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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff shares more of his experiences of survival in the progressive wreck that is San Francisco—this time discussing the rising cost of renting an apartment and the effects of the City’s rent control law.
In the last segment we discussed how San Francisco voters created their own homebuying crisis/disaster by blocking virtually all new housing construction for over three decades, all while blaming relentless unaffordability on “free market capitalism.”
Now we’ll focus on soaring apartment rents and rent control, because skyrocketing home prices have condemned an increasing share of San Franciscans to accept the prospect of becoming “lifetime renters.”
HOW SAN FRANCISCO RENT CONTROL WORKS
So people often ask me “How can you not be affected by these skyrocketing housing prices? How can you afford to keep a roof over your head?”
To which the two answers are “I never intended to buy” (covered in Part 2) and ironically, "I’m protected by progressive rent control laws.”
In 1979 San Francisco government passed its first rent control law. Any rental unit built before 1979 was subject and landlords could only raise rent on tenants by a small percentage permitted annually by the Rent Control Board.
For the last 30+ years that increase has typically been around 1%-1.5% with 2% hikes allowed in a few rare cases.
The City made an exception for apartments built after 1979. Policymakers had a little common sense left in the 1970’s and were concerned that subjecting all future construction to rent control would discourage building of new apartments.
However, that turned out to be a moot point as just a few years later the Board of Supervisors began its practice of killing virtually all new housing construction in San Francisco. So in practice very few units have been exempt from rent control rules.
Strangely enough, in one important respect San Francisco’s version of rent control is actually less draconian than versions that have been in effect in several East Coast cities going back to World War II. When a San Francisco unit is vacated the landlord is allowed to lease it to a new tenant at current (ie. much higher) market rates whereas in many eastern cities the new tenants also pay low, controlled rents upon moving in.
So the good news is San Francisco landlords do get some relief from rent control when a unit turns over.
The bad news is it's still rare since now there’s every incentive for tenants to never move out.
If a long-term tenant moves out of a cheap, rent-controlled unit and tries to get a new apartment he’ll find his new rent is double, triple, or quadruple what he was previously paying since he was protected for decades and now “catches up” to current market prices. So he doesn’t move—ever.
Likewise if a landlord sees he’s getting decent rent on all his units save one from a four-decade old tenant he might look more closely for contract violations to evict him and replace him with a new tenant who pays triple or quadruple the rent.
The entire arrangement has produced a “rent control attorney” industry, replete with aggressive TV ads, with some lawyers representing tenants and others representing landlords—yet another drain on the local economy.
"IS YOUR RESIDENCE RENT CONTROLLED?"
So in my case, I moved to San Francisco at the end of the dot-com bubble collapse and occupied an apartment in a very nice area at the nadir of the depressed rental market.
Good timing on my part.
Since then the Rent Control Board has permitted my landlord to raise the rent by an average of 1.1% per year with one notable exception: In 2016 San Francisco government mandated he seismically retrofit the building to withstand a major earthquake and the law permitted him to pass on the cost—estimated at over $100,000—to all six building tenants with a monthly increase amortized over 20 years.
Strangely the Rent Control Board mailed out a letter notifying me of the cost passthrough approval and was actually brazen enough to itemize the rents that residents in the other five building units were paying.
Aside from the blatant violation of privacy there’s the cost itself, so strap yourself in.
Three of the units have been occupied by the same tenants since the late 1970’s, mid-1980’s and late 1980’s. One has two bedrooms (approx. 1100 square feet) and the other two have three bedrooms (approx. 1350 square feet).
ALL THREE were paying under $1,000 a month—in the year 2016 in the middle of a rental crisis—for units that could have been rented out at the time for $3,500 (two bedrooms) and $4,500 (three bedrooms). Since 2016 the prices have only relentlessly increased further—a dip during the 2020 shutdowns notwithstanding.
But of course my neighbors will never move out.
I ran into one of the friendlier ones outside who was paying under $1,000 at the time (splitting with a roommate!!!) and he complained to me: “Can you believe our landlord is allowed to raise our rent $150 to pay for that seismic work?”
I thought “You’re complaining?”
I moved in around 2004 and was paying well over double what that neighbor was and, unlike your typical San Franciscan, believed under $1,000 a month was unfair to the landlord. Now he was just forced to shell out over $100,000 to prevent the building from collapsing in an earthquake and my neighbor was complaining that it’s not going to be free.
Meanwhile you can imagine how much revenue San Francisco landlords calculate they’re missing out on.
On the flip side, today’s “market prices” are also inflated since the city government has cartelized residential real estate by making new housing construction effectively illegal for nearly four decades. So with one hand San Francisco government giveth, and with the other hand it taketh away.
As I mentioned in a previous column there’s not enough room here to cover every bad consequence of rent control but I’ll just mention two: poor maintenance/upkeep and “haves and have-nots” renter division.
1) The first is probably self-evident. When rents in an expensive city like San Francisco are being held down by the Rent Control Board at $1,000-a-month there’s a lot less money for landlords to spend on building upkeep and maintenance. The result is that old apartment buildings with classic, historic architecture are in steady states of decay, disrepair, and dilapidation.
For years nearly all my building's windows’ wood frames and sashes were literally rotting. Decades of paint layers were visibly peeling off with enough thickness that they could cut your fingers. When I moved in every garage door was of a different manual construction. Exterior doors were not fitting in their jambs due to the hinge wood rotting.
I was slow to complain since I understood the pressures the landlord was under.
The fact that I didn’t call every week demanding a repair and actually paid my rent every month—something I’ve learned militant tenants don’t do—placed me in his good graces.
A few years ago the landlord died and his daughter, who inherited the building, wanted to sell. So she paid for new windows and new paint for which I am grateful, while some of my neighbors had a “well it’s about time” attitude.
It’s easy to see the disrepair effects all over San Francisco. Most residential blocks have “owned” homes lining either side of the street until you reach the corners where the buildings (that have no backyards due to their corner locations) are usually rented apartments. The homes are visibly well-kept with fresh paint, new rooves, and nice windows, while the apartment buildings on the corners are faded and decaying. The contrast is unmistakable.
Rent-controlled tenants complain loudly about the state of their buildings while in the same breath demand their rent had better not go above $1,000 a month.
2) The second pernicious effect of “haves and have-nots renter division” is the result of artificially constrained vacancies.
Since moving means an instant doubling or tripling of one’s rent, no one ever moves out unless they’re leaving San Francisco completely.
Landlords also notoriously take their vacant units off the market during downturns, holding out for a better market if the rent is going to get locked in for decades at +1% a year. Perfectly usable, empty apartments disappear from the market and supply is reduced.
Many tenants who move out of San Francisco to buy a house in the suburbs quietly keep their apartment and openly boast online about using it as a weekend vacation home.
And why not? It’s so cheap, thanks to rent control. More reduced supply.
There’s also a lot less incentive to rent out vacant bedrooms since the rent is so low. This is my specific case; I keep a second bedroom empty for guests, something I wouldn't do if my rent more than doubled overnight to the going market rate.
More reduced supply.
Or perhaps a widow with three bedrooms whose children have moved out keeps her large apartment two-thirds empty because downsizing, what people do in a normal market, results in a huge rent hike.
More reduced supply.
In microeconomics terms the price ceiling (ie. control) removes incentives to use space efficiently.
So rent control makes far fewer vacant units available than actually exist. And the artificially restricted supply of available apartments cruelly drives rents for new tenants even higher than what the market would have otherwise charged—all in an already superexpensive city.
The end result, perversely enough, is that rent control has created a two-tier renter “class” system. There are those on the inside who pay far below market—many of whom are quite wealthy—and those on the outside looking in, often poor or just starting out in life, facing far higher than market rent.
It’s yet another case of “haves and have-nots,” that inequality thing so derided by San Francisco progressive voters and government... once again created courtesy of San Francisco progressive voters and government.
One more phenomenon that takes units off the market is conversion to condos. As the gap between controlled rents and sale prices widens, many landlords simply put their units up for sale as a condo so they can cash in for a million dollars and walk away from all the headache.
Keep in mind the reason sale prices are so high is San Francisco has forbidden new construction in the first place, another government-created problem, so landlords are simply responding to the new incentives. Well converting rentals to condos takes even more rental units off the market—for good—which further reduces supply and drives rents up even further.
In response the city government cracked down on that practice with another intervention: a lottery system where only a tiny number of landlords were allowed to convert to a condo, and those landlords had to get lucky and win through the random annual drawing.
It’s a strange world we live in where a multi-unit building owner is not allowed to sell his own units to new owners without government permission, but that’s the mess San Francisco has created for itself.
Immediately the lottery system got backed up with applicants by over a decade so new applications were suspended a few years ago, but it's scheduled to restart soon. Here’s a short explanation of how it works.
So back to “How the Hell Can You Stand to Live in San Francisco?” one of the most common questions I get from friends and family is “how can you afford an apartment?”
Now you know. I’ve been rent controlled for nearly 18 years.
Granted as a 2004 move-in (not 1985) I’m not paying $1,000 a month, and most CO readers would probably think the rent I pay is insane when compared to their city.
But I can afford it, and let’s just say it’s very, very cheap by San Francisco standards. If I moved out right now the landlord could find new tenants willing to sign for at least double what I'm paying.
And the sweet irony?
I’m against rent control and have voted once already to banish it so long as the construction moratorium is also ended, but of course I keep losing that battle to left-wing San Franciscans who deride "greed" and evil landlords while voting overwhelmingly to keep it.
So the liberals keep winning at the polls, but keep losing in real life. Thanks to all the San Francisco housing policies they keep voting to keep in place, large swaths of them remain forced to pay an arm and a leg to find an apartment. There’s no shortage of stories of four left-wing college grads or Google software developers forced to squeeze into two-bedroom apartments for $6,000 a month in Hayes Valley while I get my own two-bedroom with a garage all to myself for a small fraction of the price: all because of rent control.
The free-market guy lives in relative comfort while the militant progressives struggle in squalor.
What poetic justice.
But hey, they got exactly what they asked for. And so long as the voters refuse to adopt a more market-friendly attitude towards housing then I have no qualms whatsoever about continuing to benefit from rent control at the expense of liberals who suffer from the very policies they vote for… over and over again.
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