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The Case for Ending Rent Control 

Wednesday, Aug 9 2000
In the political pantheon of left-leaning San Francisco, Joan Holden is an icon of radical respectability. Since 1968, Holden has written 30 anti-capitalist plays for the Tony Award-winning San Francisco Mime Troupe. Last year's offering, City for Sale, satirized greedy developers and gentrification of the city's Mission District. As an artist-slash-housing activist, Holden has long been an advocate for rent control laws, which limit the amount of rent a landlord can charge tenants.

Holden says San Francisco's rent control ordinance should be broadened to cover all residential buildings, including live-work lofts, which currently are exempt from such controls. She has but a single demur to the enactment of stronger rent controls: She says landlords should be allowed to pass on the costs of capital improvements to tenants. A ballot initiative coming before local voters this fall would ban such capital improvement "pass-throughs"; Holden says the ban would be unfair to landlords, even "draconian."

Holden the rent control advocate is also, it turns out, Holden the landlord. She owns and operates a four-unit apartment building in the Mission District. She also recently applied to city government for permission to pass through $110,000 in capital improvements of her building to her rent-controlled tenants.

In some ways, Janan New is Holden's political mirror image. New is executive director of the San Francisco Apartment Association, a lobby for small- and medium-sized landlords. She opposes rent control, calling it a failed social policy. She blames the current "obscene" rents in San Francisco on governmental tampering. She says rent controls screw up the supply-and-demand mechanism that regulates prices in a capitalist economy. And, she opines, anti-landlord measures on the fall election ballot will blast rents into outer space and drive the middle class out of San Francisco.

New, however, will be staying in town. She owns a house, which, for a conservative who believes homeownership is a key part of the American Dream, is hardly unusual. But New was able to save money to buy her home by living in rent-controlled apartments for 17 years. "I am a firm believer in the free market," she explains, "but I needed a place to live."

In San Francisco, the debate over rent control is often more about emotion and ideology than study or impartial analysis. Most San Franciscans have a personal stake in rent control, one way or the other, and self-interest has its way of breeding ardor, spin, and outright hypocrisy.

The good and bad effects of rent control have, however, been studied nearly to death by a broad spectrum of public policy economists. The nearly universal verdict on rent control is that its mild forms can be beneficial to some renters, but that more stringent forms -- such as the form that exists in San Francisco -- create shortages of housing and high rents that harm tenants, especially the poor ones whom rent control was designed to protect.

In a political backlash against the economic downside of rent control, most jurisdictions that have experimented with it have in turn outlawed it. In San Francisco, however, a significant majority of voters live in rent-controlled dwellings and have -- in their minds -- transformed what was originally intended to serve as a temporary price control into a sacred right.

Politically powerful tenant activists claim that the economic law of supply and demand does not apply to the housing market, at least not in San Francisco, because, they say, with precious little proof, "infinite" numbers of people are ready to move here, if housing is built. An alliance of tenant organizations and neighborhood groups is working to pass laws that would further limit the development of commercial and residential space, on the unusual theory that a lack of supply will somehow reduce demand.

Scientific studies, government reports, and dozens of interviews with experts and players on both sides of the housing question, however, show that San Francisco's housing shortage and the high residential rents it has created are the result of two major factors: political impediments to housing construction and rent control itself.

In the thick of the debate about living space, the Board of Supervisors is commissioning San Francisco's first-ever study of rent control. It will take a year to complete, and, because rent control is the third rail of S.F. politics (much in the way that Social Security is the dangerously electrified issue on the national scene), there is no assurance that the study will lead to significant changes in San Francisco housing policy.

But there is clear need for change. Thousands of existing apartments have been withdrawn from the market, construction of new rental housing is severely restricted, and rents continue to reach for the stars.

Not in spite of rent control, but -- as history has proven -- because of it.

It was 1979. Elvis was dead. Disco was king. A weird mixture of inflation and recession -- called stagflation -- was so wracking the U.S. economy that Ronald Reagan was able to base his presidential campaign on a promise to address the crisis through an untested set of policy initiatives known collectively as supply-side economics.

In the spring of that year, San Francisco landlord Angelo Sangiacomo abruptly raised the rent on 5,000 middle-class tenants. Renters across the city revolted, organizing themselves to put a strict rent control ordinance on the fall ballot. Then-Mayor Dianne Feinstein and the San Francisco Board of Supervisors pre-empted the tenants' initiative by quickly enacting rent controls that were more moderate than the ones headed for the ballot.

Feinstein's rent control law was intended to be temporary, lasting only as long as the hyperinflation that was then afflicting the economy. This initial version of rent control was intended to serve a definite group: "senior citizens, persons on fixed incomes and low and moderate income households." People, that is, who were having a hard time paying rent.

The new law limited a landlord's ability to raise rents while guaranteeing landlords a "fair return" on their investments. It also exempted two- to four-unit buildings from rent controls, if the owner lived in one of the units. The law instituted just-cause evictions, which meant that tenants could no longer be evicted at the whim of the landlord, but only for nonpayment of rent or for nuisance behavior. Related ordinances greatly limited the conversion of apartments into condominiums, a practice that had been shrinking the rental supply.

Since then, the Residential Rent Stabilization and Arbitration Ordinance has been amended 54 times, sometimes by vote of the Board of Supervisors, sometimes by ballot initiative.

Before the late 1970s, rent controls had been enacted in the United States only during times of war and economic crisis. Policy-makers considered the controls to be of temporary use in damping inflation. With the exception of New York City, controls were lifted when the national emergencies receded.

Here, though, the temporary fix has become permanent.

San Francisco's initial form of rent control was temperate, especially when compared to what came later. Initially, rents could rise by up to 7 percent each year, meaning that landlords could adjust rents to keep up with even moderately high levels of inflation. Landlords were allowed to pass through costs of capital improvements that benefited an individual tenant, a provision meant to address concerns that landlords would cut back on maintenance of their properties once rent controls began limiting landlord income. When a tenant moved, a landlord was allowed to let the unit for whatever the market would bear. (But the unit, with the new rent, would then go back under rent control for as long as the new tenant inhabited it.) Importantly, all housing built after 1979 was exempt from controls; this exemption for new construction was meant to keep rent control from discouraging the construction of new rental housing, because new units could still be leased at market rates.

Over the years, however, the ordinance was amended to become more and more favorable to tenants, and unfavorable to landlords. In 1985, the formulas used to calculate allowable yearly cost-of-living increases in rent were lowered to 4 percent.

Fearful that the popular rent controls would be broadened to include new construction, developers became reluctant to build multifamily housing that might not pay for itself. They were also held back from residential development by related zoning and land use restrictions. In 1986, for instance, Proposition M capped the amount of new office space that could be constructed each year, potentially limiting the number of new jobs created in the city, and the potential demand for new rental housing.

In 1992, tenants started voting as a bloc to strengthen tenant privileges. Allowable rent increases were lowered to about 2 percent. Significantly, in 1994, voters lifted the exemption to rent control that had affected 45,000 units in small apartment buildings.

Then, in the mid-1990s, San Francisco's economy exploded.

The pressure for rental housing cooked as tens of thousands of people moved to the city, drawn by the Internet and telecommunications boom. Thousands of traditional blue-collar workers left San Francisco, as the city's bread-and-butter manufacturing and wholesale industry jobs evaporated, to be replaced almost overnight by financial, technical, and professional service positions. San Francisco experienced a net growth of 8,000 jobs as the urban center shed its industrial roots.

The median family income shot from $33,000 in 1990 to $50,000 a decade later. The population grew from 723,000 -- in 1990 -- to nearly 800,000 today. Accounting for births, there were about 60,000 adult newcomers to the city.

In the same period, fewer than 10,000 new housing units were built (even including live-work lofts, which are not technically classified as residential buildings under city law).

The math is simple. At California's statewide average of 2.8 people per housing unit, to accommodate the 60,000 people who moved to San Francisco during the last 10 years, about 21,000 more housing units were needed. Ten thousand units were built. There is, therefore, a current housing shortage of, at least, 11,000 dwellings.

The Association of Bay Area Governments predicts that 20,000 more people will migrate to San Francisco during the next decade, raising the need to about 18,000 dwellings.

But, according to government reports, fewer than 1,000 new units are being built each year, which is a 20 percent decline from the construction rate in the 1980s.

In classical -- and even socialist -- economic theory, in an unregulated market, a drastic increase in demand, combined with only a small increase in housing supply, inevitably produces an upward spike in rental prices that benefits landlords, and disadvantages renters, especially those of limited means.

San Francisco's rent control ordinances, of course, were meant to address just such a situation, keeping landlords from increasing rents during times of high inflation or high demand and protecting low- and fixed-income renters from the predations of market economics.

But a wide array of housing studies show that San Francisco's version of rent control has not only failed to limit or soften the effects of the current housing crisis, but has actually worsened San Francisco's housing problem, and hurt the poor people it was designed to protect.

In utterly predictable ways.

In the late 1970s and early 1980s, rent control took hold in 200 communities. It remains strong only in San Francisco, Berkeley, and New York City; weaker versions exist in Los Angeles, San Jose, Washington, D.C., and many cities in New Jersey.

Most state legislatures have, by now, outlawed rent control. There is a reason for this: Rent control is a price control, and history has shown, and shown again, that price controls do not keep prices down, except for short periods. In fact, price controls usually have the opposite effect of what was intended, raising prices in the long term above reasonable market levels by creating shortages in supply.

The effect of price controls on supply and demand has been understood for centuries, and, except perhaps in San Francisco's tenant activism circles, is not really a matter of dispute.

The theory on price controls goes something like this: When the supply of a product exceeds the demand to purchase it, the market price of the product falls. Because of the price reduction, suppliers have less motivation to make the product, so the supply eventually falls, too.

When the demand exceeds the supply, the market price rises, and there is more motivation to make the product, so the supply increases, until there is too much supply, and then the price falls again.

The market is a seesaw in constant search of balance. The optimal market price is reached when demand calls forth the highest price possible before the supply inevitably increases and prices fall.

But if extra weight is added to either end of the supply-demand seesaw, permanent imbalance can occur. Price controls are analogous to that extra weight.

Price controls can be useful in times of economic emergency -- during war, for example -- when demand far exceeds the supply that can possibly be produced. Governments can limit the price, and dole out the supply as equitably as possible -- for a while.

The fatal problem with price controls, however, is that when an artificially reduced price is imposed, the market will naturally move to adjust the actual amount of supply to reflect the reduced price. In other words, over the long run, setting an artificially low price on a product (in this case, apartments) guarantees that the supply of that product will diminish. (Among other things, when people are unable to move -- due to excessively high rents -- they tend to stay in one place, that is, to hoard their apartments, effectively removing these units from the market. The apartments that hoarding takes off the market tend to be units traditionally rented by those of low or moderate income. Rent control, in other words, discourages turnover of low-cost housing; when low-income renters must find new housing, they face a market that offers them almost nothing to rent. Although it is impossible to say exactly how many rent-controlled dwellings are being hoarded, statistics generated by private rental agencies and analysis by tenant activists and landlord lobbies paint a picture of tens of thousands of hoarded units in San Francisco.) And a reduced supply of any salable product, when combined with steady or increasing demand, inevitably brings higher prices, and, often, the creation of what is alternately called a shadow or black market, where the product is quite available, but only at extraordinarily high prices.

That rent control has the counterproductive qualities of other price controls has been established by experience. Recent studies of Berkeley, Santa Monica, New York City, Boston, Washington, D.C., Toronto, and other cities in which rent controls set artificially low prices on the supply of housing show that stringent rent controls -- of the type that now exist in San Francisco -- do, indeed, cause rents to rise over the long term for tenants who are not lucky enough to be living in rent-controlled units. Rents zoom up for the lucky ones, too, the moment they stop being lucky and have to move.

According to studies anthologized by the left-liberal-thinking Center for Urban Policy Research at Rutgers University, the worst-case harm to urban tenants as a group occurs when stringent rent controls are linked to low-density zoning and size restrictions on residential building. That is, urban tenants as a group suffer most from high rents and housing shortages in precisely the circumstances that now exist in San Francisco.

Most economists agree that moderate rent controls, which allow landlords to recover costs and to make a reasonable profit, can help protect the elderly and people living on fixed, or very low, incomes, from excessive rents and unjust eviction. Even conservative experts, such as Anthony Downs of the Brookings Institution in Washington, D.C., acknowledge that moderate rent controls are not particularly damaging to the profits of landlords.

In Los Angeles, for example, rent control appears not to have caused rents in the uncontrolled market to rise disproportionately. Builders are building new apartment complexes. The open market is providing low- and moderately priced apartments for families.

One of the reasons rent control has had a moderate impact in Los Angeles is that that city's rent control ordinance resembles San Francisco's original law.

Under the criteria developed by scholars of rent control, however, San Francisco's current rent control system stacks up as one of the most stringent in North America. Now, landlords are allowed only tiny annual rent increases and even small apartment buildings fall under the controls. This is not to mention the many impediments, above and beyond rent control, to the construction of new housing that might assuage demand, and bring prices down.

The theoretical effects of stringent rent control -- reduced housing supplies and high prices for housing -- are well known to anyone who has taken a college economics course. In fact, microeconomics courses frequently use rent control as a case study of the negative effects of price control.

San Francisco is learning the cost of stringent rent control in the real world.

Government reports show that San Francisco's housing stock shrank after rent control was established in 1979. A before-and-after study done by Daniel O'Connor in 1987 showed that new construction of multifamily housing stock fell by 32 percent seven years after rent control. Last week, the United States Census Bureau released a report showing that the number of rental units in San Francisco has dropped by 7,500 during the last 10 years.

And a recent study shows that the average price of a one-bedroom apartment in San Francisco now approaches $2,000 per month, up 10 percent in just the last three months, and the residential vacancy rate is reportedly below 1 percent, and falling.

These dramatic price increases and supply shortages are precisely what economists would predict, given San Francisco's combination of strict rent control and strict limits on the construction of new housing.

According to studies conducted by liberal and conservative institutions alike, non-rent-controlled cities around the country are not experiencing the extreme concentration of high rents -- and dearth of moderate and low rents -- that afflicts San Francisco.

Rent control proponents argue that San Francisco's inherent desirability creates an "infinite" demand to live here that renders the economic law of supply and demand moot. Infinite demand, these proponents contend, means that attempts to reduce or stabilize housing prices by building more housing are futile; no matter how many housing units are built, there will always be more people looking to move into them.

Short of conducting a worldwide scientific poll, of course, the infinite demand theory cannot be tested.

But other cities have experienced boom and bust cycles. Other cities are generally conceived of as extremely desirable places to live. Other cities are dense and have geographical limits to expansion.

San Francisco does not need to meet an infinite demand to stabilize housing prices -- it needs to meet the demand that already exists.

No U.S. city with a history of rent control closely parallels San Francisco in terms of land area (small), demand (high), zoning (restrictive), and controls (stringent). But it is clear from the experience of many jurisdictions that a public policy that moves away from strong rent controls has advantages over a policy that proposes to keep them intact, or to strengthen them. Even New York City's rent controls are being systematically weakened, in hopes of rationalizing the only housing market that rivals San Francisco's for high rental prices and low vacancy rates.

Two years ago, the city of Cambridge, Mass., reported on the effect of abolishing rent control -- almost overnight -- in 1995. Loosened rents on previously rent-controlled units initially rose by an average of 54 percent.

Currently, average rent-controlled rents in San Francisco are less than half of what is paid on the open market (or on a shadow market that consists of thousands of live-work lofts and illegal in-law apartments). Economic theory predicts that if San Francisco decontrolled residential rents, the price of formerly controlled units would rise, but to a level nowhere near as high as rents currently being charged.

In other words, if rent control were suddenly lifted, some 180,000 rent-controlled units would be thrown into the open market, inevitably lowering overall market rents. To be sure, many tenants with rent-controlled apartments would find their rents greatly increased, and such increases would fall most heavily on those with low or fixed incomes.

But even if San Francisco's rent control laws were simply loosened, so that half of currently rent-controlled units were safeguarded with protective subsidies for elderly, fixed-income, and very low-income people, 90,000 units would flood the rental market immediately, and 90,000 more would follow over time.

This does not mean that 90,000 or 180,000 units would become empty. It does mean rents would probably go up and, then, gradually fall to a market equilibrium. It does mean that some people could no longer afford to live in their apartments, depending upon their relationships with their landlords. But, for tenants as a group, rents would eventually stabilize -- as supply met demand -- at significantly lower market rates than those that prevail today.

Housing experts generally agree that abolishing rent control without encouraging housing starts by other methods would be an act of futility, and that abolishing rent control suddenly would produce unwarranted suffering. Decontrol of rent will work to lower overall rents, they say, but the decontrol should probably be phased in as a significant undersupply of available housing is addressed.

Because of its small land mass, San Francisco is indeed the second most dense city in the country, after New York City. But the notion that there is nowhere to build housing that would meet existing demand again appears to be more a matter of local folklore than empirical fact.

In 1950, the population of San Francisco was 775,000, almost what it is today. And government studies indicate that there is room for expansion of housing stock to fit current demand.

With the defeat of rent control in Cambridge, San Francisco, New York City, Santa Monica, and Berkeley became the last strongholds of stringent rent control in America. In city after city, unbridled rent control has been moderated, toned down, and even eliminated, not because it was accomplishing its purportedly central goal of keeping housing affordable to low-income populations, but because the price controls were ruining housing markets and raising rents for tenants as a whole, most especially for the poor. To be sure, landlords pushed for decontrol. Just as surely, stringent rent control has been the bane of, rather than a boon to, the poor.

This fall, however, San Francisco voters will be considering two electoral initiatives that would make rent control even stricter than it already is. The city's political establishment, meanwhile, is busily not commenting, apparently afraid of electrocution by San Francisco's third political rail, otherwise known as rent control.

The Mayor's Office of Housing recognizes a need for, at least, 20,000 to 30,000 new rental units in San Francisco. Housing officials have a tentative multiyear plan to subsidize nonprofit developers to build 3,500 units of moderately priced housing, mostly in Mission Bay.

Beyond that, however, the city government has no apparent plan for solving the housing crunch. When contacted over the last several weeks, city housing officials were universally reluctant to take a position for or against continuing rent control and land use restrictions that limit housing construction. Mayor Willie Brown's press spokesperson, for example, commented only that, "The mayor supports the idea of rent control."

In San Francisco, there is obviously tremendous political resistance to asking the question of whether rent control serves its intended purpose.

Calvin Welch, age 56, is the leading political strategist for San Francisco's nonprofit housing developers, who specialize in the construction of housing for those of low and moderate income. As another icon of radical respectability, Welch's claim to fame is his championship of Proposition M in 1986, which put an annual cap on the amount of office space that can be built in San Francisco.

Asserting that the price of rental housing is not affected by supply, Welch unabashedly supports permanent rent controls. He also favors two tenant-inspired ballot initiatives that will go before the voters this fall.

One proposition would strengthen a law limiting the conversion of rented apartments into condominiums, i.e., apartments that are separately owned. The proposed law would make it very difficult for groups of tenants to buy buildings jointly, through an arrangement known as tenancy-in-common. This measure was put on the ballot by the San Francisco Tenants Union, which is concerned that this form of group ownership permanently removes apartments from rent controls.

The other proposition, steered by the Housing Rights Committee, would ban most capital improvement pass-throughs to tenants. This means that landlords would have no financial incentive to fix major problems, like leaky roofs, or shaky foundations, because they could not recoup their costs either by pass-through or a rent increase.

Welch, tenant leaders, and two dozen neighborhood organizations united in an umbrella group called the Coalition for San Francisco Neighborhoods are also working hard to persuade the electorate to kill live-work loft development and further limit office development through a ballot initiative modeled on the original Proposition M.

This alliance of rent control advocates and anti-growth neighborhood preservationists has power that local politicians can only find daunting. Leaders of homeowner organizations, such as Joan Giradot, three-term president of the Coalition for San Francisco Neighborhoods, have not traditionally favored rent control. But they now find themselves agreeing with tenant leaders who represent, in some form, the two-thirds of San Francisco that rents, and who believe that the city's current housing problems are quite simply a result of too many people moving to San Francisco.

Giradot says she supports office development restrictions and limits on residential construction as a way of "preserving the quality of life" in San Francisco.

"People should go somewhere else," she says.

The belief that limits in housing supply, and simply telling people not to come to San Francisco, will somehow create reductions in housing demand may not be particularly logical, or supportable by fact. The notion that making rent control stricter will improve the housing situation in San Francisco is belied by almost all the available evidence.

But logic and evidence do not necessarily win elections, and tenant initiatives have been extremely popular at the ballot box in San Francisco.

Ted Dienstfrey, age 62, is a card-carrying member of the ruling class. The scholarly realtor was chief of the Mayor's Office of Housing under Mayor Frank Jordan in the early '90s. Today, he eases his career toward retirement as he oversees the charitable donations of Gerson Bakar, a local mover-shaker who made great wealth building garden apartments.

Dienstfrey, who was awarded a master's degree in urban planning by the University of California at Berkeley in 1960, has long been an outspoken critic of rent control. Over lunch at Pier 23, eyes twinkling, he tweaks San Francisco's tenant activists by reading aloud from The Housing Question by Frederick Engels, the co-author, with Karl Marx, of The Communist Manifesto.

Engels debunked the respectable radicals of his day (and many a San Francisco tenant advocate), who were claiming that housing is a right, not a commodity, and therefore not subject to the law of supply and demand.

"It is a complete misrepresentation of the relation between tenant and landlord," wrote Engels, "to attempt to make it equivalent to the relation between worker and capitalist. On the contrary, [rent is] a quite ordinary commodity transaction between two citizens, and this transaction proceeds according to the economic laws which govern the sale of commodities in general ... the relation between supply and demand existing at the moment decides [the matter] in the end."

Although he opposes strict forms of rent control, Dienstfrey praises its features that partially prevent landlords from gouging tenants and from undertaking unjust evictions. Then he oh-so-delicately suggests phasing it out, while keeping protections, of course, for the elderly, the disabled, and the very poor.

This could be done, he suggests, by allowing rents to increase by 4 to 7 percent a year, which would provide landlords with an incentive to maintain their properties and to keep apartments on the rental market, as opposed to selling them as condominiums. Elderly, fixed-income, and impoverished tenants could be protected from unaffordable increases with subsidies from a pool funded by city fees on new construction and a gross receipts tax on landlords, he says. When a sitting tenant vacates an apartment, it would be permanently removed from rent control. Protections against unjust evictions would remain in place.

At the same time, he adds, zoning and planning codes could be made more amenable to the building of new residential housing.

Dienstfrey's proposals would be anathema to San Francisco's respectable, radical advocates for tenant rights.

Yet W. Dennis Keating, Michael B. Teitz, and Andrejs Skaburskis are scholars who can certainly be described as having a liberal bent, and their take on rent control is not far removed from Dienstfrey's. In the concluding chapter of an anthology published by the Center for Urban Policy Research, Rent Control: Regulation and the Housing Market (1998), they collectively observe:

"Ultimately, housing in the United States will continue to be delivered through the private market. Finding ways to build alliances that could support moderate regulation while relaxing constraints on development might make more sense than fighting the same wars over and over again. Now may be a good time to rethink the possibilities of regulation, to see how it could be made more socially useful, instead of simply seeking to make controls more stringent or to abolish them.

"These are not conclusions that advocates on either side of the rent control debate want to hear."

Peter Byrne has lived in a rent-controlled apartment for nearly a decade.

Additional Links:

San Francisco Rent Stabilization Board:

California Department Housing & Community Development:

Urban Land Institute:

National Housing Institute:

Rutgers Center for Urban Policy Research:

About The Author

Peter Byrne


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