Coming soon to an apartment building near you
San Francisco is the epicenter of America’s rental housing crisis. There, the median monthly rent for a one-bedroom apartment is more than $3,600. (“Median” means that half of the one-beds cost more and half cost less.) And you can easily fork over twice that for a nondescript three-bedroom without parking.
The median rent for a one-bedroom in New York City is nearly $2,900. Boston and Los Angeles weigh in at $2,300. Rents in the Heartlands, where income growth has flattened since 2008 and rental housing is scarce, are also increasing. Nationwide, the median cost of a one-bedroom apartment is more than $1,200.
Around the country, incomes are not keeping up with rising rents, as the below chart highlights.
The Pew Charitable Trusts attributes the national increase in rental demand to the aftermath of the 2008 recession, when millions of homeowners suffered foreclosures. They migrated into rental markets, reducing supply and raising prices. Today, decent housing is unaffordable for millions of families.
Many Americans Are Barely Scraping By
What is affordable? Federal housing guidelines calculate affordability as paying no more that 30% of a household’s income toward rent.
Therefore, an income of $24,000 makes monthly rent of $600 affordable. For an income of $75,000, the affordable rent is $1,875, which in San Francisco will get you a single room in a shared apartment, according to Zumper, which tracks the ups and down of rental markets.
The picture does not get rosier outside of San Francisco. The Pew Charitable Trusts calculates that 40% of America’s 43 million renting households are “rent burdened,” i.e., paying more than 30% of family income for housing. Worse, about one fifth of renter households are paying more than half of their earnings to landlords, which diminishes budgets for groceries, child care, health care, and education.
African-American and senior households are the most burdened by rent, but fully one third of all households sampled around the country are struggling to afford the basic cost of living, according to United Way. The most rent-burdened families typically have less than $400 to cover a financial emergency. They are downwardly mobile.
What to do about the crisis?
The U.S. Senate is considering a proposal to subsidize rent-stressed tenants with tax credits. And California voters are poised to strengthen rent controls in November.
Ah, rent control, the old bugaboo.
California’s Proposition 10 proposes to loosen state-mandated restrictions on local rent control ordinances. Special interests on both sides have spent $50 million on broadcasting scary soundbites based on competing theories.
According to a main Prop 10 proponent, Coalition for Affordable Housing…
“People are tired of the false promises of ‘build build build’ solutions to this housing crisis that only seek to fill the pockets of for-profit developers. Entire communities are being wiped out while Wall Street landlords rake in the cash – we need to stop the bleeding first [with more rent control] before we can do anything else.”
Opponents of Prop 10, on the other hand, blame decades of rent control in San Francisco, Los Angeles, Santa Cruz, and other municipalities as the cause of the rent explosion. According to free-market think tank R Street Institute…
“Rent control destroys housing markets because it takes away the incentive to build new apartments, reduces the willingness of landlords to upgrade and maintain their properties, and encourages tenants to squat indefinitely in their below-market units.”
Both these campaign positions rely on what economist Paul Krugman characterized in the New York Times as “zombie arguments – that is, arguments that have been proved wrong, should be dead, but keep shambling along because they serve a political purpose.” In that instance, Krugman was talking about unproveable arguments against affordable health care, but arguments for and against rent control are also zombified.
Sadly, Krugman was himself chewed by a zombie argument.
In 2000, he wrote, “The analysis of rent control is among the best-understood issues in all of economics.” Economists agree that “a ceiling on rents reduces the quality and quantity of housing.” Krugman blamed the high rents of that time in San Francisco on “a technology-fueled housing boom colliding with a draconian rent-control law.” Zombie alert! Contra Krugman, San Francisco’s rent regulations were not (and are not) “draconian,” nor were price controls the cause of the shortage.
The economic argument for placing price controls on commodities is to stabilize hyper-inflating markets in which demand has overtaken supply. It is a textbook error to make emergency price controls permanent, as that will diminish the supply.
For housing markets, the assumption is that developers are not going to be motivated to build rental units in rent-controlled environments. But that is not what has occurred in San Francisco, which is experiencing a residential construction boom, contra the dominant theory of rent control.
Theories are useless without solid data. There has long been a lack of empirical information with which to test the efficacy of rent controls. Without the ability to produce meaningful datasets to buttress their opposing theories about rent control, the Prop 10 battle has become a war of zombie arguments – and voters are left at the mercy of their own prejudices.
Let’s dig into the intuitive argument at the heart of the theory that rent control artificially constricts the rental housing market.
It goes like this: In a rent-controlled market, people hoard cheap apartments, which freezes the rate of apartment turnover. In an unregulated market, renters are free to move up the housing ladder as their incomes increase, gradually paying higher rents for nicer places. Apartment hoarding blocks the next person from climbing the ladder. The resultant demand for uncontrolled units causes those rents to skyrocket. Developers are reluctant to build new housing in rent-controlled markets, fearing that they will not get a sufficient return on their investments due to rent caps. That is the argument of the anti-Prop 10 forces.
The basic argument of the pro-Prop 10 campaign is that there is no such thing as an economic law of supply and demand and that without rent controls, greedy landlords will keep on raising rents forever. Zombies unite!
The history of rent control in San Francisco shows that both of those arguments are based on insufficient data and wishful thinking…
The Tipping Point
In 1979 and 1994, voters approved San Francisco’s rent-control ordinances. The regulations allow landlords to raise apartment rents based upon a cost-of-living adjustment. The rent can be increased to cover capital improvements, repairs, and maintenance costs. Rents may be reset to market rates when a unit is vacated. It is, in fact, hard to lose money under this system of rent controls – it is designed to preserve a normal rate of profit for landlords.
The controls do not apply to apartments constructed after 1979, which is about 40% of the rental housing stock. Nor do the controls apply to single-family homes, condominiums, and “mom and pop” buildings with four or fewer rental units.
There is plenty of evidence that locking up nearly half the city’s overall housing stock with rent controls has, indeed, increased demand for non-rent-controlled housing.
There is plenty of evidence that locking up nearly half the city’s overall housing stock with rent controls has, indeed, increased demand for non-rent-controlled housing. To the degree that rent controls have caused excess pricing (above normal returns) in non-controlled buildings, those owners likely booked higher rates of profit than their rent-controlled brethren.
Between 80%-90% of San Francisco’s rent-controlled units turn over regularly, despite substantial hoarding. The ordinances protect tenants from unjust evictions. Much of the money that rent-controlled tenants save on housing is spent locally, studies show. Rent-controlled neighborhoods tend to be socially stable, and family- and business-friendly.
San Francisco’s relatively stable housing situation changed in the late 1990s as the dot-com industry bubbled. Cash-loaded Java programmers paid exorbitant rents in rapidly gentrifying neighborhoods – and that was a tipping point.
Landlords legally and illegally began converting rent-controlled apartments into non-rent-controlled condominiums by evicting longtime tenants. Squeezing through loopholes in restrictive zoning and building codes, developers tore down rent-controlled apartments, replacing them with high-priced studios suitable for childless folks.
Reacting to the flurry of unwanted developments, neighborhood groups fought attempts by city officials to loosen restrictions on housing density and building heights so that regular market-rate family housing could be built. “Not in my backyard” lawsuits, campaign contributions, and the occasional demonstration at City Hall stifled the growth of market-rate units, despite increasing demand as the population swelled.
As the supply of affordable housing decreased, thousands of tenants ended up paying a lot more than 30% of their gross income for rent. The elderly, the disabled, and the poor were disproportionately expelled from the city.
Apartment hoarding contributed to the problem of undersupply, but the main driver of high rents was burgeoning demand and building restrictions. Ending rent control was not a solution to the bigger problem. Nonetheless, affordable housing advocates and political “progressives” called for solving the problem of rising rents with stronger rent controls.
What’s Next for Rent Control
While strict rent controls partly catalyzed rising rents in San Francisco, New York, and Los Angeles, the explosion of rental prices around the nation has multiple causes.
California needs 1.4 million new housing units to render its market universally affordable, based on families paying 30% of household income for rent. That is not projected to occur at current rates of building, and residents who cannot find housing are fleeing the state.
The prognosis in San Francisco is better. According to the city planning department, 60% of renters live in 160,000 rent-controlled units, nearly half the renter and owner-occupied housing stock. (San Francisco is a city of tenants!) But the ratio of controlled units to market rate units is falling as new construction booms.
In the face of the housing shortage, the city’s electorate has loosened restrictions on new development in return for affordable housing guarantees. San Francisco is “adding new housing units at a pace not seen in the city in decades [although] recent production has not matched… growth in higher income households,” planners report.
Remarkably, in the past five years, 20,000 new housing units were added. A quarter of the new units are set aside by law for medium- and low-income renters: the back office and service workers necessary for the city to run smoothly for bigger spenders.
The Bay Area Council is a consortium of blue-chip corporations and local governments. It reports that completing the four major development projects already in the city’s pipeline will create affordability for another 19,000 households. The Council is not in favor of ending rent controls. “While the end of rent control will have a small, positive supply shock, this effect is far outweighed by the [projected] loss of [16,222] affordable units.”
Massive investment in new construction is proceeding apace because 80,000 newly arrived infotech and financial workers can afford the high rents in San Francisco… caused in some part by decades of rent control.
Much of the zombified noise about rent control twists facts to fit theory, rather than adapting theory to fit discovered facts.
So what is the future of rent control?
In 1994, Anthony Downs of the Brookings Institute published an examination of the pros and cons of rent control. Downs’ findings are worth revisiting since much of the zombified noise about rent control twists facts to fit theory, rather than adapting theory to fit discovered facts.
In the 1970s, hundreds of American communities adopted residential rent controls. According to Downs, “The goal of such controls was to insulate low- and moderate-income renters from rising rental costs, which had increased as part of a rapid general inflation. Although well intentioned, these decisions to control rents were often made without a full appreciation of the potentially harmful impact of rent controls on the quality and quantity of a community’s housing stock.” Shades of Krugman!
But then Downs qualifies his nod toward the standard theory: The strength of the controls determines the effects, bad and good. Downs found that “less stringent” rent controls have improved housing affordability in many communities, while more stringent, more draconian controls have caused rents to rise – harming, not helping, the less fortunate.
Downs notes the clash “between basic housing costs and widespread poverty… cannot be eliminated or resolved by rent controls.” Instead, he dropped a bombshell:
“If American society wants all of its citizens to occupy decent dwelling units, it must adopt some other measure [than rent control] to deal with this tension … either raising the incomes of poor households (that is, reducing poverty), decreasing the costs of occupying decent dwellings, or helping poor households pay those costs.”
Winners and Losers in California
Fifteen California municipalities already have rent controls, and more want to institute controls to stabilize the turbulent rental markets.
In November, statewide voters will decide whether to keep the Costa-Hawkins Housing Act of 1995, a law that forbids local governments from placing rent controls on single-family housing and condominiums. Costa-Hawkins permits landlords to raise rents on vacated units to market prices. Abolishing the law will allow local governments to limit those increases. But abolishing Costa-Hawkins would not automatically lead to unbridled rent control, as other state laws guarantee fair rates of return for landlords. And elected officials are generally not opposed to development – quite the opposite.
Hungry for supportive data, both sides in the campaign are cherry-picking a Stanford University study of rent control in San Francisco published in September 2017. The study, by economists Rebecca Diamond, Tim McQuade, and Franklin Qian, dipped into pools of big data provided by the consumer identity management firm Infutor. Micro-detailed consumer profiles were merged with digitized municipal records to create a first-of-its-kind dataset.
The Stanford economists eschewed the standard theory of rent control, which does not account for socioeconomic complexity. Crunching their huge datasets with pages and pages of mind-numbing mathematics – such as vt (x, θt−1) − vt (xθ, θt−1) = ln pt (x|θt−1) − ln pt (xθ|θt−1) – the economists teased out the economic impacts of rent control on tenants and landlords in San Francisco, historically.
They found that San Francisco’s rent controls have produced both winners and losers.
• Winners: Individual rent-controlled households have saved up to $6,000 a year, for a total benefit to tenants of $2.9 billion from 1994 to 2012.
• Losers: Renters who leased units after 1994 paid 5% ($2.9 billion) more than they would have paid absent rent control.
• Winners & losers: Due to rent control restrictions, landlords reduced the supply of available housing by 15% by converting to condos or owner move-ins: “This led to a city-wide rent increase of 7% [landlords win] and caused $5 billion of welfare losses to all renters.” But, the authors note, the rush of new supply to meet increasing demand is reducing the historic loss to the tenant category.
The authors explain that San Francisco landlords typically pass on the costs of capital improvements to tenants. And that “contradicts the traditional view of rent control, that landlords will be disincentivized from investing in the property. On the contrary, we find that landlords appear to make significant investments in their properties.”
In fact, developers have gone on an unprecedented building spree, “leading to a housing stock which caters to higher-income individuals.” Rent control has fueled “the gentrification of San Francisco, the exact opposite of the policy’s intended goal.”
Echoing Downs, the Stanford economists found that rent controls often damage the very groups of people that the measures are intended to protect. With him, they conclude that direct renter subsidies are the best panacea for cooling the overheated rental market: “The substantial welfare losses due to decreased housing supply could be mitigated if insurance against large rent increases was provided as a form of government social insurance, instead of a regulated mandate on landlords.” In other words, tax credits.
A Tax Credit Is Not a Tax Cut
Introduced by California Senator Kamala D. Harris, the Rent Relief Act of 2018, “amends the Internal Revenue Code to allow a refundable tax credit for individuals who pay rent for a principal residence that exceeds 30% of the individual’s gross income for the taxable year.”
Playing off the popularity of the existing $140 billion in deductions and other tax breaks for homeowners, Harris’ bill proposes to reimburse low-income households for a portion of their excess rent. The tax credit is not available for incomes above $100,000.
Structured as a refundable credit, a renter’s federal income tax liability would be reduced dollar for dollar. The remaining balance of the excess rent paid by the renter would be returned as a cash refund by the IRS after the tax liability goes to zero.
Renter tax credits are neither a new nor a revolutionary idea. The United Kingdom and Netherlands have similar programs. In fact, Harris’ legislation is modeled on a 2016 proposal by pro-business ideologues at the Terner Center for Housing Innovation at Haas School of Business at the University of California, Berkeley. That proposal envisions a range of tax-based options to alleviate rental burdens costing from $41 billion to $76 billion a year.
Critics of the bill fear that the tax credits are a hidden subsidy to landlords, who will raise rents to maximize the subsidy amount. They warn that developers will be incentivized to overdevelop, as occurred with the Savings and Loan debacle of the 1980s. Others decry the tax credit as welfarism that will breed dependency and sloth.
One thing is for sure… Rent control is not the sole problem of – nor is it the sole solution to – the rental housing crisis in America.
Peter Byrne Peter Byrne’s reporting has been recognized by Investigative Reporters & Editors, the American Association for the Advancement of Science, and the Society of Professional Journalists. His books on strange physics, medical fraud, and political corruption are critically acclaimed. Based in Northern California, his work can be found at www.peterbyrne.info.
