It’s astounding that, in an effort to further emulate the growing divide between haves and have-nots in California, the Oregon legislature is repeating the insanity that is driving San Franisco’s housing crisis.
Impossibly, legislators and our governor, who signed a law establishing statewide rent controls, believe their actions will result in affordable housing.
They’re right for about five minutes, for about five people.
Make sure landlords can’t raise rents and renters won’t have to pay more. That, no doubt, is the thinking of the politicians in Salem who believe they can circumvent and ignore the law of supply and demand with a few keystrokes and a majority vote.
They can’t.
San Francisco is proof. New York City is proof. The nation has other examples of the failure of rent control. The fact that politicians there cannot figure it out is not surprising since most of them apparently believe that profits are evil – though that doesn’t include their monthly paychecks.
Paul Krugman, the left-wing New Keynesian economist and New York Times columnist, has identified exactly the problem: rent control. As Krugman said, a freshman in Economics 101 will understand this. But our legislators don’t. They’re too busy thinking they’re smarter than everybody else, apparently.
So they passed a law that restricts landlords across the state from raising rent more than 7 percent per year, plus the annual change in the consumer price index. The measure would also prevent a landlord’s ability to evict tenants without a reason after they have lived in the building for a year.
There are a few carve-outs, but by and large it applies to all.
Will it even help to solve the problem of a shortage of affordable housing? Not after, maybe, the first few days.
The folly of this policy is non-controversial among credible economists. High housing prices are a straightforward supply and demand issue, and rent control subverts the market.
Our state already constricts the supply of land through its planning system. Building codes and local planning laws often further constrict the supply by increasing the price of construction, reducing potential profits.
In fact, why does the Legislature feel it has to address the problem of affordable housing at all? Because these restrictions curtail it already.
When profits are reduced, the incentive to produce is reduced. Fewer products will be produced. While demand for the product remains higher, a shortage, this will normally increase the price of the good and increase production, which in turn provides downward pressure on prices.
Price is information for buyers and producers. Profit is incentive to produce – just as we work to get our paychecks.
The state’s new rent control scoffs at this basic economics principle.
The result will be more expensive housing for anyone who is not already in a rent-controlled apartment. Landlords will more cautious about letting their properties.
Three Stanford economists last year studied an expansion of San Francisco’s rent controls in 1994, when the city capped annual rent increases to 7 percent (similar to Oregon’s) for owner-occupied rental properties with four or fewer units – something that had previously been exempt.
It did not cover buildings constructed after 1980, and the researchers were able to compare similar sets of housing throughout San Francisco. They found a 25-percent decline in tenants living in small apartment buildings compared to non-rent-controlled buildings. This was often driven by landlords buying out or evicting tenants and converting the units to condos they could sell at market price.
Tenants were more likely to continue living at the same address after 10 years, saving an aggregate $2.9 billion in rent, but that was offset by an increase of 5.1 percent in rents citywide, which cost other tenants an aggregate $2.9 billion.
Think about that a minute. That’s your kids trying to move out for the first time – paying an offset to older, presumably better-paid adults.
Meanwhile, rent for an average one-bedroom apartment is as high as $3,000 in San Francisco.
Our shiny new law exempts units from rent controls for 15 years after construction, which should reduce the disincentive to build. But those new units will have to pay back the developer and provide a paycheck, or they won’t happen.
Older units are likely to be converted and sold off – at high prices thanks to our generally restricted supply of housing. That will reduce the available number of rental units, exacerbating the problems in the rental market.
Then again, the cap is 7 percent plus inflation. Landlords aren’t generally increasing their rents that much annually. That’s a very large increase – which suggests that the legislation might be meaningless in general. We’re sure we might hear of numerous examples of higher increases in the past couple of years, but those kinds of increases haven’t been the rule, but likely a result of an acute case of growing demand.
Since they’re not the rule – and rental increases might increase at a more moderate rate of inflation – we might assume this law will just prevent shocks and allow the market to adjust gradually to the higher prices.
We might assume that, but it’s still a problem. The high rent increases of the past couple of years have spurred construction across the valley, and Portland’s rental rates have flattened. They might continue to decline. Profit drives needed production.
Stepping outside of the economics zone into business (totally a different field), a wise property owner might start increasing rents annually. They often don’t. They might increase those rates annually and take the maximum they can – just like local governments take every dime of their valuation increases to maximize public profits.
The only constraint on that will be a sufficient supply of housing, so folks in rent-controlled housing may expect more frequent and larger rent increases just so landlords can prepare for shocks in their market.
Additionally, tenant advocacy groups are already unhappy with the law. It doesn’t cap rent increases enough. Just like we argue about how high taxes ought to be, the legislature will invariably be asked to decrease the rent cap each session from here on out.
This policy is likely to drive shortages, so this seems like a likely scenario – Since we have the laboratory, perhaps a good subject for a study.
Practical experience, economics and a little thought show us how terrible this rent control law will be for Oregon’s people. It will mostly hurt the poorer as the wealthier have options to recover their publicly mandated losses.
An actual solution exists: Allow the market to increase the supply of housing. That will drive down or maintain rental and property prices.
Since we’re unlikely to adopt real free-market solutions, a number of policy changes could still achieve part of the result we’re looking for, even though we may not like the solutions. Many of us, on both sides of the American political spectrum, will not like them. But scarcity exists, and that forces tradeoffs we won’t like.
Increasing supply means opening up land for construction or increasing density.
Opening up land for construction requires us to change our planning and zoning. Increasing density requires us to change our zoning.
Last year, a state law took effect allowing the addition of an accessory dwelling unit for every primary use residential unit. That increases the density. It’s not popular with a lot of folks in these parts. Planning Commissioners didn’t like it, but they created regulations that allow for the practice here in Sweet Home. Since then, no one has acted on it.
Another bill is kicking around the legislature that would increase density, which in turn helps solve the supply problem. House Speaker Tina Kotek, a Portland Democrat, introduced HB 2001, which would ban single-family residential zoning. That’ll get things going, providing more space for construction by increasing density, while protecting farm and forest land as intended by Oregon’s land use planning laws.
On the flip side, we could allow cities to annex more land, providing more land for construction; and could reduce the regulatory burden of building new housing, providing more incentive in the form of profit to build.
These ideas solve the problem. They may not be ideal, but the fact is, people need places to live. And they need to be able to afford them. If the legislature and governor agree, they should reverse course – before the voters do.