Four Reasons to Hate SF Rent Control

San Franciscans love their version of rent control (SFRC). Most other Americans disagree.

Take liberal California. In 1995, the CA legislature passed the Costa-Hawkins act, which outlawed rent control on units built after Feb, 1995. When progressives put a measure on the ballot in 2018 to repeal Costa-Hawkins, only one county supported it (look for the tiny green dot):

Prop 10 (2018) results

Nationally, rent control is actually banned in the majority of states. So, who’s right?

Understanding rent control

SF’s original rent control ordinance was enacted in 1979 on buildings with 5 or more units. It was expanded in 1994 to include 1-4 unit properties. It (supposedly, see below) applies only to structures built before 1980. SFRC allows rents to rise, at most, at 2/3 the rate of inflation per year.

Rent control’s fundamental effect is this: Some renters pay excess rent to subsidize those with sweetheart deals. Landlords have a certain amount they must earn to stay in business. When rents aren’t high enough, landlords disappear, and a crisis ensues.

For example: A landlord must clear $2,000/month rent with 2 units. In a normal rental market, each unit would rent for $1,000. In a rent control situation, one unit may rent for $500, while the other must then rent for $1,500.

It seems unfair to charge two people vastly different prices for the same thing. But that’s only one unpleasant outcome of SFRC. Let’s look at a few others.

Note: It’s important to differentiate SFRC from more moderate versions of rent control, which protect against extreme events while allowing the free market to work. For example, as of 2020, California has a 10% annual cap on rent increases.

SFRC subsidizes the wealthy

I often tweet about my 42 year old physician friend, who we’ll call Dr. X.

Dr. X has rented a studio apartment facing Golden Gate Park since med school. I know Dr. X earned around $450k in 2021, which is, I would guess, about 10 times what the bartender living in the apartment next door earns. Yet, his rent is around half the bartender’s.

Or, take London Breed, America’s highest paid mayor, who enjoyed a total compensation of $435k in 2021. Should the other renters in her building pay extra to subsidize her discounted rent, as they do now?

These, of course, are anecdotal examples. Does SFRC generally benefit wealthier people?

It must, since those who have been in a city longer earn more than new arrivals. For example, a first year guidance counsellor in SF’s public schools made $68k in 2019, but one with 20 years experience earned $107k. Why should that first year worker – doing the same job for less money – also pay more rent?

Progressivism is supposedly about equality. SFRC turns this on its head, subsidizing the high paid law firm partner at the expense of the junior associate with student loans.

SFRC reduces the housing supply

Rent control – at least, SF’s extreme version of it – can be financially disastrous to landlords, who may face unlimited increases in expenses without being able to raise rents.

So, naturally, some landlords take units off the market rather than risk a failing business, using that space in other ways. The most famous study on SFRC was done by three Stanford economists in 2010. They concluded:

In sum, we find that impacted landlords reduced the supply of available rental housing by 15 percent. Consistent with this evidence, we find that there was a 20 percent decline in the number of renters living in impacted buildings, relative to 1990-1994 levels, and a 30 percent decline in the number of renters living in units protected by rent control.

Rent control reduced the number of renters in RC buildings by 30%! This effect isn’t limited to SF. In 1978, for example, landlords actually demolished over 900 apartment units in Santa Monica rather subject them to rent control.

RC has the same effect on new construction. For example, in 2021, St. Paul, MN enacted a rent control ordinance. Permits for new buildings immediately dropped over 80%. How many rental units has SFRC prevented from being built, converted, or otherwise added to the market since 1979/1994, when the current rules were put in place? There’s no way to know, but it must be in the tens of thousands.

But doesn’t Costa-Hawkins prevent rent control on new construction? It was supposed to, but a loophole allows cities to demand RC units in return for zoning variances or other “compensation”. And SF progressives are determined to exploit this- in July 2022, Mayor Breed vetoed legislation that would have allowed thousands of new units to be built all over the city – but only with rent control. Seven Supervisors supported the legislation. One more and her veto would have been overridden.

SFRC reduces housing supply even within single units. Subsidizing any good or service leads to overconsumption. Would a single man with a low income occupy this 3 bedroom apartment alone if paying the market rent? Never.

Thanks to rent control, I finally get to live alone“, wrote Brock Keeling in SF’s Curbed magazine in 2020. That’s good for Brock, I guess, but it again proves the point.

SFRC is widely abused

If SFRC laws were followed by renters, it might be easier to swallow. But as with any free market distortion, abuse is certain to occur. The core problem is this: once your apartment is significantly under the market rent, you’ve got a thing of value you don’t want to give up. Here are some common examples of SFRC fraud.

Leaving the unit vacant

Remember my MD friend Dr. X? He lives and works in Nevada now, only rarely coming back to SF. But why not keep that vacant pied-a-tier when you need a weekend of dim sum and Giants games? I expect he’ll be paying rent there for the rest of his life.

Or, take Stuart Schuffman, AKA “Broke Ass Stuart”, a popular blogger in SF who often writes about his rent controlled apartment. His twitter account states he lives in two locations, SF and NYC. Legally, you only qualify for rent control if you’re living full time in SF. But many bon vivants hang on to their units anyway.

Renting it out and pocketing the difference.

It sounded like typical predatory landlord behavior. A new property owner had doubled the rent of the Castro apartment of Cleve Jones, a longtime AIDS activist. City leaders rallied to his cause. Jones vowed to fight the action.

There was just one problem. Jones wasn’t living in the unit. He’d rented it out, and purchased a home north of the city. After a couple of weeks, and a review by the Rent Board, he agreed to vacate the unit. It was an exhausting episode that distracted city leaders from real problems.

Living for free as a master tenant

Apartments with more than one bedroom often have a master tenant, and sub-tenants who have no direct relationship with the landlord. By law, the master tenant must charge the sub-tenants proportional rent. In practice, when sub-tenants leave and new ones come in over the years, master tenants increase the rents, eventually living rent free in some cases. When the master tenant leaves, a sub-tenant can then often take over as master, continuing the cycle. SF is full of master tenant abuse:

Passing it on to family or friends

I had a friend living in an RC apartment in the Sunset. The building was sold, the original lease was lost, and the new landlord had no idea who the actual tenant was, or the rent she was legally supposed to be paying.

Eventually, my friend moved out, and passed the unit on to a relative. This should have allowed the landlord to raise the rent, but he had no idea who was who. Was my friend’s relative actually the original tenant from decades ago? These are the nightmares rent control brings.

SFRC hinders economic growth and prosperity

Rent control locks an existing population in place. That’s the whole point – kindly grandmothers won’t be “displaced” by young tech workers moving in and increasing rents.

Protecting certain groups, like low income seniors, from dramatic rent increases might be a good thing. Even some conservative states place limits on property tax increases for the elderly, for example.

But there’s a dark side to distorting rents in favor of those who’ve been there the longest, versus those who best fit the city. Urban areas grow in spurts, in unexpected ways, and their population has to flex as well.

Consider San Francisco’s history. It started as a military and religious settlement, then experienced a gold rush, then booms in railroads, shipping, finance, and finally tech. In each of these cases, a new economy created high paying jobs and flooded the city with money. Tying the population from the previous economy to the city would have reduced the benefits of these evolutions.

Conclusion

Historically, rent control has been enacted on a temporary, emergency basis, during wars or natural disasters. When things returned to normal, they were lifted. While government price controls have a natural, naive appeal (who wants the price of anything to rise?), SFRC has made many of the problems it was supposed to fix worse, while making us a less competitive and dynamic city.

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