Tinker

Post-pandemic rent control actually hurts renters

Philip Thomas

Philip Thomas

Listen to the recording:

Rent control laws limit how much apartment costs can increase year over year. Proponents argue that these laws prevent people’s housing costs from rising faster than their incomes, which would otherwise cause displacement. But, attempts to regulate a free market can have dire consequences. In a post-pandemic housing market, rent control keeps tenable apartments empty.

With the rise of technology, the Bay Area has become an economic powerhouse, second only to New York City in its number of Fortune 500 companies. But as the number of Bay Area jobs has steadily increased, its housing supply has remained approximately flat. This imbalance has resulted in astronomical rent prices. Rent control laws, which apply to a majority of SF units, further constrain supply - resulting in even higher rent prices.

For the first time in years, San Francisco’s rent prices have decreased - by an average of 11.8% since last year for 1-bedroom units. Temporary work-from-home policies caused by the pandemic are becoming permanent, resulting in “urban flight.” And, high unemployment is resulting in fewer lease renewals.

The problem is that landlords lack incentives to decrease prices in a down economy. Today’s 1-bedroom apartments in San Francisco rent for the same price as they did in 2017. If a landlord signs a lease today, rent control laws lock them into today’s economic conditions for decades.

Running basic math on a rent-controlled 1-bedroom apartment rental in San Francisco:

Average rent in June 2019 $3,700
Average rent in June 2020 $3,360
Average yearly allowable rent increase 1.53%
Time for June 2020 rental to pass June 2019 price: 7 years

With these numbers, it will take about seven years for an SF rent-controlled apartment, leased today, to reach last year’s rent prices. In such a volatile market, landlords have no incentive to fill their units - because rent prices could go up. Plus, allowable rent increases are variable - after the 2009 housing crisis, the San Francisco government slashed its permissible rent increase to 0.1%. 2021’s rate will likely be similarly low.

These lower prices do not reflect potential evictions. Data from the National Multifamily Housing Council shows that 31% in the USA are not paying rent on-time. SF’s rental market has yet to realize the consequence of unemployment because the city has paused residential evictions. Once these restrictions ease, landlords will aggressively oust rent-controlled tenants locked into below-market rates because those tenants decrease a building's resale value.

In this post-pandemic world, landlords will keep rentable, rent-controlled apartments empty to drive prices higher. Rideshare drivers have used a similar tactic for years: they coordinate turning off the Uber app together for 5 minutes. Less supply causes surge pricing, at which point they turn the app back on to earn higher fares. Landlords can do something similar where they take apartments off the market, which creates more competition for fewer apartments and ultimately higher prices.

Finally, this may be a convenient time for landlords to renovate empty apartments, which will ultimately re-enter the market as luxury rentals. High rent prices incentivize competing landlords to build more high-end units - which is why the Brookings Institute concludes that “rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal.”

Rent control tries to regulate supply and demand. Unfortunately, in the coming year, these laws are actually going to hurt post-pandemic renters. When rent prices increase, rent control keeps people in apartments. When rent prices decrease, rent control keeps people out of apartments.

The solution? Build more housing, and abolish rent control on new rentals starting now.

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