A New Real-Estate War in Silicon Valley
wsj.com
wsj.com
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.
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.
(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.
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.
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)
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.
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?
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.
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.
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.
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.
http://urbankchoze.blogspot.com.au/2014/04/japanese-zoning.h...
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...
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.
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.
"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.