Wednesday, May 07, 2008

Rent Control in General (and Just a General Plea to Vote No on Prop 98)

Lately, there has been some articles out there attacking rent control. And to a certain extent, there is something easy about attacking it. Hell, we are Americans here. Kicked the British Crown off of our backs two centuries ago essentially because we wanted to decrease government regulation. There is also the hint that things like rent control are an invidious form of socialism which devalues private property rights.

The problem with any system is that there is always going to be some people who end up getting off better than the system intended. Over at Eye on Blogs, there was a link to a story that purported to be "A Case Study". The actual title is "Adios Rent Control". Now, the gist of the article is that because one person has somehow ended up with a sweet deal, i.e. a house for approximately $2000, per month, rent control as a hole is flawed and therefore should be abandoned.

However, that being said, eliminating rent control, especially in a city like San Francisco would be serious mistake. Take a look at it by the numbers: a median household income for a family here is $67,809 with an average family being 3.22. This works out to approximately $5650.75 per month. Now, according to SFRentStats, the median rent in San Francisco is $2250 per month. This comes out to roughly 40% of the median family's income. Thats a bit on the high side. Most people will tell you that you should never pay for housing that costs more than a third of your take home.

So, you think, that's a measely seven extra percent. Of course, that takes into account that median includes all those little one bedroom and studio apartments. When you start looking at 2 bedroom units (median: $2700 or 47%; average: $3053), three bedroom units (median: $3400 or 60%; average: $3811), and four bedroom units (median: $4000 or 70%; average: $4621), the number change significantly.

Now, I know what you are thinking. Median is not the same as average. (Median is in fact the middle point. As Hyperstats Online explains, " The median is the middle of a distribution: half the scores are above the median and half are below the median. The median is less sensitive to extreme scores than the mean and this makes it a better measure than the mean for highly skewed distributions. The median income is usually more informative than the mean income, for example. ) What it does show that is for fifty percent of the families in San Francisco, the median rents, not to mention the average, are eating up a considerable portion of their monthly budget.

Another argument that is made, and I suppose is made in the "Adios Rent Control" article, is that people hang on to these rent controlled units forever. This in effect means that the population is supporting an individual or family, instead of the unit. However, in a 2007 study commissioned by the city, more than 50% of all renters had been at their current rental for 5 years of less. Only 10 percent had been there for six years, and less than 10 percent had been in the same rental unit for 20 years of more. What does this all mean? Tenants are not staying in rent controlled units forever. Most are moving within five years.

Everyone "knows" someone like the renter in the Adios article. In my practice, I have come across the occasional spectacular deal. However, in most cases, the numbers just do not bear this out. Do not make a decision based on what is clearly the exception and not the rule.

In other places, anti-rent control advocates have argued that rent control prevents new buildings from being built. Combined with a disincentive to invest in older buildings, because of the alleged mass of below market-rate tenants whose rent would make it unprofitable, and you are left with cities with decaying buildings.

Well, if one were to look at the San Francisco Rent Ordinance, or the Berkeley Rent Ordinance (see Section 13.76.050 I), or the Santa Monica Rent Ordinance (see Section 12060 ), or the Los Angeles rent control ordinance (see the fact sheet here) one would notice something in common. All new construction after a certain, typically in 1979, would be exempt from rent control. So why then, is this claimed dearth of new construction? Rent control would not affect these new rental units.

According to the people quoted in today's S.F. Gate, passing Prop 98 would free the developers from having to deal with rent control and lead to an immediate increase in newly built units on the market. This in turn would depress the rental market as a whole.

Sounds like a nice theory. Except when has that ever happened. The best case study available looks to be Massachusetts. In the 1990s, the voters approved a ballot measure which ended rent control throughout the state. What they found was predictable in a way. Yes, landlord's did invest more to rehabilitate their properties (though I have not seen where there was a surge in new rental construction starts). However, they also found that the rents had doubled. Another interesting fact is that the rents in the non-rent controlled jurisdictions also took a jump.

Suddenly, those numbers I mentioned earlier become a whole lot uglier. The median income remains the same ($ 5670.75 per month) but the median rent goes up significantly and the average might be somewhere up around $ 4500? (Hey if my math is wrong, feel free to chime in).

In the case of Massachusetts, and particularly Cambridge, the distribution of people living in rent controlled units was a little different. Unlike Massachusetts, which found that there was actually a very small number of poor or elderly people being helped by rent control, in San Francisco alone there are 80,000 units being rented where the household income is less than $49,000. Thats a significant number of people who will be forced to either pay higher rent or move out of the urban cores (where most rent controlled jurisdictions are). Now, add in the fact that gas in California is now $4.00 per gallon (more or less). So these people will have to commute longer to find jobs, or to maintain the services they require. With no real public transportation alternative available, they will have to spend more money on housing and on transportation.

Now, for those who have jobs out there, but cannot bear the burden of the increased rent which will happen following rent control's demise, think about where you work. According the 2007 housing study, 80% of the people renting in San Francisco also work in San Francisco. How many of those jobs will increase the pay of their employees to help them meet the new rental increases?

Despite the rosy predication of Howard Jarvis Taxpayers Association and other libertarian/conservative groups, a lot of people will lose out if Prop 99 passes and rent controls in California are abolished. Not only will the controls which dictate how much the annual increase on rental units be abolished, but tenant's protections will be eviscerated completely. No longer will landlords be required to evict only for just cause. Without these protections, the landlord would be able to evict simply because they want to raise the rent.

Who will really benefit from deregulation of the rental markets in California? One group: the landlords. However, landlords choose to be landlords (I myself hope to be one someday). However, the amount of benefits which landlords will accrue if Prop 98 passes is out of proportion to what the rest of the population gives up. They become immune to government regulation, since that could be construed as a taking. They get to be free of rent control, meaning that in urban areas, where space is at a premium to begin with, people will be constructively evicted by their rent increases.

What actually needs to be fixed? Oh, that's right, California's eminent domain law. But the landlord's decided that they would try and get it all in one fell swoop when they came up with Prop 98. Do not let them get away with it.

Please get out there and vote on June 3, 2008. Vote no on Prop 98.

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