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The Case for Ending Rent Control 

Wednesday, Aug 9 2000

Page 3 of 6

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.

About The Author

Peter Byrne


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