Entirely Predictable Unintended Consequences -- San Francisco Rental Market

There should be a word for "entirely predictable unintended consequences".  The Germans have come up with some good words for complex ideas, like schadenfreude, so maybe we can outsource the task to them.

Anyway, I just finished a book called Season of the Witch, about San Francisco in the 1960's and 1970's.   Churchill once said that “The Balkans produce more history than they can consume” and I am reminded of this quote when reading about San Francisco in these two decades.  Written by a Progressive sympathetic to San Francisco's bleeding leftist edge (the author cannot mention Ronald Reagan without also expressing his disdain), it is never-the-less pretty hard-hitting when things go off the rails (e.g. the enablement of Jim Jones by the entire leftist power structure).

Much of the narrative is about the great influx of lost youth and seekers of alternative lifestyles into the city; the attendant social, crime, and drug issues this created; and a quest for tolerance and social peace.   As such, it is not a book about political or economic policy per se, it's more about the people involved.  But we do get glimpses of the policies that key players like Harvey Milk, Dianne Feinstein, and Willie Brown were advocating.

What struck me most were the policies these folks on the Progressive Left had on housing.  They had three simultaneous policy goals:

  1. Limit San Francisco from building upward (taller).  San Francisco is a bit like Manhattan in that the really desirable part where everyone wants to live is pretty small.  There was (and I suppose still is) a desire by landowners to build taller buildings, to house more people on the same bit of  valuable land.  Progressives (along with many others across the political spectrum) were fighting to have the city prevent this increased density as a threat to San Francisco's "character".
  2. Reduce population density in existing buildings.  Progressive reformers were seeking to get rid of crazy-crowded rooming houses like those in Chinatown
  3. Control and cap rents.  This was the "next thing" that Harvey Milk, for example, was working on just before he was shot -- bringing rent controls to San Francisco.

My first thought was to wonder how a person could hold these three goals in mind without recognizing the inevitable consequences, but I guess it's that cognitive dissonance that keeps socialism alive.   But it should not be hard to figure out what the outcome should be of combining: a) some of the most desirable real estate in the country with b) an effective cap on density and thus capacity and c) caps on rents.  Rental housing is going to be shifted to privately owned units (coops and condos) and prices of those are going to skyrocket.  You are going to end up with real estate only the rich can afford to purchases and a shortage of rental properties at any price.  Those people with grandfathered controlled rents will be stuck there, without any mobility.

So I was reading this the other day.  It turns out there is a severe shortage of affordable rental properties in San Francisco, and lately there have been a record number of conversions of rental properties to private ownership.

With the area economy rebounding, San Francisco is in the midst of a housing crisis as many residents are evicted from their apartments. With rents strictly regulated, an increasing number of San Francisco owners are getting out of the rental business and cashing out their properties to turn them into co-ops. Steven Greenhut argues that rent control actually forces prices upward, especially over the long term, by diminishing the supply of available rental housing.

Update:  One recurring theme through the book is that progressive elements in SF saw their government and particularly their police force as "bullies".  They used this term a lot -- and they were right.  So it is interesting today to see all these progressives and how they act with power.  Turns out, they are all bullies too, just on different issues.

By the way, the Dirty Harry movies are way more interesting after reading this book.  Season of the Witch is what all this looked like to a progressive.  The Dirty Harry movies are what the same events looked like from a different perspective.

  • Quincy

    There should be a word for "entirely predictable unintended consequences".

    There is one: leftism.

  • Elam Bend

    The rent control, IIRC, only applies to building constructed before 1979, still the vast majority of the city. Also, it only applies to existing leases, so if you move the new tenants get a market rent, thus, no one moves, and often just recycles roommates. About a decade ago, several cities in California pitched their rent control. The result was that rents went up for one month and then fell. However, given all the other restrictions in place in most California cities, I'd be the rent still looks nuts to outsiders. What's interesting about the building restrictions in California is that it's supported by a coalitions of the wealthy wanting to preserve their playground city (i.e. the return they want is not economic, but aesthetic, some landlords who benefit from the increased rent (unless the bought recently) and then pie-in-the-sky leftist. When I lived there during the last internet boom, a one bedroom equaled two tenants: one in the bedroom and one in the living room. Also, north of a certain street, the vacancy was so low, the only way to get a room was to know of someone who was moving out.

  • A Leap at the Wheel

    "actually"

    The most damning word in the entire column.

  • jdgalt

    At least SF allows unlimited increases when a property goes vacant, so the only real below-market renters are those who stay for decades, which is very uncommon in SF. The point of the rent control law is not to lower rents but to make effective enforcement of the city's renters-rights law practical.

    I lived there when the Moscone/Milk shootings took place, and the law wasn't new then, nor has it changed since; so I don't think Mr. Milk had anything to do with it.

  • Mercury

    “There should be a word for "entirely predictable unintended consequences".

    Tragedy.

    Not in the more general, earthquake-hits-big-city sense but in the (ancient Greek) dramatic sense: unpleasant and intractable, universal realities colliding with human fantasy, illusion and hubris.

    However, if the government always swoops in -deus ex machina- during the last act and patches up the ill-conceived, fatally flawed program/apparatus in question (or constructs another one on top of it) thus setting the stage for another episode then the appropriate term is probably:
    situation comedy.

  • Matthew Slyfield

    “There should be a word for "entirely predictable unintended consequences".

    SNAFU:

    Situation
    Normal
    All
    F***ed
    Up.

    I have always read this military acronym as saying that things being "all f***ed up" is the normal situation.

  • slocum

    From the perspective of the politicians, the contradictions aren't a bad thing--if 1 & 2 tend to make rents rise well, then, that just creates more demand for additional regulations. And it's not like they have to worry about their voters connecting the dots and taking a market-based perspective on things. So the pols can run against 'greedy' landlords pretty much indefinitely.

  • Earl Wertheimer

    In Montreal, there is little construction of new apartments. This is due to the creation of a Rental Board that makes it very difficult to increase rents for any reason. Now these buildings are all built as condominiums, where each resident buys their unit and pays addition condo fees for shared expenses. The builder can get their money out as the units are sold and doesn't have to worry about tenants. Yet the leftists still complain about the poor maintenance of existing apartments and the shortage of rental units. They are unable to connect the dots...

  • rst1317

    That makes sense, the regulations don't benefit just the ultra wealthy but those who are already in place. There is little incentive to remodel units when people are bending over right and left to rent the unit as it already is.

  • Trapper_John

    I heard an NPR story on this during my drive in this morning. My favorite line was a tenant claiming his landlord had "found a loophole" and was evicting him. Um, it's called property rights. They kept talking to people who had lived in the area for 15, 20, 25 years renting the same apartment, as if there were some sort of squatters' rights to be invoked here as a function of tenure.

  • Roy

    Yep. NPR. aka National People's Radio.

    It does not bother me that tax dollars support that meme getting broadcast. How else can folks develop analytical thinking? I don't read only one book review before spending money and (more important) time on a book. I read perspectives and argumentation across the political spectrum, even reading that which I know in advance rests upon false, even immoral foundations. In addition to developing analytical thinking, this also aids in interacting with others.

    It does bother me that tax dollars support that meme to the exclusion of confrontation with contrasting memes.
    Especially, as is the case with the rent control, there exists such an opportunity for humor along the lines of Coyote's summarizing headline.

    Laughter can reach leftists. It can take them past the collision of their positions with reality to an understanding of that reality. I'm always hoping to see George Will break into uncontrolled laughter, tears running down his cheeks, as he interacts with some of the goofy ideas advanced on, say, George Stephanopolus' (sp?) Meet the Press show.

  • Gdn

    As I recall, a Vietnamese foreign minister noted that rent control did more damage to housing in Hanoi than all of the American bombers did during the war.

  • Don

    I'm not sure why your surprised. As with all things in the progressive mind set, it's only the intentions that matter, not that the results were predictable, nor that the intended goals were conflicting and impossible to actually implement.

    We are not to measure out political masters by what they do, only what they INTEND to do, and, of course, those intentions may change retroactively at any time depending on which way the wind is blowing that day.

  • FelineCannonball

    "so the only real below-market renters are those who stay for decades"

    On this note I hear eviction rates and owner-move-ins are through the roof in SF this fall. Apparently because landlords are either looking to sell or rent higher in this market.

  • FelineCannonball

    I'll add Prop 13 to the category "Entirely Predictable Unintended Consequences." Another disincentive to move when you get a new job, retire, spouse dies, family grows up in California. SF Bay area is the land of the mega-commute. More people doing two hour morning drives than anywhere else in the US. If you own a house you hang on to it and let the new guy next door pay the taxes.

  • Eric Wilner

    Disincentive to moving, yes, but remember the other side. Had it not been for Prop. 13, I would have been taxed out of my home a few years back, when idiots and their bankers were happily paying $800K for $150K working-class houses. Having bought a house I could afford, why should I then be taxed on the foolishness of the new neighbors? It's not like my income rises to match theirs.
    And, you're right: I can't nohows afford to move within California. But, comes time to move, I figure on emigrating to America anyway.

  • FelineCannonball

    I see where you're coming from, but it's a pretty close analogy to rent control. To the extent that it impacts housing costs it artificially lowers the availability of housing and pushes up prices in places like SF.

  • Quincy

    That's true, but it's a fraction of the pressure placed on the market by land use restrictions and the vacant rental units in San Francisco. The Bay Area is the land of the mega commute because people can afford to live in places far away from the city. These places all have one thing in common, geographically: they're flat with open space people don't really care about protecting. The hilly, pretty places nearer SF (like Marin County, where I live) have restricted land use to an incredible degree.

    The population of Marin County grew by about 8,000 people from 2000 to 2010. The population of Sonoma County, to our north, grew by 27,000 in the same time period. The population of Napa County grew by over 15,000 over the same period. The difference is land use. Marin is highly-restrictive, Napa and Sonoma less so.

    To Marin's south, in the city tens of thousands commute to each day, there are 10,000 vacant housing units. Those vacant units drive people into adjacent counties, driving up housing prices there.

    So, you have severely restricted supply and demand being shifted to suburban counties from the major city in the area. Absent these policies, the necessity of Prop 13 to protect existing homeowners would be debatable. With them, it's an absolute necessity to protect existing homeowners from markets broken by their governments.

  • FelineCannonball

    "The Bay Area is the land of the mega commute because people can afford to live in places far away from the city"

    I'm pretty sure it's because people can't afford to live close to the city. Rent control, land use restrictions, and prop 13 all limit available housing and drive up prices. I don't get your logic, unless your talking about protecting people owning vacant land that they can't build on. Seems more direct ways to deal with that relative to takings claims and/or low property tax assessments on unbuildable property rather than low assessments on the longest held property.

  • Quincy

    I'm pretty sure it's because people can't afford to live close to the city.

    Same difference. More to the point, the places closer to the city feature more restrictive land use policies than do farther away places.

    Rent control, land use restrictions, and prop 13 all limit available housing and drive up prices.

    Technically true, but a woefully incomplete assessment of the situation. Let's do better:

    Prop 13 can only serve as an amplifier for other market trends. It cannot change the direction of the housing market. For those who are currently in homes worth less than they were purchased for, moving to a cheaper property would provide an advantage under Prop 13. (Problems with underwater mortgages notwithstanding, of course.)

    In the case of suburban counties, land use restrictions artificially limit supply while SF's rent control and tenant's rights policies artificially drive up demand regardless of other market trends. Prices will always and everywhere experience upward pressure under these circumstances. Always and everywhere.

    Now, coming back to the situation in the SF Bay Area let's put the pieces together. San Francisco artificially limits supply, pricing people out of SF and driving up demand in adjacent counties. Adjacent counties, in turn, artificially limits supply, pricing people out of those counties and driving up demand in counties further from SF.

    These trends are all underway in the 1970s, when long-time residents start having problems staying in their homes due to increasing property taxes. Prop 13 is passed, which further artificially restricts supply *only* because prices are already trending upwards. So the upward trend is intensified.

    San Francisco's housing policies and adjacent counties' land use policies are root causes for the upward trend in prices. Regardless of Prop 13, the situation that currently exists in the SF Bay Area would have occurred due to these factors. Prop 13 merely protects existing homeowners from the upward trend caused by the San Francisco's housing policies and adjacent counties' land use policies which also happens to marginally intensify said trend.

    If you want to fix the problem, you have to go after the root causes. As explained above, Prop 13 is simply not a root cause while the left-wing policies of area governments are.

  • FelineCannonball

    Yes, it protects long-term homeowners and basically encourages them to stay put in one place for life. That's a pretty small piece of the puzzle on the help side. It doesn't address similar problems for long term renters who are tossed around by the same market forces ( most libertarians, correctly in my opinion, see rent control as an affront to property rights), and it doesn't address tax inequities for "new" residents who may (for what ever difference it makes) just be moving counties because of a job change or changing houses within a county because of family size, retirement, etc., and it doesn't address long term economic needs of companies (like mine) recruiting new people from around the country when they are expected to bare the brunt of education and infrastructure costs through taxes that are 10x the level of their neighbors. It does exacerbate overall housing and congestion problems.

    I'll have to agree to disagree. There are a lot of problems in the bay area where I've been a 22 year resident. This may not be anywhere close to the top of the list, but it is one of them along with a long series of NIMBY attitudes and self-centered policies on all sides of political persuasions and county lines keeping things generally dysfunctional.

  • Dave Boz

    "Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities". Assar Lindbeck, Swedish economist

  • Quincy

    I don't think we're disagreeing on the effects, rather on their relative impact on the housing market.

    it doesn't address long term economic needs of companies (like mine)
    recruiting new people from around the country when they are expected to
    bare the brunt of education and infrastructure costs through taxes that
    are 10x the level of their neighbors.

    According to figures compiled by governing.com (http://www.governing.com/gov-data/state-tax-revenue-data.html ), the State of California collected $113.5b in non-property taxes. All property taxes collected in the state totalled 55 billion per the California LAO (http://www.lao.ca.gov/reports/2012/tax/property-tax-primer-112912.pdf ). So, property taxes account for no more 1/3 of the total tax burden placed on Californians.

    As to the 10x charge, I really wonder what data there is to back that up. It's a figure I hear thrown around by Prop 13 critics, but I don't believe it. Primarily, it seems to ignore the fact that the tax basis can and does rise under Prop 13 protection. Here's why:

    1. A property's assessment is still subject to to 2% per annum increases to bring it closer to market value.

    2. A property's assessment can change with renovations or square footage additions. The property value is split between the assessment of the land and the assessment of the structure.

    Let's assume a best-case scenario under Prop 13 for a median priced home with no improvements triggering reassessment. Start with a tax basis equal to the state median price in 1976, approx. $45,000 in nominal dollars. Add an annual 2% increase in tax basis for each year from 1979-2013, resulting in a tax basis of $89,995 present day.

    Compare that with the April 2013 median home price, per Bloomberg, of $402,760. Using the base rate of 1% of the tax basis (ignoring county assessments), we come up with $899 vs. $4,028. That's about 4.5x the property tax burden, not 10x as cited. Again, this is using median prices on non-improved structures. Any reassessments due to improvements would shrink this gap.

    Finally, the bearing the brunt charge ignores state income and sales taxes, as well as price increases due to business taxes. (In the end, consumers pay ALL business taxes.) The total tax burden placed on Californians should be the far greater concern, as it inflicts more pain on everyone involved.

    It does exacerbate overall housing and congestion problems.

    I'm interested by what mechanism you think a state law, applied equally to all counties, exacerbates congestion problems. As I mentioned previously, there are policies that are likely root causes to certain counties being more affordable than others, leading to situations where people have to commute through the expensive counties.

    a long series of NIMBY attitudes and self-centered policies on all sides
    of political persuasions and county lines keeping things generally
    dysfunctional

    On this, we agree.

  • rxc

    "... how a person could hold these three goals in mind without recognizing the inevitable consequences.."

    I think this concept was defined by George Orwell to be the basis of "doublethink" (only two contradictory concepts, but good progressives are truly superior beings, so three would not be that hard).

    It is really common among the political and chattering classes.

  • FelineCannonball

    Eventually stuff hits equilibrium but right now I have an 80 year old friend in Los Altos hills paying taxes on a 100k assessment. It won't every get worse than that. Except perhaps corporate property.

    Working at Stanford for 15 years I had coworkers living in Alameda county, Marin county, Sonoma county, Sacramento, Modesto, Tracy, San Francisco. . . Pretty much all because they used to work elsewhere when the bought their first house. Maybe it's a poor sample, and the retired folks I know living one person to 3000 square feet close to Stanford were all a fluke. The studies ive seen indicate that the effect on home tenure in CA has been lengthening it by about 10-15%, but the effects are going to be greater where there is the biggest price run-up. Precisely where it matters in places like Marin and the peninsula. I'd be interested in seeing a more sophisticated analysis. It is what it is, and I'm personally doing fine manipulating the market to my advantage but I'd be interested in some sort of economic analysis on the overall effect on housing and congestion. There certainly wouldn't be any quick way to end the status quo. Unravelling prop 13 would take 30 years too.

  • marque2

    Unfortunately the state was abusing the property tax system. Prop 13 may not have been ideal - bit it cut back on the states abuses.

  • FelineCannonball

    Just pointing out the unintended consequences. State and local government is basically driven by people bouncing the car off parked cars on both sides of the street. It's why I park in the driveway.

  • marque2

    I think the increase in housing prices had more to do with the problem than Prop 13. If you own a home in Sacramento worth say 250K and then get a job at Stanford and then have to pay $1000000 for a small home - of course you are not going to move. The property tax savings issue is trivial compared to a new house cost in the Bay Area.

  • FelineCannonball

    About ten factors are intertwined in that including long tenure ownership and vacancies helping (no, not on it's own) drive up prices. And the folks I know in Marin and SF could easily swap houses for something on the peninsula if it wasn't for tax considerations.

    I have friends in Houston working for oil companies who are hanging on to houses in Napa and Marin because they hope to retire there. One's a vacant "vacation home" and one is rented out to relatives for the cost of property taxes. The price run-up is definitely a consideration, but the tax situation lowers incentives to make better use of property. I know of houses in Palo Alto that have been vacant for over a decade. Probably paying a few hundred a year to the state and that's it. My own family hung onto our grandfather's vacant house for 5 years just to time the real estate market.

  • JW

    Foreseeable consequences are not unintended.