Rent Control

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Berkeley has had rent control, administered by the Rent Stabilization Board on certain properties since 1980. With the passage of Costa Hawkins in 1995, vacancy decontrol become an option for property owners that had been previously disallowed. Vacancy decontrol means that properties subject to rent control can reset to market rents when a vacancy occurs.

Rent Control and the Supply of Housing

Professional economists across the political spectrum agree to a very large extent that rent control is counterproductive for all purposes except those of the politicians elected by its beneficiaries. The IGM Forum considered the question in 2012 and only 2% of professional economists from across spectrum agreed with the statement that "Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them."

See also Why Rent Control Doesn't Work on Freakonomics Radio, April 3, 2019:

 "As cities become ever-more expensive, politicians and housing advocates keep calling for rent control. Economists think that’s a terrible idea. They say it helps a small (albeit noisy) group of renters, but keeps overall rents artificially high by disincentivizing new construction."

Allocative Inefficiency

When a rich person inhabits a rent-controlled apartment for a long time only because it’s a sweet deal but not necessarily because it’s the best fit for his needs, the resulting regulation-created mismatch of needs to outcomes is said to be allocatively inefficient. The implicit rent-control subsidy to the rich person denies a poor person (“misallocates”) the opportunity to rent that apartment. This is especially glaring when the rich person holds the rent-controlled apartment as a pied à terre, not as a primary residence.

One solution to this inefficiency is means-testing eligibility for rent control, which is practiced in no American jurisdiction and has never been advanced in Berkeley.

Dynamic Inefficiency

Capping rental revenue to apartment owners caps those owners' incentive to invest in the property. Hence rent-controlled properties are likelier to be seedier than uncontrolled properties. This proposition can be empirically tested and has been confirmed, frequently.

Also, owners of potential apartments (e.g., spare garages, backyard cottages) or developers of new apartments - realizing that their incentives will be capped at levels that make creation of apartments likely unremunerative - will be likelier to decide not to transform potential apartments into actual apartments.

This regulation-created pressure to underinvest in existing and new supply is said to be dynamically inefficient. “Dynamic” because it occurs over the course of time. “Inefficient” because the underinvestment results in too few apartments, of relatively lower quality, reaching the existing pool of would-be tenants.

Filtering

As new housing (initially sold at a market price to the “rich") ages, it becomes used housing less desired by those rich, driving the market price to a level affordable by the “poor.” The process of aging housing becoming more affordable is called filtering by some housing economists.

The rate of filtering in Berkeley is on the order of 1.0-2.5% per year (source needed). A higher rate would mean new housing becomes affordable faster. Detractors call filtering trickle-down housing, which is accurate. When the system is permitted to operate, the housing does indeed trickle “down” the income scale. But usually the detractors would prefer to stop the trickling altogether by blocking the creation of market (pejoratively "luxury") housing. Such proscriptions lead directly to shortages in the supply of housing.

Disrupting Filtering in Berkeley

Berkeley has its own history of interrupting this filtering process. Recall the 1973 Neighborhood Preservation Ordinance that essentially stopped new housing development dead in its tracks. Voter-imposed rent control in 1980 reinforced this interruption, only partly lifted by the 1995 passage of the state Costa-Hawkins law exempting new construction from rent control and prohibiting “hard-edged” rent control, or “vacancy control” (such as in Berkeley pre-Costa-Hawkins). The result shows up in Census data, starting with 1950 when Berkeley had attained the size now familiar to us in 2019:




Population and Housing by Decade

Census Population Dwelling Units
1950 113,805 37,460
1960 111,268 41,568
1970 116,716 47,365
1980 103,328 46,334
1990 102,724 45,735
2000 102,743 46,875
2010 112,580 49,454

Population and Housing by Decade.jpg

It’s worth noticing that the Berkeley of 1950 had relatively more families, and relatively fewer single-person households, than in 2010, explaining why about the same number of people could occupy three-quarters of the dwelling units. Also, notice the 1980 population was in a trough but housing supply was still near a post-1950 high: rent control was imposed when rental markets would have been at their very slackest! That would explain the injury that landlords have felt from Berkeley’s rent control, on top of the insult of being told to grant quasi-property rights to tenants.