Wednesday, May 27, 2015

Rent Controls in San Jose

I usually try to avoid doing very controversial or polarizing posts, but in this case I can't resist. A couple weeks ago there was an article posting in the Silicon Valley Business Journal about rent controls. San Jose District 3 (Downtown San Jose) Councilman Raul Peralez is proposing to strengthen rent controls in San Jose, specifically by cutting maximum rent increases to 4% and extending rent control to all buildings constructed before 1995 (right now only buildings built before 1979 are rent controlled and the maximum increase is 8% a year). It sounds good on paper, right?

As an econ major, I can't stress how terrible this idea is. Rent controls do not make escalating rent problems better, they make them worse. Sometimes far worse.

Long story short, rent control is a manipulation of the market where demand exceeds supply (see image below). This isn't a guess or assumption, it's a science. With rent controls, there will be fewer rental options available and a greater amount of demand for those remaining units. The stronger the controls, the greater this effect. If you have ever wondered why 50-100 people are all applying for one rent-controlled apartment in SF, this is it.

You may think that if you are already in an apartment, that this will not effect you in a negative way. That couldn't be further from the truth. The stronger the gap between the market and the current rental price, the more likely your landlord will be doing everything possible to get you out of the building. Likely this will include include minimizing maintenance, refusing to do any improvements, trying to convert multi-family rentals to condos, and a variety of other items that I won't even go into. As soon as your are out of the apartment, you will be hit with far higher rents for lower quality units that more people are competing to get (again, SF). Many people will resort to "black market" apartments or tenement housing. Some will become homeless.

The damage does not end there. Rent controls will reduce the market value of all apartments affected. That means lower property taxes for the City of San Jose, and less revenue for services--including the already strapped SJPD and SJFD departments. Landlords will have less incentive to maintain their properties (in fact the opposite when trying to kick people out), leading to substandard housing and blight in both urban and suburban areas.

Thankfully, it seems like Mayor Sam Liccardo does not share the same sentiment on rent control as Raul Peralez. It's a very difficult topic to stand up to, because most voters will not understand economics and the topic of rent control is completely counter-intuitive. Sorry for the soapbox moment, but I really believe this will cause substantial damage to the rental market as can be seen in every single city around the world with strict rent controls (especially SF and New York).

Source: SVBJ

10 comments:

  1. Thank you for posting this. Although it will probably make a lot of people angry (I understand; I've been on the receiving end of rent gouges), the truth is sometimes unpleasant. This is one of those instances. It's important for the general public to understand basic economic principles. The more educated we are about this, the better off we'll be in the long run.

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  2. I am a bit disappointed in Peralez, to be honest. I know he means well, but if there's any part of San Jose that DOES NOT need rent control, it would be his District. Seems like Peralez just wants to be an advocate for affordable housing/rent control rather on being an advocate for the revival of his District.

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  3. I'm not going to get too much into it (there already a TON of arguments out there), but rent control simply does not work and is a terrible idea for SJ.

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  4. It does not work for one city (Santa Clara) to only build office space, and the neighboring city (San Jose) to only build apartments. Revenue wise that's ridiculous. San Jose should be putting their efforts into suing Santa Clara city for not providing enough housing for all the commercial properties they are building. Santa Clara sued San Jose claiming the housing San Jose built in the north did not have enough road improvements to feed workers to their rapidly expanding commercial properties. San Jose should sue back for the same issue....that Santa Clara needs to supply more housing near its commercial properties instead of having everyone commute in from SJ.

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  5. Rent control is a terrible idea proven wrong and detrimental over & over again. City after city. Ask any economics person, any financial person, or any real estate/housing person. IMHO, the people that support rent control are politicians looking for votes and/or persons looking to live beyond their means. I don't have a fancy new apartment in a new downtown high rise ... because I can't afford it and I'm fine with that (for now, until I better myself, work harder, find a better job, improve finances, etc. -- you know, work toward a better tomorrow) and think it's crazy to put a restriction on the free economy flow of finances in any regard.

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  6. All great opinions. Good job guys! Glad people on this blog are educated.

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  7. The best rent control is build more housing.

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  8. Rent control would most immediately give current or long time residents an entitlement that will not exist for other residents or people that emigrated later or were born later. I can see why rent control came about in the late 70s, as a result of prop 13 doing the same, give current or long time residents an entitlement that will not exist for other residents or people that emigrated later or were born later.

    But yeah, ultimately rent control will increase the market rents, making it unaffordable to live in San Jose for a lot of people, the landlords of rent controlled properties will also be worse off, but certain people will be better off. Granted overall it will be worse for people.

    San Jose really should try to do things to promote more rental property in San Jose, though preferably close to transit and it ways that don't require a lot of services, ie dense housing.

    But in most of the Bay Area housing is not really a free market, it is highly regulated, and people go through a lot of effort to kill extra housing close to them.

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  9. If you would care to know how most of this is already happening and not unique to rent control, but just high rents in general, then hit me up. Rent control at least provides an immediate solution, as the longterm solution of building more multi-family affordable rental units is being done in a half-assed way and not fast or large enough.

    As a housing advocate in the county, I deal with this every.single.day. It's frankly not about you and I -- it's about the displacement of our disabled, elderly, and minority populations.

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    1. Unfortunately, rent control does not provide an immediate solution. It will immediately make the problem worse and help accelerate the displacement of the disabled, elderly, and minorities you mention. I am not saying the problem doesn't already exist today, but am saying that you don't put out a fire by dumping a gallon of gasoline on it... which I think is the perfect analogy for rent control.

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