Earlier this week I posted on the growing tensions in the bay area caused by the rapid increase in housing costs that is displacing renters employed outside the tech industry. Some of the residents of San Francisco and Oakland who are concerned about the ever shrinking supply of affordable housing have been staging protests against the most visible symbols of the tech invasion – the buses operated by tech giants like Google, Apple, Facebook, and Twitter. These buses make it a lot easier for young tech employees to live in San Francisco, which has driven up the demand and cost of housing there.
But, as I pointed out last time, San Francisco’s housing costs haven’t even fully returned to the bubble peak so what’s the big deal? The big deal is that people don’t like any change that hurts. Presumably these renters benefited when housing prices cratered in San Francisco over the last few years but now that housing costs are returning to their previous highs these same people have become apoplectic and some of the Google bus protests have taken on a disturbingly violent undertone.
All this wailing and gnashing of teeth is just another symptom of the entitlement mentality, validated by opportunistic politicians, that has gripped the nation in the last few years. People increasingly believe that they have a right to live “affordably” wherever they want. But the real world, subject to the immutable laws of economics, doesn’t operate that way and when politicians try to stand in the way of progress they just make matters worse. San Francisco’s problems can be seen more clearly in light of their own government mis-intervention.
Case in point: San Francisco’s restrictive development policies have sewn the seeds of their own housing shortage. “San Francisco was down-zoned…to protect the “character” that people loved. It created the most byzantine planning process of any major city in the country.”
And the city’s attempts to fix the “problem” of soaring housing costs through rent control has simply created a permanent class of San Francisco tenants dependent upon an ongoing redistribution of wealth from their landlords to them. Some of these renters have lived in their subsidized housing for decades at rents far below market. For example, during my apartment hunting trip in San Francisco with my daughter in July we stumbled upon a formerly rent controlled apartment that had last been rented for $500/ month and after a gut rehab was now on the market at $4000/ month. The tenant had lived there for 35 years.
In reality, the real beneficiaries of rent control are low wage industries since it provides them a large pool of lower wage workers in close proximity to their businesses. In the absence of rent control these businesses would be forced to pay higher wages for the smaller pool of employees that could afford to live within the city limits.
Rent control has inevitably created problems in San Francisco, which are detrimental to the quality of life in that city. First, an owner of rent controlled properties wants to be the worst possible landlord. There is no point in wasting money or time trying to keep a tenant that is costing you money. That is why that unit we saw was not rehabbed until the tenant left. Yet, amazingly tenants in rent controlled units complain about their landlords! What do they expect?!?!?!
Second, the market can only get so far ahead of the rent controlled price before something has to give. The fundamental law of real estate is that property will inevitably be put to it’s highest and best use. It’s like static electricity building up in the atmosphere until it suddenly releases as a lightening strike. The building owner eventually gets out of their rent control handcuffs by petitioning the rent control board, repurposing the building, or moving into it themselves. The tenants then get a huge rent increase or they get evicted.
Had it not been for rent control these vulnerable renters would have gradually moved out of San Francisco on their own timeline as housing costs rose. However, rent control lulled them into a false sense of security and now they aren’t the least bit prepared to move according to someone else’s timeline as in the case of 97 year old Mary Phillips:
Of course, they and others see their predicament as the fault of greedy landlords and developers. Never mind that they have reaped huge economic benefits for decades.
As for the eviction problem…it is enormously overstated by everyone. A commonly quoted statistic is that the Ellis Act evictions have gone up 170% in the last 3 years. But that amounts to an increase of only 73 – out of a population of 825,000 people. So this problem is affecting 0.009% of the population. (Yeah, I get that if you are one of the 73…)
San Francisco has tried to legislate affordable housing into existence but it just doesn’t work. At a cost of $250,000 in government subsidies per unit affordable housing is just too expensive to be practical. And requirements to include affordable housing in new developments either totally discourages development or developers find it more cost effective to just pay the fines.
In the end you can’t just pass a bunch of laws to solve the housing affordability problem. It’s like trying to change the law of gravity because too many people are falling down. You have to accept the natural laws as a given and get out of their way.
In the early 1980s I turned down a job opportunity in Silicon Valley because the cost of living was too high for the salary I would be earning there and people have been recently leaving California for the same reason. I would expect California companies to eventually make the same rational decision. I’m perplexed that they haven’t already.
Long ago my brother-in-law and his wife decided to live in the southern suburbs of Chicago precisely because they got “priced out of Chicago”. And when I retire I will leave Chicago for a lower cost of living city. This is the rational response to changing economic conditions. No one would suggest (I assume) that Lincoln Park, Beverly Hills, or The Hamptons need affordable housing. Why then do people think they have a right to affordable housing in San Francisco or the expensive areas of Chicago for that matter?
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