The experiences and perspectives I’ve gained while living in San Francisco will certainly constitute a formative experience in my life. One of the most fascinating aspects of the city at this moment in time is the issue of rising rents in San Francisco, which some blame on the migration of highly paid technologists who are driving up rent for the “ordinary citizen.” There are certain social, political and economic trends which are deeply rooted in this great city’s history, and I would never profess to have the answers to such a complex issue (especially considering I have only lived here for four months). I do want to zero in on one of of the economic principles behind high rent, which I believe is being ignored by a majority of people today.
At the end of the day we are dealing with a classic supply and demand issue. Anyone who has studied basic economics understands supply and demand and has probably studied it as it relates to rent control as well. Demand for living space is increasing rapidly in San Francisco, and who can blame anyone for wanting to live in this beautiful city? Furthermore, urbanization is a global trend, which has been occurring for decades, and is not in any way limited to the Bay Area. Basic economics suggests that unless supply increases to meet the demand, prices for homes will rise. I believe that is the fundamental issue at hand, a supply issue. The purpose of this post is not to address the zoning strict laws found in San Francisco and Silicon Valley or the prevailing social or political trends, but rather to speak on the issue of rent control.
This post is as much for anyone who will ever read it as it is for me, to sort out the policy of rent control for myself and maybe to clear things up for you too.
For those of you who aren’t familiar with rent control it is a government imposed ceiling (or price control) on how much landlords can charge for rent. What this really means is the government gets to dictate rent. It means the government feels they can better estimate the true cost of a property than the free market can. This is a huge point of contention for me because I fundamentally disagree with the premise that government knows something that the rest of us don’t. That city council member understand the real estate market better than developers, landlords, realtors and the like is simply false. Unfortunately, it is the ordinary citizen who is left dealing with the consequences.
What are some of the consequences of rent control…
- Landlords can’t charge the going market rate for their properties, which means…
- They don’t have the money to reinvest in upkeep of current properties leading to deterioration of housing units.
- There is less money to invest in new housing projects.
- There is little incentive to keep tenants happy because they know 1. They won’t leave a rent controlled apartment and 2. If they do leave there is a long line of people right behind them looking to take their place.
- Developers have little incentive to build new buildings if they know they won’t be able to charge market rates for the new properties.
- This means new buildings will be higher end buildings, targeting people who can afford to pay above market rent for apartments or for people who can buy their apartments outright.
- It creates a disincentive to move. New families don’t want to move to larger apartments because their current rent is so low, and empty nesters don’t want to downsize because they would end up paying more for a smaller space. This leaves the next generation of new families and empty nesters bidding for a smaller number of desirable places to live.
Clearly there are some significant adverse consequences resulting from rent control. So why don't politicians speak up?
- Nobody likes landlords and they become an easy target for politicians looking to place blame.
- There are a lot of people (voters) who benefit from rent control, namely the people living in underpriced homes.
- It is a very emotional issue. Imagine a news report very showing an elderly citizen who could not afford to live in their apartment if it was not rent controlled.
If none of this convinces you that rent control is not a smart policy I implore you to ask yourselves a simple question. What US cities use rent control extensively? LA? New York? San Francisco? Curiously enough it is those same cities that have the highest rent in the country.
The proof is in the pudding.