Monday, May 9, 2011

Economist's Notebook: Tenancy Rent Control

This map, created using 2010 census data, shows vacant housing units in the Bay Area

Source: The Bay Citizen ( Credit: Eric Fischer

Via Greg Mankiw I find this fascinating article about the affect of tenancy rent control in San Francisco.  Tenancy rent control is a term Kaushik Basu and I coined to describe the type of rent control that is attached to a tenancy as opposed to the old-style price ceiling attached to a rental unit.  Tenancy rent controls (often found in the form of tenant's rights laws) are the far more common modern version of rent control and do not fit the classical textbook price ceiling model that we still teach our econ 101 students.  Which is why Kaushik and I wrote two papers that attempt to model the effects of these types of rent controls (you can find them here and here).

Here is an excerpt from the article in the Bay Citizen:

Koniuk, who himself lives in suburban Belmont, gave a half-interest in the building to his older son in 2007 so he could evict a tenant and move in himself. But under San Francisco’s extraordinarily pro-tenant housing laws, landlords can do this only once per building.

So while Koniuk desperately wants to move his younger son into the building’s other four-bedroom apartment, he cannot. He is exploring legal options. Robert Murphy, who has lived there for 30 years without a lease, remains, paying $525.82 a month.

Last spring, Koniuk offered Murphy $45,000 to move out. Murphy’s lawyer demanded $70,000, a sum Koniuk says he does not have. Meanwhile, the city’s Rent Board notified Koniuk that he was allowed to increase Murphy’s monthly rent this year by $2.63.

Murphy is afforded extra protections as a renter because he is more than 60 years old. Koniuk might still be able to evict Murphy and allow his younger son, Adam, to move in by invoking the Ellis Act, which would entitle Murphy to about $10,000 in compensation and give him a year to vacate. But doing so would impose permanent restrictions on the Divisadero building’s future use, seriously depressing its value. And should 24-year-old Adam decide to move elsewhere, the Koniuks would be legally required for a decade to offer Murphy his old apartment, at his old rent. Invoking the Ellis Act would also mean that any new tenant to the unit, should Murphy decline the chance to return, would also be entitled to Murphy's old rent amount for many years to come. So the Koniuks would likely opt to just leave it vacant.

Kaushik and I were neither condemning nor supporting such laws, rather we were simply trying to understand how they impact an economy.  What we found was that long stayers (those who were able to remain in an apartment for a long time) ended up paying less than they would in a free market and short-stayers paid more.  Landlords were no better or worse off on average.  So whether tenancy rent control is  a good thing depends on what type of tenant you are: older, less-mobile people probably benefit at the expense of younger more peripatetic people.

For example, this story could have been told from another POV that focused on the aging man who has lived in his little apartment for 30 years being saved from homelessness by the good laws of the city.

A research question left open, that I have never returned to, is what economic impact might such legislation have on a city's economy.  As it leads to a lager concentration of older tenants and keeps the younger ones out.

As far as market equilibrium, if there is a higher concentration of long-stayers, this increases the cost of renting an apartment and initial rents have to increase as a result.  In the end, at least in San Francisco, the result is a lot of vacancy.
Increasingly, small-time landlords like Koniuk are just giving up. One of his Divisadero Street neighbors has left two large apartments on the second and third floors of her building vacant for more than a decade, after a series of tenant difficulties. It’s just not worth the bother, or the risk, of being legally tied to a tenant for decades.

“Vacancy rates are going up because owners have decided to take their units off the market,” said Ross Mirkarimi, a progressive member of the Board of Supervisors. He attributes that response to “peaking frustrations in dealing with the range of laws that protect tenants in San Francisco that make it difficult for small property owners to thrive.”

Perversely, that is hurting the city’s renters as well, as a large percentage of the city’s housing stock is allowed to just sit vacant, driving up rents that newcomers pay for market-rate housing.

Sadly, though price ceilings are almost nonexistent as rent controls these days (at least in the US) it is still the general framework people use to think about all such rent control laws thanks to econ 101.


Marvinlee said...

As a former long-time landlord, I applaud this article, and the research on which it is based. The laws sound even worse than the unfair Corvallis, Oregon rental housing statute.

Jack R. said...

Interesting post.

My son is on sabbatical from OSU* this year; after a brief position at UCSC, he and his wife are living in a VRBO 3rd floor flat in the inner Mission district of SF.

I assume the VRBO avoid 'tenancy rent control' issues.

My son and his wife were able to negotiate a 15% price reduction as they are there for four months total. My daughter-in-law is a RN working as a traveling-nurse; her contract employer pays a sustantial housing stipend. My son is analyzing and publishing and taking urban hikes.

*Ohio State University