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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 ta

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.

kspaans 10y ago
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?
- closeparen 10y ago
  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?
  - ubernostrum 10y ago
    Why would anyone build anything anywhere in California, when they could take it to a "business-friendly" state instead? The answer is the three things that matter in real estate: location, location, and location.
    - WalterBright 10y ago
      Business-unfriendly just translates to higher costs and higher prices.
- bhickey 10y ago
  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.
- ThrustVectoring 10y ago
  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.)
  - candiodari 10y ago
    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. This is not a 100% rule, just 5 or 6 nines.
    - WalterBright 10y ago
      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.
      - kvb 10y ago
        In a toy economy that's definitely true, but the empirical results are mixed in the real world, where there are lots of complicated dynamics.
        JoeAltmaier 10y ago
        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.
- twblalock 10y ago
  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.
  - spoonie 10y ago
    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.
tormeh 10y ago
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.
- whybroke 10y ago
  You have just described the mortgage deduction.
colbyh 10y ago
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.
- kspaans 10y ago
  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.
  - markeroon 10y ago
    Rent control in Toronto is a godsend. Housing prices may be out of control but rent is still reasonable.
  - johan_larson 10y ago
    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.
  - aianus 10y ago
    That's because Toronto has no problem allowing lots and lots of new skyscraper condos to increase supply.
- endymi0n 10y ago
  > 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.
cmejo 10y ago
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.
- klipt 10y ago
  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).
- ThrustVectoring 10y ago
  "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.
Spooky23 10y ago
Great theory. How has the demise of rent control increased the amount of affordable housing in NYC?
drdeadringer 10y ago
Are 10-year waits for an apartment a reality in at least some of Silicon Valley?
- joshu 10y ago
  No, it was an example of things that rent ceilings would cause
- sjg007 10y ago
  It is in SF and in LA.
madeofpalk 10y ago
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?
- aianus 10y ago
  Housing of all sorts is plain expensive. A regular house in a decent family-friendly neighborhood in San Francisco costs millions of dollars. Just an apartment is already over a million. http://www.zillow.com/noe-valley-san-francisco-ca/ http://www.zillow.com/noe-valley-san-francisco-ca/
  - madeofpalk 10y ago
    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.
    - woah 10y ago
      SF is mostly 2 story bungalows and there are actually laws against building in the majority of the city.
    - Eridrus 10y ago
      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.
Eridrus 10y ago
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.

kspaans 10y ago

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?

closeparen 10y ago
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?
- ubernostrum 10y ago
  Why would anyone build anything anywhere in California, when they could take it to a "business-friendly" state instead? The answer is the three things that matter in real estate: location, location, and location.
  - WalterBright 10y ago
    Business-unfriendly just translates to higher costs and higher prices.
bhickey 10y ago
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.
ThrustVectoring 10y ago
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.)
- candiodari 10y ago
  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. This is not a 100% rule, just 5 or 6 nines.
  - WalterBright 10y ago
    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.
    - kvb 10y ago
      In a toy economy that's definitely true, but the empirical results are mixed in the real world, where there are lots of complicated dynamics.
      - JoeAltmaier 10y ago
        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.
twblalock 10y ago
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.
- spoonie 10y ago
  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.

tormeh 10y ago

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.

whybroke 10y ago
You have just described the mortgage deduction.

colbyh 10y ago

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.

kspaans 10y ago
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.
- markeroon 10y ago
  Rent control in Toronto is a godsend. Housing prices may be out of control but rent is still reasonable.
- johan_larson 10y ago
  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.
- aianus 10y ago
  That's because Toronto has no problem allowing lots and lots of new skyscraper condos to increase supply.
endymi0n 10y ago
> 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.

cmejo 10y ago

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.

klipt 10y ago
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).
ThrustVectoring 10y ago
"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.

Spooky23 10y ago

Great theory. How has the demise of rent control increased the amount of affordable housing in NYC?

drdeadringer 10y ago

Are 10-year waits for an apartment a reality in at least some of Silicon Valley?

joshu 10y ago
No, it was an example of things that rent ceilings would cause
sjg007 10y ago
It is in SF and in LA.

madeofpalk 10y ago

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?

aianus 10y ago
Housing of all sorts is plain expensive. A regular house in a decent family-friendly neighborhood in San Francisco costs millions of dollars. Just an apartment is already over a million. http://www.zillow.com/noe-valley-san-francisco-ca/ http://www.zillow.com/noe-valley-san-francisco-ca/
- madeofpalk 10y ago
  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.
  - woah 10y ago
    SF is mostly 2 story bungalows and there are actually laws against building in the majority of the city.
  - Eridrus 10y ago
    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.

Eridrus 10y ago

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.