Legends in Our Own Minds

A new report shows the housing shortage wasn't caused by the dot-com boom -- but by lack of housing construction

Once upon a time -- a time that now seems long, long ago -- San Francisco was seduced by a legend. Dot-com yuppies were moving into the city by the thousands and driving up rents, this legend said. These skyrocketing rents pushed out legions of good San Franciscans, and the only thing allowing low-income people to remain here was a stringent rent-control law.

This legend became the driving theme of almost all political debate; it inspired anti-dot-com street protests, which begat newspaper stories, magazine articles, books, television shows, and documentary films. Thus invigorated, the story of the San Francisco dot-com boom and the housing crisis it was said to have spawned became the turning point of the 2000 elections for the Board of Supervisors. Voters ousted incumbents from the board, which was said to have ignored the negative effects of the dot-com boom. New supervisors promised to enact development controls on dot-com office construction said to be encroaching on residential neighborhoods, and to deal, somehow, with the housing crisis. To that end, some new supervisors even suggested strengthening rent control.

Then, two years later, in the first week of February 2002, even more quickly than it had emerged, the legend of the dot-com housing crisis died -- or at least should have.


In 2000, during the thick of the legend years, the city hired the consulting firm Bay Area Economics to conduct San Francisco's first ever comprehensive study of housing and rent control. The results, scheduled for delivery to city officials this week, show that the commonly accepted version of events that fueled San Francisco's 2000 anti-dot-com rebellion was largely a fantasy.

Using data from the U.S. Census, the San Francisco component of the federal government's American Housing Survey, the California State Employment Development Department, and other public sources, analysts parsed the effects of the Bay Area housing shortage, the recent economic boom, and rent control, and wrote a report, the San Francisco Housing Data Book. The report finds that the S.F. dot-com jobs boom was actually a highly publicized jobs burp; San Francisco employment grew at half the rate of California at large during the past decade, and lagged behind the rest of the state "even with the regional boom of the late '90s," the report says.

A close read of housing construction patterns enumerated in this new report suggests that the staggering increase in S.F. rents during the 1990s can be attributed primarily to anti-growth neighborhood associations, which essentially shut housing construction down in areas of town where they wielded influence. When one excludes the two neighborhoods that accounted for half of S.F. housing construction during the 1990s -- South of Market, where a planning loophole allowed the construction of live-work lofts, and the Western Addition, home to a federal redevelopment zone -- San Francisco housing growth averaged less than two-tenths of 1 percent per year. Anywhere else, numbers like this could only mean that an extended recession had depressed housing starts; here, the ideology-driven depression in residential construction created an acute housing shortage that caused rents to more than double in 10 years.

Meanwhile, the city's sacred rent-control law, originally designed to protect the poor from high rents and housing shortages, had evolved into an entitlement for the rich, the new housing report shows. More than a quarter of the households benefiting from the law made more than $100,000 per year. Thousands of children, old people, and poor folks were, meanwhile, left out in the cold chaos of a housing market distorted by a combination of rent control and the misguided, Not in My Back Yard, anti-housing activities of S.F. neighborhood groups.

The city's new housing report confirms that the economic dislocation of the 1990s was as bad as the anti-dot-com movement claimed. But the remainder of the Dot-Com Legend, which held that an influx of new Internet businesses was responsible for our city's woes, was a lie: San Francisco actually had only itself to blame.


In the world of actual facts (as opposed to the leftist ranting of anti-dot-commers), San Francisco neighborhoods like the Outer Sunset -- a sparsely occupied quarter that offers the potential for tens of thousands of units of new housing -- fought off development so effectively during the 1990s that housing there grew by an average of nine one-thousandths of a percent per year; statistically speaking, that is, the Outer Sunset didn't grow at all. The story was similar in the Richmond, Bernal Heights, the Inner Sunset -- everywhere in San Francisco that NIMBY neighborhood associations lurked.

By 2000, a mere 40,000 new workers had joined the S.F. economy since 1990, but they had to compete for a minuscule supply of additional housing; during the last decade the city's housing supply grew by only 11,200 new apartments. This acute scarcity drove the rent for an average studio apartment to $1,500 per month by fall 2001. This was down slightly from a 2000 peak, but double 1990 rents.

As a palliative to the housing crisis, the Dot-Com Legend offered rent control. In San Francisco, landlords can't increase rents on apartments built before 1979 by more than 60 percent of inflation, as measured by the consumer price index. Apartments built since then are exempt from rent control. Originally conceived 23 years ago as a stopgap, anti-hyperinflation measure specifically for the old and the poor, the rent-control ordinance was revised time and again during ensuing years to the point that San Francisco's rent-control measure is now one of the most stringent in the land. And during the Dot-Com Legend years, it became one of the most sacrosanct.

In the San Francisco of the Dot-Com Legend, one could criticize public housing projects, welfare, subsidized health care, or programs for the homeless without drawing much attention. The city government was run in such an obviously inefficient manner that even liberals felt free to criticize the management of poverty-relief programs. But rent control was taboo; one couldn't point out that nearly all economists believe stringent, San Francisco-style rent control exacerbates housing shortages without being branded, in S.F.'s so-called "progressive" circles, a cruel, illiberal philistine who didn't care about the poor.

But judging from the statistical nuggets uncovered in the new Housing Data Book, San Francisco's rent-control law is a far cry from being the palliative to the poor that proponents portray it. In fact, it is, in great part, a sop to the rich, and of only spotty help to the needy.

More than one-quarter of San Francisco rent-control beneficiaries have a household income of more than $100,000 per year. Meanwhile, only 19 percent of rent-controlled apartments' occupants have a family income of less than $15,000.

Rent control in San Francisco appears to discriminate against families with children; units not covered by rent control are twice as likely to have two or more children living in them as rent-controlled units are, according to the Housing Data Book. This is true even though children are among San Francisco's neediest residents.

San Francisco rent control bypasses many of the elderly; around one-third of San Franciscans over age 65 are unprotected by rent control. The survey didn't even consider the 12,000 homeless San Franciscans who receive no rent-control benefit at all.

It's not unusual for a well-conceived poverty-relief program to miss some of the needy. But rent control is the grossly polluting factory of entitlement schemes; it harms, rather than merely neglects, everyone outside its walls. The new Housing Data Book does not go just one way. It debunks some of the most hyperbolic criticisms of San Francisco rent control; the report shows, for instance, that it's not true that S.F. landlords keep their apartments empty for fear of locking in rent-control tenants. Rumor once had it that some landlords lived in cheap, rent-controlled apartments, then used the money they saved to buy up apartment buildings; the Data Bookshows this isn't true. A negligible number of San Franciscans are both landlords and renters.

But judging from the drastic rent increases experienced during the 1990s housing shortage, economists' basic understanding of the price-gouging effects of rent control remains in place. Apartments are like any commodity in the sense that when they are subjected to price controls, the "controls" actually end up increasing prices in the long run by discouraging production. The original rent-control law sought to address this scarcity effect by excluding all housing built after 1979. But the effect lingers, not least because builders and their bankers fear that San Francisco may someday include new housing under rent control anyway.

Lenders need only look to San Francisco's political twin, New York, for an example of a city where newer buildings were included in a revised rent-control law after city fathers had sworn this would never happen. And the construction industry is well aware that supervisors such as Chris Daly and Matt Gonzalez believe newer buildings should be put under rent control. This scares off construction financing, driving up financing costs and making all new housing more expensive.


By applying real factual analysis to the housing debacle of the 1990s, perhaps our city fathers will be freed to repair some of the damage wreaked by the fanciful legends perpetrated during the dot-com boom. Old, oft-repeated falsehoods about the local housing market allowed San Franciscans to blame outsiders for their housing problems, rather than themselves. Perhaps, as they read their copies of the new housing report this week, supervisors, Planning Commission members, and others in positions of influence will realize that we're still in the throes of a housing shortage, and that the only way out is to loosen the choke hold that NIMBY neighborhood associations have on the planning process.

Perhaps, with help from this new report, political leaders will see that rent control has strayed far afield of its original aim, and consider phasing it out by allowing controlled rental units to become market-rate units when tenants leave. Perhaps these newly unrestrained units will become subject to a special gross receipts tax, earmarked to subsidize housing for poor families and elderly. Perhaps the city government will use some of this money to build public low-income housing -- which economists say is a far more effective solution for reducing poverty and homelessness than rent control. Perhaps this new, sober assessment of our city's 10-year-old housing disaster will serve as a sort of addict's intervention, and San Francisco will wake up from the denial of the dot-com, build-no-housing years. Perhaps San Francisco will begin to live up to its potential as a liberal, caring city, to become, in reality, the stuff of legend.

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