Rent Control Redux
Does rent control make the "affordable housing crisis" better, or worse?The L.A. Times has a big article on rent control today.
The article begins by trotting out the ususal ad misericordiam poster child for rent control: the little old lady who has to spend most of her Social Security check just to pay $653 a month for "her" apartment. Only a heartless bastard would want to throw granny out of "her" apartment, right? That's what you're supposed to feel.
Rent control laws, however, apply to any tenant in a building, not just low-income tenants. Doctors, lawyers, investment bankers and others who can easily afford to pay market rent benefit from rent control, at the expense of their landlords, who may have lower incomes. The article says 550,000 units are covered by rent control. Has anyone studied the income levels or net worth of the occupants of those units?
The article also states, "Without rent control, the average market-rate rent for an apartment in central Los Angeles is $1,485, as of the third quarter of 2006, said Delores Conway, director of the Casden Real Estate Economic Forecast at USC." Well, yes and no. That may be the "average rent" right now for units that are not covered by rent control laws. However, economic studies confirm what common sense tells you: by effectively removing a huge portion of the housing stock from the market, rent control laws drive up the price of units not covered by the rent control laws.
To put it simply: what do you think would happen to the price of the non-rent-controlled apartments if, all of a sudden, 550,000 additional units were suddenly available to the highest bidder?
Price controls, including price controls on real estate, distort the free market system, and cause inefficient allocations of resources. By "locking up" a huge portion of our city's housing stock -- 550,000 units -- we make it more difficult for people to live near their jobs. Result? Longer commutes, more traffic jams, higher prices for apartments, and more political pressure to increase the population density of our city by building huge "behive" complexes for people who want to live closer to their jobs.
If you favor rent control laws because you have, or hope to obtain, a rent-controlled apartment, then just admit your position is based on your personal financial self-interest. That's fine; there's nothing wrong with wanting to save money. But please don't pretend rent control laws are in the public interest. They are not. If you want to help the poor, then help the poor. Give THEM money, or vouchers, or Section 8 subsidies. But don't screw up the efficient allocation of resources by imposing price controls.
Posted by Walter Moore @ 1/14/2007 09:17:00 AM
18 Comments:
I totally and absolutely agree with you. Rent control does not help low income renters. It is not good for the economy as a whole.
Argumentum ad Misericordiam: (argument from pity or misery) the fallacy committed when pity or a related emotion such as sympathy or compassion is appealed to for the sake of getting a conclusion accepted.
Walter,
Thanks for the breakdown. I've been talking about rent control as part of the housing situation in L.A. And I agree with your premise, that rent control can drive up the existing units, and all that.
However, if there are laws on the books, they need to be followed, or overturned, because NOTHING is more unfair than some people following rules, while others get a pass.
So, it's not like I'm trying to stick up for "rent control" just for the sake of protecting poor people.
HERE'S MY MAIN CONCERN: Everytime someone says "rent control", they immediatley think, "poor people", "Section 8", and all that.
But this is about the middle-class, two income families that are being driven out of the City.
So bottom line, either overturn rent control, or stick to it. (When some do, and some don't that throws off the ying-yang.
AND, the good news is, for rent control haters...The California Property Protection Act (Howard Jarvis Tax Association) has that "eminent domain protection" ballot measure coming up in November with that one little old sentence that puts an end to rent control, anyway.
So ED protection AND the end of rent control...For guys like Mayor Sam and Walter...that's gotta be the best combination since Snoop and Dre, Paris and Nicole, or the peanut butter and chocolate of Resses' Peanut Butter Cup.
YOU MAY AS WELL START EVICTING NOW -- WHO'S NOT GONNA VOTE FOR THAT
Walter asks: "The article says 550,000 units are covered by rent control. Has anyone studied the income levels or net worth of the occupants of those units?"
Logical, relevant question. Have the income or wealth levels been studied for LA rent control areas, or other large urban centers?
I agree that laws should be enforced or repealed. Anything in between is simply lawlessness, where laws become nothing more than an tool for those in power to abuse that power.
Rent control laws should be repealed. Immigration laws should be enforced -- which, by the way, would also drive down the price of housing by reducing the demand for same, at least in the short run. In the longer run, demand would rise because some of the hundreds of thousands of legal citizens who flee this state each year might consider returning.
(See how you can work illegal aliens into almost any issue? It's not a coincidence or trick.)
Excellent post Walter. This should pretty much take the wind out of the sails of all these liberals who promote this socialistic scheme.
I would also argue that vouchers and section 8 also drive up the cost of housing just as Medicare drives up medical costs.
It should be noted that in the City of L.A., rent control only applies to units built before 1978. These are not the high-end units that doctors, lawyers, etc. would want. In fact, the yuppie writing this recently gave up a rent-controlled unit for a newer one with better amenities.
That being said, I do agree that rent control should be abolished if (and only if) we get rid of another "socialistic scheme" with roots in 1978: Proposition 13. We were led to believe that it would protect little old ladies who spend most of their Social Security checks on property taxes, but Proposition 13 also applies to doctors, lawyers, investment bankers and others who can easily afford to pay their property taxes.
Not only is this "socialistic scheme" inherently unfair to property owners by distorting the free market system, it has placed a strain on local governments that forces them to increase property tax revenues through dubious "redevelopment" schemes and by zoning for big-box stores and auto dealerships instead of additional housing.
The problems with Prop. 13 have only magnified in the last 6 years, with property values increasing several times over. Many people are paying taxes on a fraction of what their property is truly worth, preventing them from moving to housing that is closer to their jobs, increasing gridlock.
To put it simply: what do you think would happen to the price of housing if, all of a sudden, people were made to pay their fair share of property taxes?
If you favor Prop. 13 because it saves you money on your property taxes irrespective of your ability to pay, then just admit your position is based on your personal financial self-interest. But don't draw false distinctions between rent control and Prop. 13; neither is in the public interest. Both must be repealed.
First of all, if you think a building is undesirable merely because it was built before 1978, wow. Some of the most desirable properties in this city were built decades earlier.
Second, rent control provides a disincentive to maintain and improve the properties to which it applies. You can't raise the rent to cover the cost of painting, installing new landscaping, etc., so why bother.
Third, what exactly do you mean when you say people should pay their "fair share" or property taxes? Do you mean someone who has five children in public school, and therefore consumes around $100,000 per year in tax money, should pay higher taxes than a two-income couple that already pays higher state and federal income taxes? Is that "fair?"
And shall we force the elderly retiree or young couple to sell their property merely because rising property values push up their taxes -- regardless of whether the public interest actually justifies the resulting automatic rise in tax revenues? If that's your concept, what financial incentives do you think you will create in a neighborhood? An incentive to drive values up, or an incentive to run the neighborhood down?
Rule of thumb: the more you tax something, the less you get of that thing.
P.S. Thanks, Sam.
P.P.S. Mitch, as I have previously suggested, Proposition 13 should be "portable." This would increase efficiency: people would be free to move closer to their jobs -- or sell to others for the same reason -- without suffering a massive financial disincentive.
Furthermore, making Prop 13 portable would not REDUCE property tax revenues, because the people who sell would pay the same taxes as before. Indeed, portability could even INCREASE revenues by getting existing homeowners to sell their home to new homeowners, who would then pay higher taxes on the building.
Okay, enough of this. I've got to study some French and read the new Michael Crichton novel, "Next."
P.P.P.S. Mitch, Proposition 13, which LIMITS TAXATION, can be called many things, but cannot legitimately be called a "socialist scheme." Nor does it in any way interfere with contractual rights. Rather, it limits the power of the government to raise an indvidual's taxes. Rent control, by contrast, limits the ability of invididuals to enter into freely negotiated private transactions.
Interesting point - nothing new, but worth reminding everyone.
If rent control laws are abolished, I would they'd be phased out over the course of many years. Otherwise, my guess is that we'd see a large number of long term residents kicked to the curb, our courts logjammed with lawsuits of discriminatory pricing and evictions, and so on.
I'm also curious (but too lazy to research) if non-rent control cities tend to have a more transient populations - if people are forced to moved now and again because their landlord can jack up the rent on a whim, or at the end of each lease term, this doesn't help encourage people to stay in the area. Since the turnover rate is so high already in Los Angeles, I think rent control probably helps keep long term residents.
When it comes to the "fair share" argument, consider this twist to Walter's scenario:
A two-income couple moves buys a house for $700K next door to a person with 5 kids who bought their house 10 years ago for $200K. The person with 5 kids is paying property taxes on a roughly $200K valuation while the two-income couple pays property taxes on a roughly $700K valuation. This is not fair at all, as both families should pay taxes on current valuation, which is $700K.
Making Prop. 13 "portable" only makes a bad situation worse. Am I the only one who forsees the devastating effect this would have on government services? I like having police and firefighters in my city.
Walter: "the more you tax something, the less you get of that thing." So, uh, if we repeal Prop. 13, we'll get less property to tax? Huh? Or maybe we'll have less of our existing housing stock? So people will demolish their houses rather than pay property tax on them? Huh?
We can raise taxes on property without getting less property. They aren't making more land, and barring massive earthquakes, tsunamis, and landslides, they aren't taking any away.
Most reasonable people should see Prop. 13 as just as problematic as rent control, if not moreso. Repeal both, or repeal neither!
Let's take a look at the hypothetical:
"A two-income couple moves buys a house for $700K next door to a person with 5 kids who bought their house 10 years ago for $200K. * * * This is not fair at all, as both families should pay taxes on current valuation, which is $700K."
The two-income couple bought the house knowing exactly what the taxes would be, as did the family that bought 10 years ago. I'm missing the part where this is "unfair." Why does "fairness" require that each famiy's taxes rise or fall based on factors beyond their control, in amounts they cannot know in advance, and for which they cannot plan?
As for the idea that we will face a fiscal crisis unless property taxes rise in lock-step with property values, let me just say, "Huh?" Let's use your own hypothetical families. The five-kid family moves to Arizona, and another childless couple moves in. The property taxes that house generates are now far greater (10 years' worth of market appreciation) even though the new household consumes far fewer public expenditures (no kids vs. five kids). Nor does it cost more to have the Fire Department continue to provide protection for the neighborhood. What is the justification for tying taxes to market valuation? There is none.
If you want to argue that Proposition 13 is somehow strangling state and local government, you need to start by addressing some actual numbers, in particular, the phenomenal growth in the amount of revenues each has received over the past five, 10, 15 years.
You cannot credibly claim that the need for tax revenues is correlated to the rise -- or fall -- of the market price of real estate.
Rather, the need for public expenditures rises with, say, increases in population -- especially if that population consists of a disproportionate number children, criminals, illiterates, drunk/drug abusers, and chronically ill.
Game, set, & match goes to Moore.
This is a very good discussion - thanks Walter, Mitch, et al.
If any other bloggers are reading this I would suggest you link to this story - its a great debate.
As a Realtor for almost 20 years, I can tell you that lots of well-to-do people cling onto their “rent control” units. Some even use them as second “homes.” For example, Mayor Ed Koch used a $400 per month “rent control” unit as a second home.
It’s hard to convince someone to give up what they think is the deal of the century in order to build equity. It doesn’t matter if they earn $100,000 or $200,000. They think they will get richer by staying put in an older unit that they may consider “charming”... not those boxy, new buildings with cheap drywall and carpeting. They prefer plaster walls, hardwood floors, cozy alcoves and wood windows.
Sometimes I can convince them to buy rental property; rarely can I get them to actually move to their new place. They’ll dump a tenant in the new place and stay at the “rent control” one...at least for a few years.
I would estimate 50 people in the past ten years have said they wish they’d listened to me. They lost millions in equity, and at the same time, they hurt those who truly needed an affordable place to live.
Section 8 vouchers or something to that effect is the only way to help those in need.
Charlotte Laws
P.S. Prop 13 is fair because people go into their tax situation with their eyes wide open. If a person cannot afford the taxes that go with the property, then he or she should not buy it. To base taxes on the whim of the market is to bankrupt some people and keep others in perpetual state of fear. We encounter enough fear these days, we don’t need color coded tax alerts.
Well here's a perspective from someone who owns a 4 unit building in Santa Monica that is under rent control. They are all 2 bd, 1 ba.
I am a young attorney, so while I do make a good living, I feel like it is unfair for me to have to subsidize these tenants and let me tell you why.
The argument always is about the old lady paying out of her SS check, as you mentioned. But that is often not the case. My tenants consist of one old lady who is terminally ill. She is not poor by any circumstance. Another tenant is a single male. Not poor, minority, etc...no "protected class" here. The final tenant is an architect and his wife.
The irony is that in the 4th unit (which I now occupy -- she left on her own will so don't get on me about that) was a single mom, also terminally ill, and she was paying market rent with Section 8 covering 2/3 of her rent.
That is ludicrous. The exact person who should be benefitting from rent control (single mom, terminally ill) was the only one paying market rent. Of course Section 8 was subsidizing her.
I just don't see why it should be my (or any landlord's) job to subsidize able-bodied people who simply choose not to work that much and rape the system. Why should I have to bust my hump to pay the mortgage so that one of my tenants who is an architect, has a BMW, flat screen tv, etc... can pay less than $700/mth in Santa Monica for a 2bd!
I just don't see how that is fair. The price of properties keeps going up, cars, gas, food, clothes, medical bills, etc... but the price for rent should remain just slightly higher than what it was in 1979. That is putting an undue burden on the shoulders of private citizens.
And frankly, I do AS LITTLE as possible to upkeep b/c I am not going to spend one cent that I don't have to, not until I can at least get one of the units at market rent. Why should I? There is NO incentive in it for me.
FYI -- I bought the place b/c as ridiculous as this sounds, with the paltry income from the 3 tenants, it made more sense than buying a nicer condo which I could not care for. Plus I figured that over time the tenants would leave or die off anyway. Does that sound cruel? What choice does one have? Basically you're waiting for your tenants to leave or die. And that is just not right.
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