Sen. Bernie Sanders (D-Vt.) has made some outlandish proposals, and his recent endorsement of nationwide rent control is no exception.
This past weekend, the 2020 Democratic contender tweeted, “We need nationwide rent control,” in a nod to his recently unveiled “Housing-for-All” plan, which includes a nationwide cap on rent increases, prohibiting rents from increasing more than 3 percent per year or 1.5 times the Consumer Price Index. There are quite a bit of economically tone-deaf elements to Bernie’s plan, but the suggestion of nationwide rent control is perhaps the most egregious in terms of promising the most disastrous results.
There are few principles in economics that receive near-universal consensus from economists, and the notion that “rent control is bad” is one of them. The economics behind why rent control tends to destroy rental markets under the auspices of trying to help renters is straightforward.
Once a price cap is established, it becomes harder for landlords to justify investing in upkeep of their properties if they don’t get to see reward from such efforts in the form of being able to charge higher rent. In the more extreme cases, the inability to charge market prices compels landlords to pull their properties from the market. This pressure on landlords has a two-prong effect over time: it reduces both the quality of the current supply and the quantity of current supply.
It gets worse. In some cities, such as San Francisco, a recent jump in apartment fires has raised suspicions that landlords are burning down their own buildings in order to avoid having their units subjected to rent-control restrictions. As reported by CBS SF Bay Area, “A fire could be a lucrative disaster for a landlord owning a rent-controlled building, the report mentions. Insurance covers the rebuild and tenants who don’t move back in, either because they died or can’t wait for reconstruction, makes room those able to pay market-rate rent.” While it’s very hard to prove arson, the fact that an economic system creates a possible incentive for people to destroy their own property spells disaster long-term.
Rent control also affects demand for apartments, as well. When the price of something is artificially depressed and doesn’t reflect the product’s scarcity, it tends to create a too-high demand for the actual availability of apartments. This fact translates into long waiting lists for rent-controlled apartments and general housing shortages.
Rent control is a convenient scapegoat for many on the left because it appears to “target” the problem—high rents. But it ignores the fact that market prices represent the complex intersection of supply and demand. And in many cities, the supply isn’t just being choked by disgruntled landlords pulling their properties off of the market or by builders disinterested in building non-lucrative rental properties.
Supply is also being choked by restrictions that make building new properties nearly impossible. In many cities where the housing supply is absolutely throttled, like San Francisco, zoning restrictions are heavily to blame. Almost three-quarters of the privately held land in San Francisco is zoned exclusively for either single-family homes or duplexes.
The decades-old zoning restrictions in San Francisco were actually a mechanism of racism, established by the city to push the poor, immigrants, and nonwhite people out of the city. Now, those very same ordinances are being supported by leftists in San Francisco, who claim the construction of more apartments threatens the “local character” of neighborhoods. As a response to some of California’s cities’ woes, the California State Senate is actually slated to review legislation in 2020 that would lift some of the state’s zoning restrictions.
But San Francisco isn’t alone in its zoning restrictions, and there’s an argument to be made that single-family homes have been intimately tied to the country’s historic reverence for home ownership. Americans have long envisioned a home as integral to the American Dream. Seventy-five percent of Los Angeles is zoned for single-family buildings only. In Seattle, 81 percent; in Charlotte, North Carolina, 84 percent. In many places, the opportunity to build more housing within a smaller footprint is simply not an option due to heavy state interference.
Furthermore, in places like San Francisco, the ability to build new multi-unit buildings is a complicated, cumbersome process that can take years. The planning code, in all its intricacies, has proven a nightmare for architects and developers. Procuring approval for a project can take twice as long in San Francisco as in other districts. And a whole cabbage market devoted to flipping entitlements (approval) to build has cropped up as a result of rising construction costs and the difficulties associated with gaining approval, which has put an increased premium on entitlements.
Some property buyers simply buy property to make money off the entitlement with no intention of actually building on the property. In other words, a secondary market has formed both to avoid construction costs and to create wealth since the primary market is so bottlenecked. A survey of developers, contractors, architects, and non-profit organizations last year revealed that construction costs are exacerbated in San Francisco often because “additional hoops and requirements seem to pop up at various stages in the process.” In one word, regulation.
San Francisco is a good case study for the disastrous confluence of rent-control polices and burdensome building regulations. Sanders is right—in certain cities, the housing shortage looms large. But his recommendation of artificial price controls would only make the problem considerably worse. In fact, many of the housing issues described above are a direct result of overexuberant government intervention.
After I expressed consternation at Sanders’ proposal, one of my Twitter followers ruefully reminded me of President Reagan’s famous quote regarding the pitfalls of state interference : “The most terrifying words in the English language are: I’m from the government and I’m here to help.” In the case of the urban rental market, that statement could not be more accurate.