The Case for Ending Rent Control

According to studies anthologized by the left-liberal-thinking Center for Urban Policy Research at Rutgers University, the worst-case harm to urban tenants as a group occurs when stringent rent controls are linked to low-density zoning and size restrictions on residential building. That is, urban tenants as a group suffer most from high rents and housing shortages in precisely the circumstances that now exist in San Francisco.

Most economists agree that moderate rent controls, which allow landlords to recover costs and to make a reasonable profit, can help protect the elderly and people living on fixed, or very low, incomes, from excessive rents and unjust eviction. Even conservative experts, such as Anthony Downs of the Brookings Institution in Washington, D.C., acknowledge that moderate rent controls are not particularly damaging to the profits of landlords.

In Los Angeles, for example, rent control appears not to have caused rents in the uncontrolled market to rise disproportionately. Builders are building new apartment complexes. The open market is providing low- and moderately priced apartments for families.

One of the reasons rent control has had a moderate impact in Los Angeles is that that city's rent control ordinance resembles San Francisco's original law.

Under the criteria developed by scholars of rent control, however, San Francisco's current rent control system stacks up as one of the most stringent in North America. Now, landlords are allowed only tiny annual rent increases and even small apartment buildings fall under the controls. This is not to mention the many impediments, above and beyond rent control, to the construction of new housing that might assuage demand, and bring prices down.

The theoretical effects of stringent rent control -- reduced housing supplies and high prices for housing -- are well known to anyone who has taken a college economics course. In fact, microeconomics courses frequently use rent control as a case study of the negative effects of price control.

San Francisco is learning the cost of stringent rent control in the real world.

Government reports show that San Francisco's housing stock shrank after rent control was established in 1979. A before-and-after study done by Daniel O'Connor in 1987 showed that new construction of multifamily housing stock fell by 32 percent seven years after rent control. Last week, the United States Census Bureau released a report showing that the number of rental units in San Francisco has dropped by 7,500 during the last 10 years.

And a recent study shows that the average price of a one-bedroom apartment in San Francisco now approaches $2,000 per month, up 10 percent in just the last three months, and the residential vacancy rate is reportedly below 1 percent, and falling.

These dramatic price increases and supply shortages are precisely what economists would predict, given San Francisco's combination of strict rent control and strict limits on the construction of new housing.

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According to studies conducted by liberal and conservative institutions alike, non-rent-controlled cities around the country are not experiencing the extreme concentration of high rents -- and dearth of moderate and low rents -- that afflicts San Francisco.

Rent control proponents argue that San Francisco's inherent desirability creates an "infinite" demand to live here that renders the economic law of supply and demand moot. Infinite demand, these proponents contend, means that attempts to reduce or stabilize housing prices by building more housing are futile; no matter how many housing units are built, there will always be more people looking to move into them.

Short of conducting a worldwide scientific poll, of course, the infinite demand theory cannot be tested.

But other cities have experienced boom and bust cycles. Other cities are generally conceived of as extremely desirable places to live. Other cities are dense and have geographical limits to expansion.

San Francisco does not need to meet an infinite demand to stabilize housing prices -- it needs to meet the demand that already exists.

No U.S. city with a history of rent control closely parallels San Francisco in terms of land area (small), demand (high), zoning (restrictive), and controls (stringent). But it is clear from the experience of many jurisdictions that a public policy that moves away from strong rent controls has advantages over a policy that proposes to keep them intact, or to strengthen them. Even New York City's rent controls are being systematically weakened, in hopes of rationalizing the only housing market that rivals San Francisco's for high rental prices and low vacancy rates.

Two years ago, the city of Cambridge, Mass., reported on the effect of abolishing rent control -- almost overnight -- in 1995. Loosened rents on previously rent-controlled units initially rose by an average of 54 percent.

Currently, average rent-controlled rents in San Francisco are less than half of what is paid on the open market (or on a shadow market that consists of thousands of live-work lofts and illegal in-law apartments). Economic theory predicts that if San Francisco decontrolled residential rents, the price of formerly controlled units would rise, but to a level nowhere near as high as rents currently being charged.