Prop 98 guarantees a minimum level of state spending on education each year. Sacramento pools most city, county, and special district property taxes into special education funds to meet this commitment. The localities only get to keep a small part of the property tax revenues for their own general budgets.

This system creates a disincentive for cities to permit housing. New housing brings in new residents who need city services. But it doesn’t bring in a commensurate increase in property taxes since most of that revenue gets scooped up by Sacramento.

Commercial development, though, brings in taxes a city gets to keep. Sales and hotel taxes are significant revenue streams. And they don’t cause the kinds of strain on city services that new residential does.

Reforming Prop 98 might be low hanging fruit. Changing the formula to appropriate a broader stream of city revenues might help ease the bias against housing. And it might even be possible to amend the law without having to fight the California Teachers Association. As long as there’s no net decrease in education funding, of course.

For those not acquainted with California politics, the California Teacher’s Association (CTA) is the most potent lobby in Sacramento. If the CTA doesn’t like a bill, it doesn’t become a law.

It’s tough to say exactly how much new housing Prop 98 actually prevents. Different cities get to keep different amounts of their property taxes, so the disincentive differs case to case. And there are plenty of other things like CEQA and Prop 13 which put a drag on new construction as well. But where CEQA and Prop 13 make it easier for residents who are already NIMBYs to gum up the works, Prop 98 is a reason in itself for a city to avoid residential development. So while we can’t do much to change the aesthetic preferences of our neighbors, we can do something to change the law. And if tweaking one law makes cities see new housing as a financial boon instead of a burden, it might be worth the effort.

The post Why Money for Schools Means No Permits For Housing appeared first on Market Urbanism.

There were two major causes of Prop 98’s defeat. One was the sponsors’ mistake in combining the popular cause of restricting eminent domain with a far less popular phaseout of rent control.

The second and more unusual cause of 98’s defeat was the presence of Proposition 99 on the ballot.

If you are interested in this, please check out Ilya Somin’s extensive writings on Proposition 98 and 99 at The Volokh Conspiracy.

The post Somin: Causes of the Defeat of Prop 98 appeared first on Market Urbanism.

Yesterday’s California returns show that Proposition 98 – the referendum initiative that would have imposed real restrictions on eminent domain and also phased out rent control – has been overwhelmingly defeated by a 61% to 39% margin. The rival Proposition 99 – an initiative sponsored by local governments and other pro-condemnation interests that only pretends to protect property rights – passed easily by 62 to 38.

The post Somin: Prop 99 Worse Than Nothing appeared first on Market Urbanism.

In a recent Field Poll cited in the article, Proposition 98 was losing by 43 to 33 percent among “likely voters,” while Proposition 99 was ahead by 48 to 30 percent. A slightly earlier poll conducted by the Public Policy Institute of California has similar results.

If, as is likely, Proposition 98 is defeated, it will probably be a result of the combination of the sponsors’ tactical error in combining the popular anti-eminent domain measure with a far less popular phaseout of rent control (a mistake I criticized in one of my earlier posts), combined with the presence of the deceptive Prop 99 on the ballot. The latter probably led voters to believe that they could protect property rights against takings without simultaneously attacking rent control.

Keep your fingers crossed….

The post Somin: Prop 98 Likely to Fail, 99 to Pass appeared first on Market Urbanism.

If you haven’t read the entire series, you can catch up with these links:
Rent Control Part One: Microeconomics Lesson and Hording
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict

Conclusion

Rent control is not just a simple price control setting the price at which willing renters and landlords are permitted to do business, it is much worse.  It is a coercive act that gives landlords no legal option, but to rent to a tenant against his will, often at a financial loss.  Rent control adds a non-voluntary burden to landlords which deepens over time because landlords do not have the option to rent to a tenant at below market rates. 

Not only does rent control cause huge distortions in the housing market, but the burdens fall disproportionately on the poor and underprivileged people it was intended to benefit. Although particular people are able to live with the comfort of low rent payments, even those renters will see their living conditions deteriorate as landlords neglect repairs and maintenance. As the situation gets worse, middle class residents are able to move away, leaving behind the poorest residents who have become reliant on the reduced rent.

In effect, rent control grants property rights to renters, that originally belonged to the original property owners. Rent control becomes a redistribution of wealth to rent control tenants away from apartment owners, market apartment renters, and newcomers to the area. Nonetheless, over time the quality of life decreases for all residents of a city where rent control is imposed.

Solutions

So, it wouldn’t be very productive for me to rant about the problems rent control creates, if I didn’t discuss solutions to the problems. Cities can flat out abolish rent control, like California’s Proposition 98, phase it out through vacancy decontrol, or use other methods to end rent control. However, ending rent control, without ending other burdensome policies, doesn’t solve the problems of limited housing options, particularly for low income people.

Abolition

Abolishing rent control overnight would bring many market rate units onto the market at once, and would greatly reduce prices for market units. However, it would force many poor residents to move all at once and would cause a shock to the overall rental market. This would correct itself over time if proper action were taken by municipalities to allow additional supply to the market.

Most importantly, developers need to be allow to bring housing supply to market. Many of the places that have the strictest rent controls are also cities that have very restrictive zoning. As new development comes to market, prices will ease on the previously regulated apartments. In fact, I would argue that development restrictions should be eliminated several years before rent control is fully abolished, in order to give developers time to bring sufficient supply to the market in preparation of full decontrol.

Vacancy Decontrol

Vacancy decontrol is a more moderate method that has been used by many cities to phase out rent control or lessen the scope of rent control. Vacancy decontrol usually means that rent controls are enforced in apartments only until the tenant leaves. At the time a tenant leaves, the landlord is permitted to return the unit to market rates. California’s Proposition 98 is, in effect, vacancy decontrol where current tenants will not be effected as long as they stay in their current apartment.

Vacancy decontrol is typically a compromise between advocates of rent control and apartment owners. While it is preferable over fully-regulated rent control, there are serious drawbacks. The biggest drawback is that it increases the incentive to hoard. When a tenant knows that a unit will be deregulated when he moves out, he will try to stay as long as he can to maintain the benefits. Tenants may have family members stay there or maintain a second residence to ensure he will not loose the benefits of rent control. As a result, controlled units are likely to stay occupied by current residents for a long time, before being let back into the market.

Unfortunately, vacancy decontrol also incentivizes landlords to try to evict tenants in order to deregulate their apartments. There have been many horror stories of landlords harassing tenants, allowing horrible living conditions to prevail, and invading the privacy of tenants as ways of encouraging tenants to move out.

Rent Control and Property Rights

What if we look at rent control as an appropriation of property rights from the landlord to the tenant? A landlord has certain limited rights, while the tenant has extensive rights to the apartment granted through rent control. Since this appropriation typically happened many years ago, one could argue the apartment is more the property of the tenant than the landlord under rent-control policy.

If one accepts this point-of-view, one way to end rent control is to force a sale of the complete property rights either from the owner to the tenant or from the tenant to the owner. The tenant would be forced to offer a price to the landlord to purchase the remaining property rights of the apartment. If the landlord accepts the offer price the unit will be sold to the tenant at that price and become a condominium.

If the landlord rejects the offer price, he will have two choices. Either buy out the renter’s contract at the same price as renter’s offer or sign a contract extending certain rent controls indefinitely for the duration of tenancy. Such a mechanism would ensure the tenant would offer a reasonable amount. In effect, this forced sales will return all apartments to the market immediately, whether they now be owned by the original tenant, original landlord, or controlled only by contractual agreement.

If the tenant could not afford the purchase price, which would likely be below market, he would be permitted to resell the condo unit at any price or forfeit all rights to the property upon failure to execute.
There would be complications if a landlord suddenly lost control of an entire building, creating a fractured ownership of the building. Allowing the landlord the option to extend the lease or buy out the tenant would enable the landlord to maintain ownership of entire buildings at his discretion.

Of course, if one believes rent control was a theft of the original property rights from the landlord, you would be hesitant to reward the tenant for years of hoarding another person’s property. However, if one believes it is theft, should the government be forced to pay reparations to landlords for lost earnings? Perhaps, with a forced sale, the government would be required to remunerate to the landlord, a certain percentage of the transaction as a form of reparations.

Vouchers

For those who believe we need to "do something" for housing affordability, there are solution which are much better than rent control.

Federal housing assistance programs began during the Great Depression. In the ’70s, Congress passed the Housing and Community Development Act of 1974. This act shifted the focus from the quality of housing to the affordability by creating the Section 8 program. Learn more about the Section 8 program here. Many state and local authorities have implemented voucher programs as well.

Low Income Housing Tax Credits

Federal programs offer tax credits to developers of low income housing (LIHTC). These tax credits are more valuable than tax deduction and are often purchased by corporations who pay high tax rates. (learn more here)

Of course, there are consequences to subsidizing housing, (which is another topic altogether) but most would agree that a system of subsidizing housing for lower income people with vouchers or tax credits are certainly less less-bad solutions than forcing the burden on the providers of housing and rental apartment market through rent control.

Zoning and Regulation

The difficulties of phasing out rent control could be lessened by the market more quickly and effectively if zoning and other regulations are loosened at the same time. The private market needs to be allowed to meet the demands of market renters, so that lower quality, and smaller apartments remain affordable to people with lower incomes.

Most importantly, municipalities need to end exclusionary regulations that forbid affordable housing that would be used by low income residents. The most widespread example is that of many suburban communities that regulate the number of housing units per acre. Such regulations prevent developers from creating multi-family housing that is typically more affordable to lower income families. Often times, these regulations are aimed at keeping certain people out in order to maintain an upscale community.

Most cities also have provisions in their zoning codes that prevent development of affordable housing. Chicago, for example, has strict restrictions on dwelling units per acre that in many instances are more restrictive than density restrictions. These restrictions are supposedly implemented to encourage more housing for families, but forces developers to build less units, thus larger units. This discourages development of smaller, more affordable units, such as studios and single room occupancy units; and instead encourages development of larger, luxury units.

Almost all municipalities have restrictions on density, usually through FAR (floor area ratio) and height restrictions that inhibit the amount of development that can happen in a certain area. These restrictions directly burden development of market rentals, which in turn, causes shortages in lower quality housing as middle class renters are forced to choose lower quality units that would otherwise be rented by low income families. Thus, destroying affordability for all demographics.

In order to "protect jobs", many cities have implemented zoning restrictions that prohibit residential development on under-utilized industrial land. These prohibitions are very short-sighted, and in effect, keep land prices low in industrial areas since alternative use of the land is prohibited. These days, industries tend to be location insensitive since transport costs have come down significantly over the last century.   Industries typically choose to locate where land is cheap, so in order to attract manufacturing jobs, a municipality must put a huge burden on the housing market.  Forcing land prices down in urban areas to attract industries does more harm than good by preventing redevelopment of the land as housing, driving housing costs higher, elsewhere.

All things considered, most currently affordable units will remain relatively affordable if the market is allowed to satisfy the needs of the wealthy and middle class renters, preventing prices from rising across the board and preventing gentrification of lower housing stock by more wealthy persons.

Property Taxes

Many municipalities tax rental housing at a much higher rate than they tax home owners. This is mostly due to political pandering to homeowners who tend to be a reliable block. Nonetheless, much of the additional tax burden gets pushed on the renter as the landlord shares the burden by raising rents. Removing this redistribution of wealth would ease the burden on rents, as would lowering real estate taxes by cutting spending.

Tax deductions for home ownership also create a misallocations of housing resources away from affordable rentals.

A Free Market for Housing

In conclusion, supply controls do as much damage to affordability as price controls. Eliminating rent control needs to go hand-in-hand with loosening exclusionary zoning and density restrictions in order to allow the market to perform as it should. A truly free-market incentivizes investment in quality affordable housing for all residents by allowing individual decisions to determine living patterns and location preferences based on quality, availability and affordability.

For more reading, see the section on Rent Control on the Links to Articles and Academic Papers page.

The post Rent Control Part 4: Conclusion and Solutions appeared first on Market Urbanism.

The post Video: Both Sides of Proposition 98 appeared first on Market Urbanism.

This post is the second in a four part series on the rent control. Read all four posts:
Rent Control Part One: Microeconomics Lesson and Hording
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict
Rent Control Part 4: Conclusion and Solutions

Black Market and Deceptive Acts

As current renters hoard their rent-controlled apartments, it is rare that new apartments become available. Sometimes, tenants would illegally sublet their units at higher rents.
Landlords do under-the table deals or rent to friends and family. New York had to crack down on landlords charging “key fees” as high as several thousand dollars to new renters.

Landlords will often find loopholes that will let them de-regulate a building, just to be released of the financial burdens. For example, in NY landlords will take their rent-controlled building and deregulate it by using the entire building as a residence for a certain number of years. This is space that could otherwise have been rented at a market rate.

Deterioration of Existing Housing Stock

Because of the disincentive to improve and maintain the property, landlords will often become slumlords and allow unhealthy conditions or activities to take place in the apartments. This lack of improvement not only is unpleasant to the current renter, but accelerates the end of the usable life of the aparment building. The Rand Corporation studied Los Angeles’ rent control law and found that 63 percent of the benefit of lowered rents was offset by a loss in available housing related to deterioration and disinvestment.

The burdens of rent-control could become so heavy on a landlord that he may find it beneficial to burn his building down to collect insurance. Of course, this is dangerous to tenants and neighbors, but happened regularly in the Bronx. The Bronx’s arson epidemic led sports announcer, Howard Cosell to proclaim “‘There it is, ladies and gentlemen, the Bronx is burning”, as the TV camera panned over the neighborhood during a 1977 Yankees World Series Games.

Professor Joseph Salerno’s lecture called “Bomb Damage or Rent Control”:

Discrimination

The free-market typically disincentivises any discrimination based on factors other than price, quality, and quantity because of the self interest of the participants. However, rent control removes this disincentive.

Since under rent control the price is set and there are many applicants, a landlord has the incentive to choose tenants based on other factors. A landlord will more carefully examine applicants’ credit history and income, which a good landlord should do, but lends toward biases against younger applicants. A landlord may decide renting families is less desirable, or may prefer to rent to attractive young females. Often times, racial preferences have influenced renting decisions, which typically worked against minorities. Thus, rent control can exacerbate segregation problems because landlords choose not to rent to people who would change the demographics of an area.

Continue on to Rent Control Part 3: Mobility, Regional Growth, Development and Class Conflict. To make sure you don’t miss any of the series, subscribe to the feed or sign up to receive posts in your email.

For more reading, see the section on Rent Control on the Links to Articles and Academic Papers page.

The post Rent Control Part 2: Black Market, Deterioration and Discrimination appeared first on Market Urbanism.

Opposition to rent control among economists spans the political spectrum, including over 90% of American and Canadian economists.  In fact, Swedish socialist Economist Assar Lindbeck famously said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing it.” (Assar Lindbeck, The Political Economy of the New Left, New York, Harper and Row, 1972, p. 39)

Without getting into the morality of restrictions on property rights, I will discuss the more subtle consequences of rent control over a series of posts.

Quick Microeconomics Lesson:

As stated by the National Multi Housing Council:

Rents serve two functions essential to the efficient operation of housing markets:

• they compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers; and
• they provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock. In this respect, housing is no different from other commodities, such as food and clothing — the amount producers supply is directly related to the prevailing market price.

Those of us who have studied microeconomics understand the near-universally accepted supply/demand consequence of rent-control: a decrease in the quality and supply of rental housing over time. But, for those who need a refresher or quick intro lesson, Professor Alex Tabarrok of George Mason University and the popular Marginal Revolution blog explains the microeconomics of rent control in this video:

When you have some spare time, watch this more in-depth lecture on price controls. (windows media) The first 45 min of the [1:25:30] is dedicated to rent control. Includes segments on how a landlord became a “serf” to his tenants, “Bomb Damage or Rent Control?”, and celebrity beneficiaries of rent control.

93% of economists agree that rent control reduces the supply and quality of affordable market housing as the videos explain. But that’s not all! The burdens of rent control only increase exponentially the longer they are in place. Let’s look at some of the more subtle aspects of rent control:

Hoarding:

Just as price controls on gas in the ’70s caused long lines and hoarding of gas, the same thing happens with housing. The tenants of rent-controlled units are not stupid. They know that the supply is limited and will become more limited in the future. They know that if they stay put, they’ll be able to pay about the same rent forever, in real terms. They know that if they were to look for another apartment, and they were fortunate enough to find one, the rent would be significantly greater than what they pay where they are.

So, they don’t move. Ever. Well, almost never. Even if their family grows or shrinks. The incentive to stay is just too great, and the wealthy and well-connected are better equipped to take advantage of the situation.  As Peter Salinas and Gerard Mildner wrote in Scarcity by Design: The Legacy of New York City’s Housing Policies:

To begin with, to earn the maximum benefits from New York’s rent regulations, it helps to occupy an apartment for a long time (because landlords are permitted to raise rents more than usual when an apartment is vacant). Affluent professionals have greater job stability and can, in any case, manage to fake their continued occupancy (in order to sublet) when they must move. Also, influence or good connections are helpful in the search for a desirable rent-regulated apartment.

When rent-controlled apartments become available, family and friends often know about it first and rent up the apartment immediately, knowing that rent-controlled apartments are so hard to come by and the opportunity to rent other vacant apartments may not come for some time.

Of course, this hoarding by existing and new tenants worsens the problems, because those who are shopping for apartments have very few, if any to choose from. The longer this goes on, availability declines further and the incentives to hoard grow exponentially, as do the negative effects.

In fact, one study found that rent control tripled the expected duration of residence in New York City.

The ones who suffer the worst are those who are trying to relocate to the area for job opportunities as vacancies become more rare.

Continue on to Rent Control Part 2: Black Market, Deterioration and Discrimination To make sure you don’t miss future parts, subscribe to the feed or sign up to receive posts in your email.

The post Rent Control Part 1: Microeconomics Lesson & Hoarding appeared first on Market Urbanism.