Since 1984, I have lived primarily in San Francisco. Before I moved to my home in Oakland in 2004 I lived in a one bedroom apartment in a 12-unit building at the top of Russian Hill – one block from the “crookedest street in the world”. When I moved, I was paying $640 in monthly rent and at the time, my family income was $180,000 a year – I was the Director of Community Development for San Francisco.
Shortly after I moved, my landlord put this 12 unit building on the market for $1.2 million – ($100,000 per unit). This is when condos in the neighborhood cost from $700,000 to more than $1 million. Although I may have looked at home ownership during the time I lived on Russian Hill, I could never find ANYTHING compared to the value I had in one of the most expensive neighborhoods in one of the most expensive cities in the world. I am sharing my experience because it highlights many of the problems with our housing policy.
Any discussion on rent control should include the California housing crisis where not enough housing is being built to meet population growth or Supply and Demand.
In 1950, California’s population was 10.5 million which increased to 37.3 million in 2010 or an increase of 252%. How communities reacted to this population growth was dramatically different. San Jose went from 95,000 to 946,000 … a whopping 893% increase. To meet the demand, San Jose constructed more than 280,000 housing units or a 917% increase (from 31K).
During the same period, San Francisco, with its slow growth policies, saw a population change from 775,000 to 805,000 – a 1.3 percent increase. (California 252% – San Francisco a 1.3% increase) Yes – San Francisco – 30,000 to California’s 26.8 million. In one of the most desirable locations in the world, San Francisco allowed little growth without even acknowledging that this would impact the housing market.
This shortage of housing in California has worsened as more communities adopt slow growth practices. From 2010 through 2014, the state population increased by 1.55 million while throughout all of California only 312,000 permits for new housing were approved or one unit for every five new residents. Significantly, the urban counties (10 Northern counties and seven Southern counties) approved only 200,000 units or only one for approximately eight new residents.
Affordable Housing
Without providing any solutions to housing shortages, some California cities implemented programs for addressing needs of residents being priced out of housing. These programs include rent control and expanding public housing programs. Both programs represent those housing units receiving one or more forms of public subsidies. And both programs alleviate the high cost of housing by passing on costs to private housing markets.
Public Housing
Public housing has been rebranded “affordable housing”. The major difference is that oversight has been transferred from government housing authorities to non-profit housing developers and much of the funding has moved from taxpayers to market rate renters and home buyers thru “inclusionary” and other housing fees.
Housing subsidies to non-profits include:
- Government purchasing property and transferring title to the non-profit;
- Forgivable and no-interest or low-interest loans for new construction and rehabilitation;
- Exemptions from property taxes; and direct HUD subsidies.
- Rent Control
Although most people won’t acknowledge it, rent control is a public subsidy based on the transferring rental income from a property owner to a tenant. If a tenant pays $1,000 for a rent controlled apartment and the market rental is $2,000 the subsidy is $1,000 monthly. The property owner receives no public funding or exemptions from property taxes and is not allowed to record the financial loss and the tenant does not have to declare the income. And unlike other government programs, there is no accountability.
The Most Unfair Element of Rent Control
The most unfair element of rent control is that a significant number of residents are in rent controlled units even though they are ineligible for all government programs for low income people. The landlord must pay for the cost of the government program regardless of tenant income.
Rent Controlled Buildings Become Undervalued
The most unintended impact of rent control is that over time rent controlled buildings become undervalued.
Appraised value of rental property is based land value, rental income and operational expenses. In a building in which rental income falls below other properties in the neighborhood, then the property becomes undervalued. This is what happens when you have a building that has been “rent-controlled” for many years and rental income falls significantly below fair market value. The difference between fair market and the undervalued amount is based on the total amount of the rent subsidies to all building tenants. On Russian Hill, the market rent was $2,800 so my subsidy was worth more than $25,000 a year (and incredibly, nine of 12 tenants were paying less than my rent).
What is commonly regarded as real estate speculation is actually what happens when there is a transfer of wealth in an undervalued building back to ownership. If the longtime owner does not have financial resources to survive the multi-year process of turning undervalued property into market rate opportunities than the property may be sold to another buyer who has the resources to “flip” the property.
The biggest rent control myth is that landlords and developers are responsible for high housing costs.
The argument that landlords control the price of rental housing is almost nonsensical when you review the skyrocketing costs for home ownership. Just like the rise in prices for condominiums and single family homes, market rents are controlled by the supply and demand of available housing units. And the homeowner gets the SKYROCKING increase in home value and does not even have to share any of the cost of the government rent control program.
SUMMARY
Housing, like food and medicine is a basic quality of life issue. Can you imagine any private market that could succeed under that same regulatory environment as housing? Can you imagine the problems if we limited food production and controlled food markets like we have restricted housing? Problems like starvation, steep increases in prices for a limited supply of food. Can you imagine the havoc if while restricting farmers’ production of food, the cities passed on the cost of the Food Stamp program to the supermarkets and mom and pop groceries? Can you imagine the outrage if cities passed on the cost of Medical and Medicaid to the local hospitals without any reimbursement? We have done this with housing.
Rent control is ultimately about governments demanding private housing providers “provide for free” the entire cost of a government program even though these same governments provide huge subsidies and/or direct payments to non-profit housing developers to provide the same level of service.
Rent Control and Affordable Housing are Band-Aids and not solutions for California’s housing crisis. Neither addresses the need to build housing to accommodate California’s population growth.
This speech was recently given by Roger Sanders to the California Association of Local Housing Finance Agencies (CAL-ALHFA) at their November 12th annual conference in Sacramento. Roger Sanders was the former Finance Director of the San Francisco Mayor’s Office of Housing and Community Development. He is currently retired.