July 29, 2015

Biting the Hand That Houses Them

Michael D. Farren

Research Fellow
Summary

Forbes recently found San Francisco to be America’s worst city for renters. On top of this, households earning the median income ($100,400) could only afford 11 percent of the homes for sale — by far the lowest percentage in the entire study. The fact that home prices are more than twice the cost compared to New York City — and rental prices are the highest in the nation — is not a failure of the housing market. It’s a failure of governmental policies restricting the construction of new housing.

Forbes recently found San Francisco to be America’s worst city for renters. On top of this, households earning the median income ($100,400) could only afford 11 percent of the homes for sale — by far the lowest percentage in the entire study. The fact that home prices are more than twice the cost compared to New York City — and rental prices are the highest in the nation — is not a failure of the housing market. It’s a failure of governmental policies restricting the construction of new housing.

Soaring rents in the Bay Area can be partly attributed to economic growth in the tech industry, but the already rising prices are exacerbated by misguided, albeit well-intentioned, housing regulations. The Board of Supervisors decided against expanding short-term rental regulations, but now San Francisco voters will be asked to decide whether even more restrictive regulations — limiting all short-term rentals to 75 days per year — are justifiable.

This ballot measure would worsen the existing housing problem by reducing incentives to build new homes and would impair The City’s ability to attract visitors. Since tourism is The City’s largest industry and contributed $10.7 billion to local spending in 2014, the laws targeting short-term rentals would amount to city residents biting the hand that feeds them.

It’s a consistent and nearly unanimous conclusion among economists that rent-control laws inhibit new housing construction and disincentivize maintenance of existing properties. Nobel Laureates on both the right — like Friedrich Hayek, Milton Friedman and George Stigler — and the left — like Gunnar Myrdal and Paul Krugman — agree on this. In fact, Assar Lindbeck, who sat on the Nobel Prize committee, famously quipped, “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”

While San Francisco is far from a bombed-out ruin, economists have empirical evidence to back up the economic theory. Harvard’s Ed Glaeser discovered a strong link between strict land-use controls and high housing prices. Daniel Fetter of the National Bureau of Economic Research added to this by studying how WWII-era rent-control laws led to a reduction in available rental properties — the regulations made the properties relatively more valuable when sold as owner-occupied homes. Similarly, sociologist Charles Hohm surveyed San Diego landlords, finding that rent controls would incentivize them to either leave the market or stop investing in their properties.

The City by the Bay is no exception to this curse of unintended consequences, as the San Francisco Tenants Union has seen a “serious and steady depletion” of thousands of rental units. Similarly, laws that restrict a landlord’s ability to evict troublesome tenants incentivize some homeowners to never even consider renting out their extra rooms. The New York Times reported an estimated 10,000 to 25,000 units are kept off the market by landlords who are reluctant to deal with rental regulations — far more than the estimated 350 units removed by Airbnb. Clearly, short-term rentals are not at the heart of San Francisco’s long-running housing shortage.

Furthermore, constraints on new construction limit the ability of property owners to address the shortage of housing. In fact, barely a year ago voters approved Proposition B, which even further restricted building heights. This prompted Gabriel Metcalf, The City’s own urban think tank director, to lament that San Francisco “effectively shut off thousands of future housing units.” So it’s not surprising to find that, according to the Census Bureau, more than 75 percent of San Francisco housing is more than 45 years old, and nearly half of its housing units were built before 1939.

If San Francisco’s residents and city leaders want to solve their never-ending affordable housing shortage, they should take Glaeser’s advice to reduce housing regulations and “unleash the cranes.” If they tear down the damming regulations, they’ll find a flood of entrepreneurs waiting to sweep away the housing crisis.