Rent Control 1 Rent ControlRent Control: Examining the Economic Impacts of the San Francisco Rent Ordinance. Suzanne F. Watroba California State University, San Francisco
Rent Control 2Introduction: In 1979 The San Francisco Rent Ordinance was enacted as a response to theCity’s housing crisis (City and County of San Francisco Rent Board, n.d.). TheOrdinance created the Residential Rent Stabilization and Arbitration Board. Theobjective of the Ordinance was to insure that tenants were not faced with excessiverent increases while also assuring landlords fair and adequate rents. The Ordinanceattempted to do this by placing limits on the amount of rent increases a landlord cancharge and by limiting reasons for evicting a tenant. The Ordinance applies to most rental units built before the 1979,approximately 170,000 (City and County of San Francisco Rent Board. n.d.). Thosebuilt after 1979 are exempt. The Ordinance does not cover commercial and non-residential use units. The Rent Board is funded by rental unit fees and receives nomoney from the general fund. The mission of the Rent Board is to: promulgateRules and Regulations to effectuate the purposes of the Rent Ordinance; hire staff,including administrative law judges; and conduct rental arbitration hearings,mediations. Throughout this paper I will discuss Gruber’s four essential questionsregarding government intervention in the case of rent control. Through aneconomic lens I will analyze the impacts the policy has had on the City. Usingeconomic tools I will evaluate the purpose of the Ordinance and discuss the effects ithas had on the rental housing market.
Rent Control 3Why Should the Government Intervene? In San Francisco rent control, or rent stabilization, was intended to keep keyworkers, families and vulnerable people in the City. The Ordinance was designed tokeep people from being priced out of their own neighborhoods by large spikes inrent. It was also to protect renters from being evicted by their landlords withoutreason. The rationale behind rent control is to create distributive justice; based on“the principle that the same amount of economic activity will take place but withdifferent distributional outcome. That is the same number of apartments providedto the same people in the same quantity” (Tucker, 1997). In other words, theOrdinance was created to increase equity so people like elderly on fixed incomes, orstruggling families, or minorities were not forced to leave the City because ofexcessive increases in their rent. The policy was designed to increase equity byregulating the amount a landlord could increase rent each year. The Ordinance seemed less to do with market failure and more to do withequity issues. In theory without the intervention people who could not afford themarket equilibrium price for rent would be forced out of the City where rents arelower. This could lead to other market demands that could cost the city; like anincrease in transportation options into the city as people were forced to commute towork from outside communities. Without rent control the socioeconomic make up of the city could changedrastically. The people who could not afford to pay market equilibrium prices forrental units would be low wage earners. So, while market forces and incentives maybe able to provide enough people to pay high San Francisco rents to rent most of the
Rent Control 4rental units, the problem would not be solved because the city may only be able toattract wealthy professionals; while failing to keep other demographics they wish toremain in the city. The free market may not increase socio-economic diversity in the City, but itmay allocate scarce housing resources in a less wasteful way. Miller, Benjamin &North argue that rent control impedes the process of rationing scarce housingbecause tenant mobility is sharply restricted (2010, p. 60). They state that manypeople live in houses that are either too big or too small for them because if theymove they face large increases in rent. If equity is the primary issue of rent controlit may not be equitable to have people who live in very large apartments, that theyonly remain in because there rent is well below market value; while a family cramsinto a tiny one bedroom, hundreds of dollars more in the same building becausethey have not lived in the City long enough to benefit from the low rental ratesothers are experiencing. There is no incentive for the one person in large apartmentto move because they will face higher rents for a smaller apartment.How Might the Government Intervene? The specific mechanism San Francisco uses in attempt to keep rentaffordable is by setting limits on the amount a landlord can raise rent each year.The increase is based on the Consumer Price Index for all Urban Consumers in theBay Area, and is usually a very small percentage increase (City and County of SanFrancisco Rent Board, n.d.). In economics it would be considered a price ceiling,because through regulation the government decides how much a rental unit pricecan be increased. However, since San Francisco does not regulate how much a
Rent Control 5landlord can charge once a rental unit has been vacated; the price ceiling vanisheswith new tenants, but follows the same regulations for annual rent increases. Additionally, the Ordinance regulates how a landlord can evict a tenant. Itsets specific guidelines for what are acceptable causes for eviction, as well as atimeline for how long a tenant has to ameliorate the problems they may be evictedfor. I will discuss the effects of both setting the price for annual rent increases andthe strict eviction polices later in this paper. The City of San Francisco created the Rent Board to oversee the rules andregulations of the policy and provide information to landlords and tenants. The Citychose rent control as a mechanism to keep people in the City and avoid landlordsfrom making excessive profits that could decrease people’s ability to stay living inthe City. While it chose only allowing modest rent increases, the City could havetaken a different approach. Instead of regulation in rental prices, the City could havechosen to use subsidies to the people who were unable to afford renting a unit at themarket price. Perhaps subsidies would be a more appropriate and accurate way toachieve the distributive justice rent control aims at achieving because it could targetthose who need assistance the most.What are the Effects of Government Intervention? Rent control may be achieving some of its goals. Some families, low-incomeearners and people on fixed-incomes may be able to stay living in the City becausethere rents have been kept at an affordable level. The downside is that rent controlmay lead to a decrease in supply, as landlords let houses deteriorate because rent isbelow the cost it takes to maintain the property, yet demand may still increase
Rent Control 6because prices are lower. According to Jenkins the model of rent control as a strictprice ceiling predicts maintenance levels in a controlled unit will depreciate(January 2009). However, despite the general belief among economists that rentcontrol leads to poor maintenance because of a disincentive for landlords tomaintain rental units, a study found that in San Francisco their was no discernabledifference between rent controlled and market rate controlled units in terms ofquality ratings by tenants (San Francisco Housing Datebook, 2002). This could bebecause San Francisco has a vacancy-decontrol, so rental prices could read just tomarket value giving landlord’s incentive to fix up the property once low payingtenants leave, but often times turnover does not happen so prices remain well belowmarket value and landlords have no incentive to maintain the property. The low turn over of rental properties is not always because people areremaining in the city, illegal sublets are often the problem. In my very own building,where I pay the market price since I am a new tenant (or above if rent control is infact raising the price of renal units because demand is higher than supply), mydownstairs neighbor sublets her inexpensive rent controlled studio, while she livesnext door in a two-bedroom apartment. She can benefit from moving back to theapartment later if she wants to at the same price she has been paying for years.Other renters charge more for their sublets than they pay for rent, thus making aprofit off the sublet without incurring any of the costs owners pay like taxes andmaintenance. This low turnover also makes it difficult for people willing to pay marketequilibrium prices to find rentals because there are fewer rentals, with plenty of
Rent Control 7people willing to pay from them leading to other abuses. Rent control is designed tocreate social economic diversity and keep housing affordable but it may lead to adecrease in social economic diversity as landlords become more picky in whom theyrent to since they have a high demand for their property. I know when I moved toSan Francisco I had an extremely difficult time renting an apartment. I would showup with my application, good credit score and rental history, but there were alwaysat least ten people there who were older, more established and probably much morefinancially well off than a woman just moving to the city for school. As a result I wasunable to live in the neighborhoods I wanted to and had to move to the outskirts ofthe city where demand was lower, and thus my landlord did not have as manyapplicants to choose from. I still paid the same amount the other apartments werelisted at, but got less utility from my apartment because of its distant location to mywork and school. Additionally, after talking to many friends whom had landed greatapartments for the same price, they admitted that their parents had offered to paythe entire years rent in cash to the landlord, an option that eliminates many peoplefrom the competition. This large up front cash payment is referred to as “keymoney” and makes it very expensive for people to move from one apartment toanother (Miller, Benjamin & North, 2010). San Francisco’s rent control Ordinance also regulates what a landlord canevict a tenant for. The policy is designed to keep landlords from harassing tenants,since they would have an incentive to evict the tenant to receive a higher rentalprice (Miller, Benjamin, North, 2010). The downside of this policy is that even when
Rent Control 8tenants are doing illegal things, like subletting, it is too expensive for landlords toperuse evicting them because the policy is designed to protect renters.Why Did the Government Intervene in the Way it Did? The general census among economists seems to be that rent control leads tomany unintended and undesirable effects that outweigh the equity issues it isdesigned to control for. So, why does rent control still exist in San Francisco? Itcould be that in 2000 there were 79,545 specified owner occupied units, comparedto 214,198 renter occupied units in the City (U.S. Census Bureau). Renters are themajority, and as mentioned through out this paper once they occupy a rental unitthey benefit from landlords only being able to raise rent a small amount each year,and protection from easy eviction. Renters who have been living in the City for along time, may be profiting greatly from their below market level rents and may notwant to see rent control abolished, even if it has other unintended consequences.This means that renters may have a huge impact on government official’s decisionsin whether or not to support the policy. Government officials understand that themajority of voters are probably benefiting from rent control and would not want torisk re-election by trying to terminate the program. Likewise, officials are citizenstoo and may be benefiting personally from rent control. San Francisco also has a long history of unions. If special interest groups,such as labor unions, believe that rent control helps keep workers in the City theywould be unlikely to support a change in the policy. Other unions, like the tenantsunion, would also bring strong opposition to any changes in the current policy.
Rent Control 9 References:City and County of San Francisco Rent Board (n.d.). Mission Statement. Retrieved August 5, 2010 from http://www.sfrb.org/index.aspx?page=1Jenkins, B. (January, 2009). Rent control: Do economists agree. Econ Journal Watch, volume 6, #1, pp 73-112.Roger, M., Benjamin, D. & North, D. (2010). Bankrupt Landlords for Sea to Shining Sea. In D. Battista (E.D.) In the economics of public issues (pp58-67). New York: Addison-Wesley.San Francisco Housing Datebook. (2002). Retrieved August 7, 2009 from http://www.sfrb.org/index.aspx?page=137Tucker, W. (1997). How Rent Control Drives Out Affordable Housing. Retrieved August 6, 2010 from http://www.cato.org/pubs/pas/pa-274.htmlU.S. Census Bureau (2000). American Fact Finder. Retrieved August 6, 2010 from http://factfinder.census.gov/servlet/QTTable?_bm=y&- qr_name=DEC_2000_SF3_U_DP4&-ds_name=DEC_2000_SF3_U&-_lang=en&- _sse=on&-geo_id=16000US0667000