Rent Control

Over on the Pink Pistols SF list the darnedest thing, rent control, came up. Find below my responses:

Starchild makes a point on which I must concur - rent control is, sadly or otherwise, a "feel-good" concept that attempts to defy the laws of supply and demand and actually reduces the rental stock in a given market, often creates an artificial and illicit market in sublets (at substantially higher prices and very tidy profits for the holder of the original lease), and promotes misery in the general populace.

Thus, even though Proposition 98 only prohibits rent control in new tenancies and would do substantially more good were it to abolish rent control entirely, its more limited provisions would not threaten any person currently in a rent-controlled space. Instead, as property owners and developers become confident they are safe from undue regulatory interference requiring them to offer their propert(ies) at a loss, rental availability will likely increase (with new stock coming
into the market ranging from grandma's spare bedroom to 30 story residential towers) and in turn drive down prices by expanding supply. Not least among these new entrants to the rental markets will be units withdrawn entirely, using methods of greater or lesser creativity, from the market during the period of rent regulation.

As a result, rentals will likely cost somewhat more as they achieve market rate but their increased number will limit the extent of that increase.

As a former Californian, I can only view the passage of Proposition 98 with anticipation and pleasure and hope that it is the only the first step in a growing realization by Californian voters that regulation is the last and worst solution to most problems, to be employed in only the very most desperate of circumstances.

Regrettably rent control is to rents what a sledgehammer with a dry-rotted handle is to tools. Looks good, feels good, but one heck of a surprise when you deliver that mighty blow.

Pt II in response to:

"Rent control has been an expensive failure ..." I don't think so. My rent has doubled in the last 5 years - I know dozens of people who have been forced out of San Francisco by rent raises. ANYTHING that keeps at least a hint of control in place is a positive market force. And as for the notion that people will stop offering places for rent if there are limits - again, totally unreasonable. They will still make a profit, just not such an exorbitant one.

Individual rents fail to measure the market. For the individual that's "already in", rent control can be really great either directly or indirectly a really great thing with a rent way below market rate after a few years and the ability (with greater or lesser legality, depending on the local scheme and landlord alertness) to sublet (re-rent) their rent controlled unit to third parties at seriously inflated prices to folks desperate to live "in the area". For individuals "not in" and for landlords, the situation is substantially less great.

Landlords don't own some static "goldmine of obscene profits" when they buy a building - they have substantial costs, which are *not* regulated and typically increase (with inflation) each year. Beyond the simple mortgage (while eventually paid off, with what a building goes for, it's neither small nor short term normally), a landlord has maintenance (both normal usage and tenant foolishness..."you mean I can't hang a weight rack from the rafters?"), insurance, management costs, upkeep/cleaning, power, water, and utilities to pay for with rent revenues. When faced with rising costs and the occasional roofing adventure, and little or no prospect of recouping those costs - staying in the market (or entering the market) becomes a much less attractive activity...and if one is sufficiently creative, one can always work the system to depart the market - and thus available rental stock diminishes or grows far more slowly than demand and we return to folks being forced out of an area, but by unavailability rather than price.

Thus, low and middle income renters are driven out of the market. Rental units are no longer being built and may actually be removed from the market, demand continues to expand, but only condo's (not affordable by the average person) are going in. If you can just sell the unit as a condo, as opposed to putting up with all the expense and headaches of a marginal rental, doesn't it make more sense to sell?

The numbers for residential rental units are not nearly as splendid as one might suppose, and as a result, it takes much less to create a disincentive to offer rentals than one might think. I only glossed over some of the more common, non-building specific expenses above - depending on the structure/location/tenants, all sorts of other expensive adventure is possible.

And that is my final word on the subject. Price Controls generally, and rent control specifically, are seductive temptresses leading only to results almost precisely counter to their goals later on as whether its' rent or beans, once delivery cost begins to approach or exceed the investors point of return that very same investor or group thereof will be motivated to dump the investment and spend their money elsewhere.