Proposition 10
Voters in California are being offered the opportunity to expand the scope of rent control this November. If you are one of those voters, I offer you a few thoughts on the subject. An editorial in the Wall Street Journal a few years ago asserted that rent control was the second most effective way to destroy a city; the most effective being cluster bombs. I will try to explain why I agree with that position.
Specifically, Proposition 10 overturns a State law that limits the scope of rent control ordinances that local jurisdictions can enact. That law prohibits control on newly constructed buildings and prohibits vacancy control (the amount a landlord can charge for a vacant unit). If the Proposition passes, there will be no restrictions to any ordinances any city or county wants to pass. Based on past history, a number of left leaning cities will certainly impose a higher level of control than presently allowed.
First, you need to know that rent control does not protect the poor from the rapacious grasping of the storied 1%. The majority of rental units are owned by mom ’n’ pop operators who are trying to make a living or supplement their retirement income. Big complexes are typically owned by Real Estate Investment Trusts or private equity funds. The investors in those vehicles are mostly mutual funds with 401k money or pension plans. If you participate in a pension plan of any kind, and you vote for Prop. 10, you have sent a round in the direction of your foot.
Second, rent control does not help the poor or those on fixed income. In a rent control jurisdiction, a controlled unit that comes vacant attracts lots of applicants, because demand for rentals exceeds supply. Rent control laws are never enacted in places where there are plenty of rentals that compete for renters. Does the poor applicant get selected? No prize for the winning guess. The applicant with the best credit rating, most solid job history, best landlord references and cleanest background check gets selected. Over time, poor people are a smaller and smaller percentage of those residing in controlled units. The result is a government mandated transfer of wealth from one group of middle class people (owners of apartments) to another group of middle class people (those who worked the system to their benefit). As usual, poor folks get screwed. We only pretended to help them.
Third, rent control regimes lead to an inevitable deterioration of the housing stock. If I own a vacant unit in a market rate environment, I will paint, install new carpet and buy new appliances in order to maximize the amount of rent prospective tenants would be willing to pay for my place. If I have a mandated rent, and a line of people who want the unit, the winning applicant gets it “as is”. Advocates think they can solve this problem with aggressive inspections. Inspectors are not in a position to mandate fresh paint or unit renovation, and never will be. That kind of mandate would definitely prompt a winning 5th Amendment lawsuit. The law that Prop. 10 seeks to overturn was passed in order to forestall the prospect of such a suit.
Finally, apartment construction will come to a screeching halt if Prop. 10 passes. It might gradually resume in some jurisdictions that publicly and effectively reject any prospect of new rent control laws, but there will definitely not be construction in the urban areas that desperately need more housing. Even if you could find a developer dumb enough to consider constructing a new building, you could not find a banker dumb enough to lend him/her the money to pay for it. Lenders want to be repaid. If they loan against an asset that has fixed income and escalating expenses, they go broke. Rent control laws mandate how much rent can be charged, but not the amount the owner will be required to pay in taxes, insurance, maintenance, utilities, etc. Lenders are looking for a gap between net income and debt service that gets bigger as the loan seasons. Developers and investors are looking for the same thing. If laws mandate shrinking profits (which will inevitably evolve into losses), no investment will be made.
A new one bedroom apartment in San Francisco will cost you $4,000/month. You can get the same amenity in Dallas for $1,200. Dallas doesn’t have rent control or a Planning Commission that carves huge extractions out of proposed developments. The folks in San Francisco are too smart to be taken in by the obvious conclusions. They’d rather blame property owners than look in the mirror. Don’t be sucked in by Prop. 10! It will make a bad situation worse.
