
Jerry Brown's proposal was probably the kind of compromise you are looking for: as of right construction would apply to developments with a certain percentage of subsidized housing. (The nice thing about subsidies versus rent control is that they are means-tested, so you won't end up with high-income earners taking advantage of rent control and low-income earners paying market rate.) Unfortunately, his proposal did not get anywhere.
It would also help if the incentives shifted. Right now, cities make money on business land use, but lose money on residential land use (on average). So either residents need to lower their expectations of services, or start paying more taxes.
If you want to fight unaffordable rents, you've got two real options. The first is to do a revenue-neutral tax on landlords - preferably through a land-value tax in order to remove incentives against building tall. The related second choice is to lift development restrictions, up-zone things, and build public transit infrastructure.
Rent controls are just a short-sighted way of giving hand-outs to people who are politically connected or otherwise good at navigating bureaucracy. It's a price ceiling, with all the classic issues of them: shortages, quality reduction, search costs, deadweight loss, and misallocation of resources.
Shortages: More people want apartments than can get them.
Quality reduction: if you're in a rent-controlled apartment, the landlord knows you aren't going anywhere, so why would they improve the building in any way that they can avoid?
Search costs: joining a decade-long waiting list for an apartment. Fun.
Deadweight loss: Developers want to build places that people would benefit from renting, but they don't, because it's illegal to charge rates that would make them money.
Misallocation of resources: someone with a $400/mo rent-controlled apartment in a prime location in downtown SF will keep it forever, even if they only use it a couple weekends a year. Or people commuting from SF to Mountain View can't trade apartments with people commuting from Mountain View to SF, since they're locked into their rent-controlled place.
Deadweight loss: Developers want to build places that people would benefit from renting, but they don't, because it's illegal to charge rates that would make them money.
Is this because rent control would drag down market rents below the profitability level for developers? Why can't the developer charge the rent they want for new builds? Or is it because most developers expect some high amount of rent inflation when the puts units on the market?
It's not that they couldn't make any profit by building in rent-controlled areas, but why would you allocate the capital for construction to a rent-controlled area when you could take it to a city without rent control?
There are projects that are teetering on the edge of profitability (in terms of cap rate.) Increase permitting times, shave off a few stories, force more units to be below market rate, and all of a sudden those projects evaporate.
Suppose you have a project that's viable if you can rent the units at $X and then raise rents along with inflation. Then the rent control board comes in and limits increases to a sub-inflationary level. Great, just compensate for it by increasing your initial rents. Now it takes you 4 months to fill every unit in our hypothetical property rather than 2 months.
Deadweight loss doesn't affect things that are already obviously good ideas or obviously bad ones. It only affects things on the margin - the least profitable units that developers would still be interested in building.
Suppose a developer can build as tall as they wanted to, but each additional floor is more expensive: the break-even point is that each extra floor needs $100/month additional rent per unit. If you use law to force prices $100/mo lower, then the tallest floor doesn't get built anymore, because now it's not worth building.
(And if rent controls don't actually reduce the rents that people pay, then the controls aren't actually doing anything, so why have the overhead of the law? If you're reducing prices by law, things that people want to buy at or above the reduced price and sell at or below the market price don't get traded.)
Here's a lesson from a finance course that I thought was thoroughly non-obvious: all change happens at the margin. For instance, interest rate changes cause real estate appreciation or crashes by changing the decision of buyers that are just on the cusp of being able to afford a home or not.
Such as with the $15 minimum wage - it's the marginal businesses that will shut down, and the people with marginal job skills who will be shut out of the job market.
Thanks for saying that! Its common for folks to play what I call 'dot to dot' where they draw a thin line from one action to some chain of results. They say "I proved its a bad idea!" Its like sketching in 3 or four lines in a dot-to-dot puzzle and saying "See! Its a dog!" when it might be the Sistine chapel.
Thinks are complicated. All the dot-to-dot statements are somewhat true, but they're all going on at the same time.
Higher minimum wage means more spendable cash, which means more small businesses see an uptick in sales, so more profit. See! I can do it too.
Any business that buys inventory at $15 and sells it for $10 is going to go out of business. What complicated dynamic would change that?
(Yes, I know that often businesses miscalculate the value of an employee, and it may have other sources of profit that cover the losses, etc., but it doesn't change the reality that the profit motive will squeeze such things out.)
It's not just that. Actually, most rent control policies allow new or unoccupied units to be rented out at the market rate.
The problem is that the legal increase in rents is generally capped, so if the tenants who move in today remain in the rental units for many years, eventually they will be paying far below market rate.
On the other hand, the cost of insurance, maintenance, etc. for the landlord will continue to increase at the market rate, so the landlord's profit on rent will continually shrink and may become negative. That's obviously going to make developing new rental properties less attractive.
Why are the landlord's costs going up "at the market rate" (which we will assume is higher than inflation)? Because the plumber lives in a market rent apartment and has to charge twice as much as a few years ago? Why would their insurance costs go up that fast? It's not like their property taxes are going up that fast. ;)
I believe the arguments that rent control is distortionary and poorly targeted (maybe they should make it means-tested rent control! I'm sure that won't have any effect on poorer people trying to rent! :P). But I don't see how market-rate rent increases, that happen fast enough for people to reach for rent control, are because the landlords are maintaining the same margins and seeing their costs increase. I do get the opportunity costs and reduced resale value costs though.
This. It's so silly. You're just selecting an arbitrary group of people and insulating them from the real problem, at the expense of other arbitrarily selected people. The problem doesn't go away.
Very well put. Personally, I'm a big fan of rent control as a general concept but I think what people are missing is that rent control isn't actually a solution for this specific problem.
Home prices aren't being driven up by developer greed or predatory landlords, they are stabilized at a rate acceptable to the market. In this case, since the availability is limited you are allowing a small percentage of the total population (those with outsized buying power) to define what is acceptable.
Rent control (alone) just pushes the problem down the road. Build more and everyone will be happy...eventually.
The province of Ontario has rent controls and I never heard of it as an issue in the ~7 years I was renting there. I guess it helps that most towns don't have market rents growing way faster than inflation.
New buildings are exempt from rent controls. Rents on a unit also reset to market rate when a new tenant moves in. And Toronto is also the only place in Ontario you really hear about soaring housing costs. So rent controls are a fairly limited phenomenon here.
> Build more and everyone will be happy...eventually.
Except this still will not help due to the economic forces driving urbanization. Silicon Valley is a self-fulfilling prophecy and creating more supply will only help to drive more demand.
Every new person newly moving into a heavily urbanized area will drive 0.5 more persons wanting to go there due to new network and auxiliary jobs created (groceries, haircutter, ...). As more than 70% of our jobs are by now defined by interactions with other people, urban centers of excellence are doomed to grow.
This is why building new housing is only ever a short-term solution as well. The only long-term solution to urbanization and gentrification is making these areas less attractive by offering less jobs in a major area.
Your charts don't prove him wrong. Your charts prove that prices are higher where houses are getting built, prices are low and where prices are high, houses aren't getting get built. Neither addresses changes in demand. (Price is not indicative of demand without considering supply.)
I'm going to go way out on a limb here and say that there aren't a literally infinite number of people that want to live in San Francisco. Case in point, me. I hate San Francisco and avoid going there whenever possible.
Rent control is not a benefit for well connected people. It is a benefit for middle income people that live and work in the neighborhood who otherwise couldn't. It requires filling out paperwork; are we really going to argue that we should just hand it out to the first person that puts their name down? There are certainly problems with the administration required to get into an apartment and NYC made some good steps to reduce the burden recently (e.g., can't be denied solely on bad credit, no more home visits, etc) but the answer isn't to make it an application-less procedure.
In California, rent control only protects incumbents against rising rents provided they stay in the same place. As soon as they move out, the rent for the next person gets reset to market rates, due to state law (Costa-Hawkins Act).
"politically connected" is a poor choice of words for the concept I was trying to get across. Like, I'm not at all surprised that people that live and work in an area would vote themselves a law that says that their rents must be cheaper than they otherwise would. There's significant negative long-term consequences of it, but those mostly fall in other times and places.
I'm curious, because "Housing Affordability" parallels to a "problem" we have here in Sydney, do people buy property in cities in America? I'm always hearing about unaffordable rent and rent control and the likes, but is purchasing property in San Francisco outrageously expensive?
Is rent uncharacteristicly high for the value of the property in SF, or is housing of all sorts just plain expensive in SF?
So why is the conversation centred around "rent"? Aren't rental prices just a byproduct of purchasing price?
You want cheaper rent? Make purchasing cheaper. You want cheaper property? 'Fix' the supply/demand problem.
I'm not entirely convinced that there is a problem - SF, NY and Sydney (heh, little old Australia still trying to stay relevant here) are great cities which are in high demand (close to infinite!), yet is extremely limited in space/land. To me, it makes sense that the price reflects that demand.
The talk is about rent because poor people rent and there are policy options that effect rental prices directly, rather than as a byproduct. Eg in NYC there are many co-op buildings that forbid renting units, or the idea of rent control, or housing vouchers or public housing.
I think that policy options that effect supply are the ones I would prefer, but we can't ignore other options.
The word "rent" covers more than one concept. The version you seem to be at is called "rack rent" - the price of a place to sleep. "Land rents" are a much more esoteric conceptual ... mess. You have to look to David Ricardo and Henry George for that.
Who says it has to be revenue neutral? That's probably a way to try and make it more palatable to people, but has no bearing on effectiveness, and it will shift the tax burden so it's not like it won't have opponents already.
Rent control just creates an even less regulated, shady sub-industry of subletting, where the lucky ones who got in under rent control basically keep the apartment for life and skim the difference between what they pay, and the real market value.
How do landlords/the IRS allow this? If you tenants can do it without their landlords noticing, why can't landlords do it themselves to get around rent controls?
Management companies and big developers are too visible to avoid it, but individual property owners cheat the system all the time. For example, if you have an in-law unit attached to your home in San Francisco, you'd be smart to reach a handshake deal with a nephew or friend-of-friend instead of signing a lease with a stranger.
In SF you essentially lose your lease instantly if caught, so the profit motive is not a sure bet. Couple that with the requirement since 1998 that subletters be informed what the actual rent is and the ability for the subletter to report the sublessor, and it's almost a sure loser.
That's a good point. I have not heard about that in NYC. To note a tangential topic of dead-weight loss...I know one person in Manhattan using their studio apartment as storage. Yes, because the cost of their rent controlled apartment is less than purchasing a storage unit.
It's never stopped people in SF. I know a couple people renting extra rooms and making a profit off of it. That is, their rent is zero and they actually pocket money each month.
Exactly, the rent control can keep rents so low, that the subletter gets a great deal even though their rent for one room pays for the whole house. Why would they bring it up with the tenant board?
One trick is to charge equal rent while occupying a much nicer space in the house. The link above tries to address this. For instance, a larger bedroom with attached bathroom could be considered more valuable. Most common, the master tenant lives in it but collects equal rent from the subtenant who lives in a smaller bedroom with poor light and a long walk down the hall to the bathroom - in this case, the subtenant could probably challenge this arrangement and get a reduction in rent. Another approach, I suppose, would be to "overvalue" the larger bedroom and collect an unusually large payment from the new subtenant, say an 80/20 split justified by the notion that the new tenant gets a nicer bedroom.
One thing to keep in mind is that SF is a pretty pro-tenant city. A master tenant who does this can get into major trouble. Of course, if a subtenant hauls the master tenant in front of the board, it'll be war in that house. Buy hey, this is SF real estate, it's war anyway, right?
High apartment and real estate costs are the outcome of a variety of factors. I.e., it's a multidimensional equation. Attacking it by capping the rents is like saying that we are going to legislate 2 + 2 = 3.75.
Rent control is a terrible idea for controlling cost. This is basically universally agreed upon by all economists. You just artificially reduce the supply of housing because people in rent control places will not leave. On top of that it actually makes it more difficult for low income people to rent since you have to have a sterling rental history to get a rent control apartment.
So you actually just exacerbate the situation. Rent control is one of those things that sounds good at face value but once you think about it a little more you realize it's a terrible idea.
They were specific to the situation you mentioned.
>because people in rent control places will not leave.
What kind of details are you looking for here? That they don't leave because it's likely the lowest possible they would be able to find, and that the tenants would be increasing their cost otherwise.
that's if there is one open. argument made is that people that have rent controlled apartments don't leave for economic reasons. this would mean it lessens the supply of rent controlled apartment in the area.
the competition for a place is high in the bay area, so even if they find and apply for an apartment doesn't mean they'll get it. my personal situation is worse due to me finding rooms instead of entire apartments. lived in 4-5 different places in last 4 years. I would get a response rate of ~5% from craiglist when looking in SF, percentage better in the peninsula. Usually competing against 10+ people viable applicants each time.
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 giant Equity Residential. That far outstrips the roughly $200,000 reported raised by various groups supporting rent control.
Real estate is a broken industry. Moreso in the Bay area, but the negative effects there ripple outward. See: http://ecosteader.com/alternative
In the Airbnb story yesterday, my comment (which was maliciously downvoted), was this:
"Landlords and Realtors get their cut every time there's a turnover in occupancy. Interestingly, this is the root problem at both ends -- from people living in poverty (Portland's sidewalk tent campers who get shuffled around), those suburbanites affected by the housing "crisis", and those who can afford to own in any upscale hip-n-trendy neighborhoods where Airbnb rentals are desperately sought. Those rooting for turnover are usually those who profit the most from it.
Sure, people travel and need to rent rooms once in a while. People like to rent while they're young and mobile, but the two use cases need very serious and separate delineation from each other. Airbnb is pushing them more into "overlap" territory. Airbnb's expansion into "subletting" was the kicker.
So, long story made short: it's an interesting economics problem I've been working on solving in my spare time, as a very long and iterated side project with Ecosteader (ecosteader.com). Some of the details emerging need a better format for communication; however, the most clear thing to come from my research is that people need to _own_, and they need to be able to transact with each other directly. Middlemen (Airbnb is the middleman here) taking significant commissions is part of the problem.
But the middlemen problem has sort of an obvious solution: to tax rental income so aggressively that it's just not an appealing source of investment to people who invest in rentals. Use the tax generated from over-inflated rents to build properties for sale, and/or figure out a way to use that money to grant-deed land on which people can build. This last option seems the more fun opportunity to me, and is what I originally had in mind building an eco- site.
The homesteading movement needs to come back, adapted a bit for the 21st century."
Disagree if you want... but explain how the problem can be solved better any other way.
Most Americans do not have the savings required to own in cities. Ownership might be a solution that works for you, but penalizing landlords penalizes renters who can't afford ownership.
Whether it's affordable to own in cities isn't entirely independent of what restrictions we put on landlords. To take one end of the restrictions scale: if being a landlord were simply banned, i.e. you could occupy property but not rent it out, purchase prices of apartments in most situations would end up lower. Copenhagen does that in large swathes of its property market, for example, by requiring owner-occupancy in some categories of housing. And you can clearly see the price differential: apartments in the buildings that allow unrestricted rental have much higher purchase prices than otherwise similar apartments in buildings restricted to owner-occupancy, by often a factor of 2-3x. (That isn't to say as a policy proposal this would fix SF's particular problems, just that purchase prices aren't independent of landlords' role in the property market, as prospective owner-occupiers have to bid against prospective landlords in cases where landlordism is permitted.)
We agree with each other. Restricting rentals reduces competition for owning homes, which lowers the price to purchase a home. You'll get more homeowners. Everyone who still rents is worse off because the supply of rental housing has been choked off. They will live in less desirable neighborhoods than they would in a world without such restrictions.
Alternatively you could remove the mortgage interest tax credit and/or tax the imputed rent that homeowners earn. That could cool the market, at least if you could apply it selectively to overheated markets.
I'm in a new apartment building (I'm the first tenant in my unit) on Ocean Ave about a 10 min walk from Balboa Park. There are still a handful of units in this building of about 30 units that are unoccupied, almost a year after construction finished. Admittedly, most of the empty units are 2 beds, which I can see being harder to fill than the 1 beds.
I was thinking the same thing. Prop 13 is basically rent control for homeowners/landlords. It dramatically increases friction in the real estate market, and increases NIMBY'ism by giving people huge incentives to avoid doing smart things, like downsizing from a house into a condo due to tax increases.
While I lived in Mountain View, I rented a house built in the 50s that was renovated in the early 2000s (but renovated carefully to stay within the prop 13 guidelines). Houses up and down the street were selling for well over $1M, and they were smaller and in rougher shape than our rental. I've recently seen some houses in that neighborhood go for $1.4M So let's assume our rental was worth 1.2M The landlord bought the house in the 70s. I just checked the Santa Clara county property tax for this house: $1760.36 / year on an assessed value of $130K. This is for a house whose market value is roughly 10x that!!
So an owner of a house has a roughly 90% discount on his property tax, but only as long has he neither moves, nor improves his house. This causes lots of older folks to remain in houses that are far too large for them. Like older people everywhere, these people oppose "change". They want the neighborhood to look exactly the same as it did 40 to years ago when they moved in. They don't want condo or apartment buildings. The oppose new development of any kind. Meanwhile, they pay next to no property taxes, and the schools are falling apart, and there is no money for improvements that could help with traffic (like more bridges over or tunnels under the Caltrain tracks) or other services.
I'm so glad that I'm back to living in a sane market on the East coast, and don't have to deal with this issue anymore.
Japan seems to be in vogue here on HN atm but I think we in the west could learn from their zoning laws. All they do is set the maximum zone that can be used.
Isn't supporting rent control a little like denying climate change?
When so much research and expert analysis shows something is bad, lay people are somehow oblivious "eh, I just don't believe it".
Worse yet, why is it so easy for people to like the idea of rent control but dislike the idea of cash assistance? If you want teachers (or whomever) to be able to live nearby, fine then just give them a cash subsidy.
Giving out cash doesn't kill the market economy, allows the benefit to be given out precisely, and anyone you want can pay for it via a tax - landlords, rich people, sales tax, whatever.
Do nothing or do something, just don't do rent control which hurts everyone.
It has the same problem as climate change: it directly and obviously impacts their personal economics on a big scale. Global warming regulation makes companies that employ millions say they'll have to start firing people, and they will if it passes, and anti-rent-control measures mean a lot of current San Franciscans would have to move because in the short term any change in the regulations will cause their landlord to eject them (raise prices beyond what they can pay, not that raise prices by itself wouldn't be enough).
People are always saying that it's bad that people don't vote for their own self-interest but forget that there is a reasonable time horizon for decisions, and it's not infinite.
For people living at the margin, for whom it matters most as they'll be the ones affected, that time horizon is zero. At a zero time horizon the decision is obvious : no to change ! Yes to more rent control !
The minimum time horizon for considering these economics would be the amount of time it takes for new buildings to get built, which I imagine would be 2-3 years at least. If you consider the reasonable time needed for the building supply in San Francisco to exceed supply, we should say this measure will only start helping people when the market is oversaturated. That may never happen. Realistically, anything less than 10 years seems to me a very long shot.
This is known as a fallacy in economics. You should have a time horizon on your decisions, and of course, it should not exceed, let's say, 10 years less than your expected lifespan.
So something like 50-60 years is the longest considered timespan. Rewards on that sort of timeframe have to be extreme (essentially 1.0450=7, as in 7 times ROI would be the risk-free rate. For an investment with minimal risk a factor 30 or so would be required)
We have a pie. It only has a certain number of slices. Unfortunately there are more people who want a slice than there are slices. That sucks.
There's a lot of way we could determine who gets a slice and who doesn't get a slice. We could give slices to people who have been there longer. Or we could let people who have more money and value the pie slice sufficiently high to spend their money buy a slice. We could give some money to people who really really want a slice but just can't afford it. We can debate and argue about all the ways we could pick the pie slice winners.
But at the end of the day it doesn't matter. The exact same number of people will get slices. And the exact same number of people will not get a slice. All we're doing is picking winners and losers in different ways.
The only debate that matters is the one that grows the pie. We need more pie so more people can have a slice. Taking a slice from Peter to hand to Paul is an utter waste of time.
"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.
"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."
You can get around the paywall by typing the title of the article into Google, and clicking on the link to wsj.com.
Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” As the WSJ says, we have “tenant organizations, unions and church groups” fighting to pass rent control. They all face imminent declines in power if their constituents have to leave. I guess they are hoping for breathing room, until either the economy collapses or “permanent BMR units” can be built to help with the inevitable churn. But rent control by itself makes the situation even worse for the working class.
No amount of science and repeated real-world demonstrations seem to matter to the self-appointed “soul” of the community.[0] The people are, on the whole, just looking for somebody to follow, and the activists are indoctrinating the kids early and often. Horrible legislation has a decent chance of becoming law.
Rent control is going to happen. What it will do is set the price level where it is currently at. It will only be for apartments and those built before 1995 and it will become hard to get into those apartments. Condos, SFH, duplexes etc.. won't be affected but maybe those rents won't rise "as much".
The way to stop rents from rising is simple: Make sure there's enough new supply of housing to meet new demand. A lot of people are moving to the Valley but environmental / historical / construction / neighborhood regulations slow down new housing because existing residents don't want their neighborhood "ruined" by new residents and traffic. Attempting to solve rising rents by legally regulating what the market can charge is not a great idea. It will be even harder to find a vacant apartment as people hang onto their rent controlled units, and landlords will have a big incentive to find a way to throw people out of their homes to collect a higher rent as prices rise. Basically existing residents get subsidized as new people trying to move in get fucked over, which works perfectly for politicians who are not elected by people who don't live here yet.
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[ 2.8 ms ] story [ 108 ms ] threadI understand the opportunity costs of rent control: if rents in your neighbourhood have gone up 50% this year you feel like a sucker if you can only raise them by 5%.
Similarly you might put off minor renovations (that don't require the tenant moving out) because you won't necessarily be able to charge more to make up for the cost (apart from selling the property).
But is it common to rent out a property below cost, assuming you can make it up later with rent increases? E.g. you just bought a property in Mountain View so your mortgage payments are high, plus the cost of all of the new appliances, and maybe it's an older house so labour and maintenance costs are higher than the $4k/mo you charge in rent.
And buying or building real estate for speculative purposes is extraordinarily common.
Also called "every house owner in the western world".
I think a lot of homeowners feel this way and aren't in way "speculators", but they're a non-vocal population.
By the way, I put "bought" in quotes because it often seems like I'm renting it from the state.
Due to all the handouts to banks through the mortgage industry that have in part caused house prices to go up like they have (ie. QE), many first time buyers have to leverage themselves to the hilt for their first underwhelming home in order to hopefully one day sell for enough to let them ladder up to a nice home.
People would much rather own their forever home and not have to worry about selling at some point like you, but that just isn't the reality for most. So speculation is almost forced in the sense that if you want to own your forever home at some point, you have to play the leverage game.
There's no need to shed tears for anyone. I fail to see why moral high ground be ceded to either side, honestly. These aren't tenements in 19th century New York. Renters know the deal when they sign leases.
If it didn't, rent control would be wholly unnecessary.
If costs rise faster than inflation I can see how rent control hurts, but then it seems to me that there are other problems.
I wonder what a more broad-based proposal would look like, one that also had some right-wing/market-friendly features. The left gets rent controls, and the right gets what? As-of-right construction? Relaxed zoning rules? Whatever it is, it would have to be pretty major for the right to put up with rent controls.
(By "the right" I mean pro-business democrats mostly, because we are taking about a very blue area of the country.)
That is what exclusionary zoning is. You can make neighborhoods expensive on purpose by zoning for fewer people than want to live in a neighborhood so only the richest can live there. It was upheld by the Supreme Court in 1975. It's time to eliminate it near jobs.
Anyone who claims to care about affordability while supporting laws that make their neighborhood expensive on purpose is full of poop.
Something like that would make residential construction available and cheap enough to fix the regional affordability issues. And that's the only thing that'd make up for enacting rent controls - making housing cheap enough that the controls are irrelevant.
The problem with the Bay Area is not just zoning -- it's the fact that even when land is zoned for housing, all kinds of local advocacy groups can prevent development by filing frivolous lawsuits and demanding further environmental reviews (even when thorough environmental reviews were already conducted).
As of right construction would prevent many of those kinds of lawsuits.
Jerry Brown's proposal was probably the kind of compromise you are looking for: as of right construction would apply to developments with a certain percentage of subsidized housing. (The nice thing about subsidies versus rent control is that they are means-tested, so you won't end up with high-income earners taking advantage of rent control and low-income earners paying market rate.) Unfortunately, his proposal did not get anywhere.
Rent controls are just a short-sighted way of giving hand-outs to people who are politically connected or otherwise good at navigating bureaucracy. It's a price ceiling, with all the classic issues of them: shortages, quality reduction, search costs, deadweight loss, and misallocation of resources.
Shortages: More people want apartments than can get them.
Quality reduction: if you're in a rent-controlled apartment, the landlord knows you aren't going anywhere, so why would they improve the building in any way that they can avoid?
Search costs: joining a decade-long waiting list for an apartment. Fun.
Deadweight loss: Developers want to build places that people would benefit from renting, but they don't, because it's illegal to charge rates that would make them money.
Misallocation of resources: someone with a $400/mo rent-controlled apartment in a prime location in downtown SF will keep it forever, even if they only use it a couple weekends a year. Or people commuting from SF to Mountain View can't trade apartments with people commuting from Mountain View to SF, since they're locked into their rent-controlled place.
The answer is the three things that matter in real estate: location, location, and location.
Suppose you have a project that's viable if you can rent the units at $X and then raise rents along with inflation. Then the rent control board comes in and limits increases to a sub-inflationary level. Great, just compensate for it by increasing your initial rents. Now it takes you 4 months to fill every unit in our hypothetical property rather than 2 months.
Suppose a developer can build as tall as they wanted to, but each additional floor is more expensive: the break-even point is that each extra floor needs $100/month additional rent per unit. If you use law to force prices $100/mo lower, then the tallest floor doesn't get built anymore, because now it's not worth building.
(And if rent controls don't actually reduce the rents that people pay, then the controls aren't actually doing anything, so why have the overhead of the law? If you're reducing prices by law, things that people want to buy at or above the reduced price and sell at or below the market price don't get traded.)
This is not a 100% rule, just 5 or 6 nines.
Thinks are complicated. All the dot-to-dot statements are somewhat true, but they're all going on at the same time. Higher minimum wage means more spendable cash, which means more small businesses see an uptick in sales, so more profit. See! I can do it too.
Deadweight losses are the inevitable leftovers of decreased efficiency after they have been drawn.
https://en.m.wikipedia.org/wiki/Deadweight_loss
(Yes, I know that often businesses miscalculate the value of an employee, and it may have other sources of profit that cover the losses, etc., but it doesn't change the reality that the profit motive will squeeze such things out.)
The problem is that the legal increase in rents is generally capped, so if the tenants who move in today remain in the rental units for many years, eventually they will be paying far below market rate.
On the other hand, the cost of insurance, maintenance, etc. for the landlord will continue to increase at the market rate, so the landlord's profit on rent will continually shrink and may become negative. That's obviously going to make developing new rental properties less attractive.
I believe the arguments that rent control is distortionary and poorly targeted (maybe they should make it means-tested rent control! I'm sure that won't have any effect on poorer people trying to rent! :P). But I don't see how market-rate rent increases, that happen fast enough for people to reach for rent control, are because the landlords are maintaining the same margins and seeing their costs increase. I do get the opportunity costs and reduced resale value costs though.
Home prices aren't being driven up by developer greed or predatory landlords, they are stabilized at a rate acceptable to the market. In this case, since the availability is limited you are allowing a small percentage of the total population (those with outsized buying power) to define what is acceptable.
Rent control (alone) just pushes the problem down the road. Build more and everyone will be happy...eventually.
Except this still will not help due to the economic forces driving urbanization. Silicon Valley is a self-fulfilling prophecy and creating more supply will only help to drive more demand.
Every new person newly moving into a heavily urbanized area will drive 0.5 more persons wanting to go there due to new network and auxiliary jobs created (groceries, haircutter, ...). As more than 70% of our jobs are by now defined by interactions with other people, urban centers of excellence are doomed to grow.
This is why building new housing is only ever a short-term solution as well. The only long-term solution to urbanization and gentrification is making these areas less attractive by offering less jobs in a major area.
This is empirically false:
https://dwtd9qkskt5ds.cloudfront.net/blog/wp-content/uploads...
http://blogs-images.forbes.com/trulia/files/2014/02/TruliaPr...
QED.
Government price controls have a 4000 year history of miserable failure. See "Forty Centuries of Wage and Price Controls."
How has the demise of rent control increased the amount of affordable housing in NYC?
Is rent uncharacteristicly high for the value of the property in SF, or is housing of all sorts just plain expensive in SF?
Just an apartment is already over a million.
http://www.zillow.com/noe-valley-san-francisco-ca/
You want cheaper rent? Make purchasing cheaper. You want cheaper property? 'Fix' the supply/demand problem.
I'm not entirely convinced that there is a problem - SF, NY and Sydney (heh, little old Australia still trying to stay relevant here) are great cities which are in high demand (close to infinite!), yet is extremely limited in space/land. To me, it makes sense that the price reflects that demand.
I think that policy options that effect supply are the ones I would prefer, but we can't ignore other options.
http://sfrb.org/topic-no-154-limits-rent-charged-master-tena...
One trick is to charge equal rent while occupying a much nicer space in the house. The link above tries to address this. For instance, a larger bedroom with attached bathroom could be considered more valuable. Most common, the master tenant lives in it but collects equal rent from the subtenant who lives in a smaller bedroom with poor light and a long walk down the hall to the bathroom - in this case, the subtenant could probably challenge this arrangement and get a reduction in rent. Another approach, I suppose, would be to "overvalue" the larger bedroom and collect an unusually large payment from the new subtenant, say an 80/20 split justified by the notion that the new tenant gets a nicer bedroom.
One thing to keep in mind is that SF is a pretty pro-tenant city. A master tenant who does this can get into major trouble. Of course, if a subtenant hauls the master tenant in front of the board, it'll be war in that house. Buy hey, this is SF real estate, it's war anyway, right?
So you actually just exacerbate the situation. Rent control is one of those things that sounds good at face value but once you think about it a little more you realize it's a terrible idea.
>because people in rent control places will not leave.
What kind of details are you looking for here? That they don't leave because it's likely the lowest possible they would be able to find, and that the tenants would be increasing their cost otherwise.
the competition for a place is high in the bay area, so even if they find and apply for an apartment doesn't mean they'll get it. my personal situation is worse due to me finding rooms instead of entire apartments. lived in 4-5 different places in last 4 years. I would get a response rate of ~5% from craiglist when looking in SF, percentage better in the peninsula. Usually competing against 10+ people viable applicants each time.
Real estate is a broken industry. Moreso in the Bay area, but the negative effects there ripple outward. See: http://ecosteader.com/alternative
In the Airbnb story yesterday, my comment (which was maliciously downvoted), was this:
"Landlords and Realtors get their cut every time there's a turnover in occupancy. Interestingly, this is the root problem at both ends -- from people living in poverty (Portland's sidewalk tent campers who get shuffled around), those suburbanites affected by the housing "crisis", and those who can afford to own in any upscale hip-n-trendy neighborhoods where Airbnb rentals are desperately sought. Those rooting for turnover are usually those who profit the most from it.
Sure, people travel and need to rent rooms once in a while. People like to rent while they're young and mobile, but the two use cases need very serious and separate delineation from each other. Airbnb is pushing them more into "overlap" territory. Airbnb's expansion into "subletting" was the kicker.
So, long story made short: it's an interesting economics problem I've been working on solving in my spare time, as a very long and iterated side project with Ecosteader (ecosteader.com). Some of the details emerging need a better format for communication; however, the most clear thing to come from my research is that people need to _own_, and they need to be able to transact with each other directly. Middlemen (Airbnb is the middleman here) taking significant commissions is part of the problem.
But the middlemen problem has sort of an obvious solution: to tax rental income so aggressively that it's just not an appealing source of investment to people who invest in rentals. Use the tax generated from over-inflated rents to build properties for sale, and/or figure out a way to use that money to grant-deed land on which people can build. This last option seems the more fun opportunity to me, and is what I originally had in mind building an eco- site.
The homesteading movement needs to come back, adapted a bit for the 21st century."
Disagree if you want... but explain how the problem can be solved better any other way.
While I lived in Mountain View, I rented a house built in the 50s that was renovated in the early 2000s (but renovated carefully to stay within the prop 13 guidelines). Houses up and down the street were selling for well over $1M, and they were smaller and in rougher shape than our rental. I've recently seen some houses in that neighborhood go for $1.4M So let's assume our rental was worth 1.2M The landlord bought the house in the 70s. I just checked the Santa Clara county property tax for this house: $1760.36 / year on an assessed value of $130K. This is for a house whose market value is roughly 10x that!!
So an owner of a house has a roughly 90% discount on his property tax, but only as long has he neither moves, nor improves his house. This causes lots of older folks to remain in houses that are far too large for them. Like older people everywhere, these people oppose "change". They want the neighborhood to look exactly the same as it did 40 to years ago when they moved in. They don't want condo or apartment buildings. The oppose new development of any kind. Meanwhile, they pay next to no property taxes, and the schools are falling apart, and there is no money for improvements that could help with traffic (like more bridges over or tunnels under the Caltrain tracks) or other services.
I'm so glad that I'm back to living in a sane market on the East coast, and don't have to deal with this issue anymore.
http://urbankchoze.blogspot.com.au/2014/04/japanese-zoning.h...
When so much research and expert analysis shows something is bad, lay people are somehow oblivious "eh, I just don't believe it".
Worse yet, why is it so easy for people to like the idea of rent control but dislike the idea of cash assistance? If you want teachers (or whomever) to be able to live nearby, fine then just give them a cash subsidy.
Giving out cash doesn't kill the market economy, allows the benefit to be given out precisely, and anyone you want can pay for it via a tax - landlords, rich people, sales tax, whatever.
Do nothing or do something, just don't do rent control which hurts everyone.
People are always saying that it's bad that people don't vote for their own self-interest but forget that there is a reasonable time horizon for decisions, and it's not infinite.
For people living at the margin, for whom it matters most as they'll be the ones affected, that time horizon is zero. At a zero time horizon the decision is obvious : no to change ! Yes to more rent control !
The minimum time horizon for considering these economics would be the amount of time it takes for new buildings to get built, which I imagine would be 2-3 years at least. If you consider the reasonable time needed for the building supply in San Francisco to exceed supply, we should say this measure will only start helping people when the market is oversaturated. That may never happen. Realistically, anything less than 10 years seems to me a very long shot.
Except in the case of climate change the time horizon under consideration should be more like 100 to 1000 years.
So something like 50-60 years is the longest considered timespan. Rewards on that sort of timeframe have to be extreme (essentially 1.0450=7, as in 7 times ROI would be the risk-free rate. For an investment with minimal risk a factor 30 or so would be required)
There's a lot of way we could determine who gets a slice and who doesn't get a slice. We could give slices to people who have been there longer. Or we could let people who have more money and value the pie slice sufficiently high to spend their money buy a slice. We could give some money to people who really really want a slice but just can't afford it. We can debate and argue about all the ways we could pick the pie slice winners.
But at the end of the day it doesn't matter. The exact same number of people will get slices. And the exact same number of people will not get a slice. All we're doing is picking winners and losers in different ways.
The only debate that matters is the one that grows the pie. We need more pie so more people can have a slice. Taking a slice from Peter to hand to Paul is an utter waste of time.
"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."
You can get around the paywall by typing the title of the article into Google, and clicking on the link to wsj.com.
I'm genuinely curious because I think in a few years from now Denver will be in the exact same boat.
Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” As the WSJ says, we have “tenant organizations, unions and church groups” fighting to pass rent control. They all face imminent declines in power if their constituents have to leave. I guess they are hoping for breathing room, until either the economy collapses or “permanent BMR units” can be built to help with the inevitable churn. But rent control by itself makes the situation even worse for the working class.
No amount of science and repeated real-world demonstrations seem to matter to the self-appointed “soul” of the community.[0] The people are, on the whole, just looking for somebody to follow, and the activists are indoctrinating the kids early and often. Horrible legislation has a decent chance of becoming law.
[0]http://www.theatlantic.com/politics/archive/2015/12/san-fran...