Editor's notes

The myth of rent control subsidies

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Tredmond@sfbg.com

EDITORS NOTES It's as if someone has some kind of auto-respond system: Every time I write about housing or rent control, one of the trolls who comments on the Guardian Politics blog complains that landlords are "subsidizing" longterm tenants.

That's a complaint I've heard plenty of times before — rent control is a "subsidy" because property owners have to allow the use of their property for a lower rate than the current market might allow.

And it's completely wrong.

In fact, it only takes a basic understanding of economics to realize that in many cases, tenants are subsidizing their landlords. That's how the business works.

You don't have to read Karl Marx to learn that in a capitalist system, the owner of a business typically pays his or her employees less than the value they bring to the operation; the difference is what's called "profit." It's how American capitalism works.

Same way, when a landlord signs a rental agreement with a tenant, the rent he or she charges is typically enough to: (a) cover that tenant's portion of the building mortgage; (b) cover expected maintenance costs, and (c) provide the owner with a profit. Not that many landlords go into the business to lose money, or to break even.

I have a friend who bought a multi-unit building in the East Bay a few years ago, and it's a great deal for him: He lives in one unit, and the tenants in the other units pay enough rent to cover most of the mortgage. So my friend's housing is practically free. The tenants are subsidizing him.

Now: Add in rent control, and what do you get? The same exact situation. At the time a landlord and a tenant agree on a lease, the payments are adequate to cover the landlord's costs plus a margin of profit. (Otherwise the landlord would be a fool to sign the lease.) Over time, the rent goes up a little bit every year. The landlord's mortgage either stays the same, or, these days, goes down after a refinance at the lowest rates in history. The landlord's next biggest expense — property tax — goes up by less than the allowable rent increase most years. So every year, the tenant pays the landlord more than it costs the landlord to provide the housing. Every year, the vast majority of landlords in San Francisco make a profit.

Yes: a rent-controlled unit prevents someone who bought a building years ago and has longterm tenants from making even more of a profit. It is, and should be seen as, a way of limiting profit on rental property to a reasonable amount, not to what a speculative market could bring. That's fair; housing is a public right, and should be regulated a little like a public utility. (PG&E gets to make a profit every year, but not an unlimited profit.)

But like workers in a capitalist system whose product of labor subsidizes the profit of the owners, tenants in San Francisco are subsidizing landlords. That's how the private housing market works.

Comments

I used to balk at mentioning the amount of rent I paid, like I was getting away with something. Fuck that.

Posted by Fierce Missy on Jun. 05, 2013 @ 5:52 am

You are paying less for something than it is worth, for no other reason than you can hide behind a technicality.

Posted by Guest on Jun. 05, 2013 @ 6:17 am

And your comments are 'worth', what?

Posted by pete moss on Jun. 05, 2013 @ 10:28 am

We're talking about rent subsidies, however.

Posted by Guest on Jun. 05, 2013 @ 10:39 am

I take it you are an academic? Academs are the only one I know familiar with the concept of zero-value.

Posted by pete moss on Jun. 05, 2013 @ 10:59 am

an arcane, academic concept.

A significant percentage of the population have a zero negative financial value to the community. Or less than zero, of course.

Posted by Guest on Jun. 05, 2013 @ 11:11 am

'Fierce Missy': that is a cool screen name.

Posted by pete moss on Jun. 05, 2013 @ 10:24 am
Posted by Guest on Jun. 05, 2013 @ 10:38 am

You fail to take into account the "opportunity cost" of the landlord's equity. If I own a building worth a million, then the way I assess the rent received from that is not just in terms of my costs, but also in terms of what I could get from that same million invested elsewhere. Every business person works with his ROI and not just his cost base.

So if I get a 5% return from my SF property but your friend in the East Bay (where, I assume, there is no rent control) is getting 10%, then that's a problem. Why? Because I would be an "idiot" (to use your term) to continue to provide housing in SF for a 5% return when I could get 10% in the adjacent Marin, San Mateo or alameda counties.

Moreover, there would be less risk of having a bad tenant there, because I can evict at any time for any reason or no reason. And future rent increases would be at a better rate.

The rationale response, therefore, is to Ellis the SF building, sell it as TIC's, and then reinvest the proceeds in rental housing elsewhere, doubling my return. And of course that is exactly what is happening.

Posted by Guest on Jun. 05, 2013 @ 6:16 am

He focuses on the landlord's costs as being the major determinant of what the rents should be.

But then what happens when a rental building is sold? The new landlords has probably paid far more for that building, has a much bigger mortgage, and pays way more property tax. So, according to Tim's logic, the rents should go up significantly to maintain the same margin over cost.

But of course that doesn't happen. Rents do not change when a property changes hands even though the costs do. Rent control would work in a fairer way if the rent was computed to terms of a ROI over cost, rather than the present system. But then Tim doesn't want fair" - he wants tenants to "win" and landlords to "lose".

Then he acts incredulous and baffled as to why so many landlords Ellis.

Posted by anon on Jun. 05, 2013 @ 7:40 am

When did tenants become responsible for the bad business decisions of their landlords? A buyer has plenty of opportunity to run the numbers, to see whether or not the property is a good investment. No one is forcing the landlord to purchase a particular property, or any property, for that matter.

In addition, there are extensive tax benefits for landlords. Landlords often buy properties with negative cash flow to offset profits in other business investments.

Posted by PeonInChief on Jun. 05, 2013 @ 7:55 am

terms of costs, and so it was pointed out that if we do that, then when those costs go up, so should the rents.

And in fact rent control does support that idea to some extent, via the use of passthru petitions for increased maintenance costs or capital expenditure.

Rent Control would never have passed constitutional muster if it did not allow landlords a reasonable ROI, and the passthru features are in there to deter legal challenges of rent control as a "taking".

Posted by Guest on Jun. 05, 2013 @ 9:49 am

Fuckin Russians

Posted by pete moss on Jun. 05, 2013 @ 11:02 am

San Francisco property is a very good investment. If you buy and ELLIS ACT it...

Posted by Guest on Jun. 05, 2013 @ 5:47 pm

property owners will Ellis.

Why doesn't he understand this?

Posted by Guest on Jun. 05, 2013 @ 7:30 pm

Let's analogize rent control to information control. Say one foreign-owned entity --the master tenant -- bought up every independent news building in town -- the Guardian, SF Weekly, BAR and the Examiner, etc. Then lets say that only a few die hard doormen at each building were retained as a pseudo staff to sort of slosh away at their keyboards with the time time-worn tripe that they've been sloshing for years, while the rest of the planet evolves and actually interesting things happen and interesting ideas form and dialogue takes place elsewhere, and young people couldn't be bothered because the whole building became a dull self serving vanity project wrapped in a master tenancy... I even hear rumors that the desiccated corpse of Karl Marx is still writing up in one of those buildings.

Posted by Guest on Jun. 05, 2013 @ 8:02 am

Because I was at college that I last heard that very Marxian quip about a company's profit being the difference between what it's workers "earn" and what they actually receive in pay.

That discounts, of course, the fact that without the promise of that profit, no investor would ever have invested in that company, and so the capital that created all those jobs would never have existed.

That's why every nation that has attempted Marxism has retreated from it eventually. And moreover had to control freedom of speech to maintain power and control to last even that long, before the walls come tumbling down and free enterprise is discovered.

Nobody emigrates to a Marxist state. They risk their lives trying to escape from it.

Posted by Guest on Jun. 05, 2013 @ 10:48 am

The truth is humans are self centered and for the foreseeable future will be, It's the ONLY way things get done. There is nothing wrong with that, it's how we evolved on a planet that has a food chain. BLAME EVOLUTION At least we frown on canibalism now, baby steps....

Posted by Guest on Jun. 06, 2013 @ 8:03 am

The rest, as they say, is history.

Posted by Guest on Jun. 06, 2013 @ 8:57 am

... no.... this is too stupid to respond to... nevermind.

Posted by lillipublicans on Jun. 06, 2013 @ 9:21 am

influence, and not their ideologies per se.

Posted by Guest on Jun. 06, 2013 @ 9:45 am

My point in quoting Marx was not to promote Marxism but to explain capitalism. Yes, capitalism works because people invest capital (and take risk) to create enterprises that employ people. But the whole system would collapse if there were no profit motive, and profit comes from paying your workers less than they add to the productivity of your business.

I don't think any serious capitalist or economist would argue with that; it's just fact. Right or wrong, facts are facts and this is how things work.

Yes, there is opportunity cost in not putting your money elsewhere -- but the value of SF real estate rises so fast, and the taxes are so low, that we don't seem to be losing investors.

Posted by tim on Jun. 06, 2013 @ 1:34 pm

rather prejudicial way of describing a system that has brought prosperity and success to hundreds of millions of people across the globe.

The fact that a profit necessitates that the wages workers receives is less than the profit does not in any way invalidate the model.

Because those same workers still get paid when the company makes a loss. In those cases, the workers are being paid not too little, but too much.

The profit is the sauce without which nobody would invest in the enterprise, meaning no jobs at all for the workers. So the profit does get spread around.

Moreover, the model increasing with knowledge workers is that the workers get bonuses, profit-sharing, stocks and options, thereby dissolving the old school divide between boss and worker.

So Marxism has happened. The workers do control the means of production. Just not in any way that an old commie like you would ever have understood or supported.

Posted by Guest on Jun. 06, 2013 @ 2:17 pm

The first form is a direct subsidy. section 8 housing vouchers are a good example - taxes are raised and used to make partial rent payments to people who need it. That's a subsidy, no question.

But what about indirect subsidies. This case is sneakier because, instead of a government raising taxes, which is electorally unpopular, they instead simply mandate that some third party reduce or limit their rents or profit.

Rent control is an example of an indirect subsidy. The government, party A, passes a law requiring party B to (effectively) subsidize the rent of party C. The voters like that because it doesn't cost them anything in extra taxes.

Other examples of indirect subsidies are HealthySF and the minimum wage. It's social engineering and wealth redistribution on the cheap and snide, and it is a subsidy by any other name.

Posted by Guest on Jun. 05, 2013 @ 9:53 am

It's all myth. Private property owners make enough money providing and maintaining housing for long term tenants. There is absolutely no rational reason for them to invoke the Ellis Act.

Posted by Guest on Jun. 05, 2013 @ 10:47 am

whether you personally think the owner is making enough or not. It depends on whether he thinks he is making enough.

And if he can get a better ROI on a building that isn't rent controlled, why wouldn't he?

Posted by Guest on Jun. 05, 2013 @ 10:59 am

I appreciated the informative essay, but not all real property for rent is rent-controlled and therefore, lends itself to speculative pricing, so-called “fair market,” although, from financier to broker, there is nothing fair about it. Once rent-controlled housing is condemned for demolition, then regulation of rental housing will become vestigial. America and other so-called developed countries have been in a heated neoliberal growth frenzy for about 33-years. More appropriate nomenclature for “fair market” is “market efficiency” price that has more influence on determining the price that goods or services clear inventory (I'm here omitting the economics gobbledygook). In the abstract, if this price is too high, then the price is manipulated downward or decreased, by industry so that trades happen more consistently. If the price is too low then the price is manipulated upward or increased by the industry to slow demand. Relevant to real estate, the trend seems to be “to increase the price.” The question remains, is this rent payment a subsidy to the landlord? I need to think about this more.

Posted by Awayneramsey on Jun. 05, 2013 @ 2:00 pm

We can always rely on you for that but, then again, isn't consistency the hobgoblin of small minds.

But no, rent isn't a "subsidy" to the landlord. It's simply what you pay for a home that you cannot afford to buy but someone else can.

You rent a home and the landlord rents the money to buy that home. You aren't so different from each other.

Posted by Guest on Jun. 05, 2013 @ 2:04 pm

Hey Tim,How about price controls for advertising space in your publication? Why shouldn't advertisers get price protections? Isn't advertising a public right?

Posted by Guest on Jun. 05, 2013 @ 4:30 pm

Big profits are the only reason you even have apartments to fight over, in regards to rent control. Rent control was only applied to buildings built before 1979, because no one would EVER build a building again if rent control applied to it, Cuba a country that best matches your " cheap housing for everyone" sentiments has not built anything for the last 50 years. They live in dilapidated crumbling structures that are not even maintained. Property is a valuable commodity and to allow a few lucky creeps below market access to it, is text book unjust enrichment.

Posted by Guest on Jun. 05, 2013 @ 4:40 pm
Posted by Anonymous on Jun. 05, 2013 @ 4:51 pm

I should have said "property in San Francisco is a valuable commodity". You can buy a house in Detroit for 500 dollars.

Posted by Guest on Jun. 05, 2013 @ 5:45 pm

This argument tends to ring hollow when you consider that the allowable rent increase in SF is based on 60% of CPI, which means in inflation adjusted dollars, the rent on these units goes down each and every year! If he really believed this argument, he would be advocating for 100% CPI as a fair deal for LL's with long term tenants. This also begs the question why such a regulatory regime is being imposed on small, owner occupied buildings? In the end, this entire rent control scheme is driving out small rental housing providers in favor of corporate landlords and TIC developers. Don't things so? Ask a tenant if they like the idea of their current LL selling? I think the rent control laws need to be reformed to be fair to actual rent housing providers, before they all throw in the towel and we become a City of TIC's.

Posted by Guest on Jun. 05, 2013 @ 4:49 pm

Rent control will not be reformed. Thank goodness there are relatively straightforward exit strategies from the rental business.

Posted by Guest on Jun. 06, 2013 @ 10:14 am

no new rent controlled homes are being built, while the people who benefit the most from RC will gradually move or die off.

Meanwhile new arrivals can see how it hurts them.

And of course thousands of RC units are lost each year to OMI's, Ellis evictions, TIC formations, condo conversions, merges, demolitions and change-of-use permits.

Demographics is the key factor and SF'ers are becoming more moderate and affluent as knowledge workers move here and poorer folks move to cheaper cities.

Posted by Guest on Jun. 06, 2013 @ 10:27 am

I can't wait that long.

If I'm going to subsidize people, it will be my parents and my children. It will not be people who have not prepared for their future and want to live in my property for the remainder of their lives (at ridiculously discounted rents).

I'm sorry.

Posted by Guest on Jun. 06, 2013 @ 11:11 am
Posted by Guest on Jun. 06, 2013 @ 11:24 am

No need to be sorry, the Ellis Act is not immoral, no matter what some left over and discredited socialists say. (they ignorantly think your property belongs to the public anyway) Don't you love how they say SAN FRANCISCO'S RENTAL STOCK as if it was public property? They do have public subsidized housing, the SFHA and it's a corrupt and mismanaged disaster. It's not your responsibility to make up for public corruption and waste.

Posted by Guest on Jun. 06, 2013 @ 3:32 pm

Even in the public sector which is allegedly "non-profit", profit is involved as public employees steal and embezzle over and over again. Nothing gets done without the carrot of a profit, leading the way...

Posted by Guest on Jun. 06, 2013 @ 3:50 pm

Lawyers, brokers, DPW, DBI and SFRB employees.

Tenants who successfully squat in a place for decades, maybe illegally subletting or using AirBnB.

Landlords who can winkle their tenants out of the door.

Everyone else loses and pays for this, one way or the other.

Posted by Guest on Jun. 06, 2013 @ 4:00 pm

Period. Paul Krugman has stated this again and again. We see it in San Francisco as well. The removal of rent control in Boston resulted in a flood of newly remodeled unites in the city and not a vast increase in rents for anyone - except for the tenants who'd been living in their units for 30 years thinking what a bargain they had while everyone else fought for housing.

At the very least the argument against means testing rent control is nonsensical. How Tim can justify allow an Apple engineer to enjoy rent subsidized at the levels of 2002 while a new immigrant family pays market rate for housing is beyond me.

Posted by Lucretia Snapples on Jun. 05, 2013 @ 4:55 pm

There's the rent board itself, with maybe 30 or more employees, mostly graduate-level.

There's a small army of lawyers on both sides, for landlords, tenants but also for TIC formation and condo conversions.

Then there is the fee-based SFTU and HRC, full of earnest "activist-counsellors".

And of course rent control creates what progressives always love - differing classes of people in a contrived conflict, most obviously LL versus TT, but also LL's versus LL's, and TT's versus TT's as there are winners and losers among both groups.

Perfect for a little class warfare demagoguery. Outside of RC, LL's treat TT's as customers to be wooed and feted. Not SF. The system has failed even the people it was designed to help, while rewarding only tenants who squat for decades and landlords who find ways to generate turnover.

Posted by Guest on Jun. 06, 2013 @ 6:33 am

Subsidized housing is government supported accommodation for people with low to moderate incomes. That is the accepted definition, Rent control accomplices the same thing by government fiat on the backs of private property owners. Rent control in definition and fact are forced private subsidies. No disjointed editorial can change this fact.

Posted by Guest on Jun. 06, 2013 @ 6:29 am

Subsidized housing is government supported accommodation for people with low to moderate incomes. That is an accepted definition. Rent control accomplices the same thing by government fiat on the backs of private property owners. Rent control in definition and fact are forced private subsidies. Government is not "supporting" the difference between market value and the artificial rent controlled value of privately owned properties, but the property owners are. Landlords are literally subsidizing rent controlled tenants. No disjointed editorial can change this fact.

Posted by Guest on Jun. 06, 2013 @ 6:46 am
Posted by Guest on Jun. 06, 2013 @ 7:28 am

Don't forget that renters currently subsidize property owner's income taxes. For example, if 2 people each the exact same amount, the person who purchases a house with long=term financing will pay less in income tax than the renter, due to the home-mortgage interest deduction.
Another reason for income tax simplification. May everyone pay some minimum income tax - say $100, and after a certain income level ($25,000), make everyone pay the same % of income, without deductions, and without regards to where the income came from (interest, dividends, capital gains, estates).

Posted by Richmondman on Jun. 06, 2013 @ 10:42 am

But mortgage interest doesn't count towards it, although property tax does.

I wouldn't say that tenants subsidize homeowners though, since many homeowners own their own home without a mortgage (about a third) and many more do not owe enough to make it worthwhile to itemize - they just take the standard deduction instead.

Renters also get a credit on their state taxes which homeowners do not get.

Posted by Guest on Jun. 06, 2013 @ 11:09 am

Please, do "protected" landlords get money for expenses to re- let their apartments when tenants move out? Are tenants expected to live in a unit for life unless a landlord wants them to move out? Rent control is so one sided and unfair, I can't believe it has not been ruled unconstitutional. Hint deep pocket landlords SUE, stop letting the SFTU make you their bitch !

Posted by Guest on Jun. 07, 2013 @ 4:35 am

"Carl Assar Eugén Lindbeck (born January 26, 1930) is an economics professor and an artist. He is still an active economist at Stockholm University and at the Research Institute of Industrial Economics (IFN).

Lindbeck has done research on unemployment (e.g. the insider-outsider theory of employment), the welfare state (including the effect of changing social norms), and China's reformed economy. Lindbeck received a Ph.D. from Stockholm University in 1963 with the doctoral thesis A study in monetary analysis.

He is well-known to students of economics for his quip that "next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities". (Assar Lindbeck, The Political Economy of the New Left, 1971, p. 39)"

Posted by Guest on Jun. 07, 2013 @ 9:02 am

It's not shocking that the Editor and Publisher of the San Francisco Edition of Pravda, who believes profit is evil and property is theft, would try to rationalize the communist/socialist inspired rent control by referring to the communist Karl Marx. Why does Editor and Publisher of the San Francisco Edition of Pravda think that the mere act of renting an apartment turns over all property rights to the tenant with out the responsibility of upkeep. Why does he believe that tenants should be sheltered from inflation for their entire lives? Why doesn't he recognize the fact that neither communism or socialism have never worked anywhere they've been tried. The Editor and Publisher of the San Francisco Edition of Pravda should relocate to Cuba where everyone lives in government housing and struggles to keep their 1950s and 60s cars running.

Posted by Howard Epstein on Jun. 08, 2013 @ 4:16 pm

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