Saturday, February 12, 2011

The Perverse Incentives of Rent Control

Only a couple of weeks ago, within a period of a few short hours, an arsonist went on the rampage in the Castro District of San Francisco. The center of San Francisco's large gay community the Castro saw four fires that were intentionally set.

While no lives were lost 17 people were out on the streets homeless, having lost all their possessions and their homes in just a few minutes.

The Red Cross helped these people temporarily but, now they need more long term solutions. But they also just lost everything they owned so they have lots of expenses.

The wonderful people of San Francisco are trying to help them. They are holding fundraisers to help the people.

And now it appears that there are people with vacant apartments who are willing to help out the victims of these attacks. But rent control laws are getting in the way. The San Francisco Examiner says, "under San Francisco housing laws, a landlord cannot offer a below-market rent without them locking that unit into that rate" under the rental control laws. City Supervisor Scott Wiener said: "As a result of this risk and despite their desire to help, some landlords are hesitant to assist with short-term below-market rentals after a fire, earthquake or similar event." Wow, with laws like that it sure is a good thing San Francisco doesn't have to worry about earthquakes.

As I understand it, a landlord who, out of compassion for someone in unusual circumstances needs emergency short-term housing, and who offers that housing at below-market rent is then forced to continue offering that space at the same rent after the person he was helping moves out. In other words, the short-sighted rent control laws penalize landlords who try to show compassion to people such as the victims of these arson attacks. Supervisor Wiener is trying to pass emergency legislation to allow this sort of short-term rental without stripping the landlord of the right to get market rents for this apartment later.

Let me recount a story of the perverseness of rent control in San Francisco, that I personally know to be true. I was, in fact, told of this incident by the tenant in question.

This tenant was renting an "apartment" which amounted to the entire floor of a large building. His apartment had 7 bedrooms in it. I knew of the apartment but never knew the size until this tenant wanted me to sign a complaint against the landlord because the tenant had 21 cracked windows in his apartment.

This surprised me. I had a rather large apartment in the city myself. And, by my count, had only 23 panes of glass in total in the apartment. That's counting each window as having two panes. So I was shocked by the number of cracked panes and asked how many bedrooms he had. That was when I learned there were 7 bedrooms. Each would have its own windows, as would the lounge and the kitchen and the bathroom.

The conversation was quite enlightening. The tenant didn't work, he didn't need to. He used the rent control laws to make himself wealthy at the landlord's expense. He would rent each bedroom out for a couple of hundred dollars each. In addition he would spread the utilities bills between the tenants. The landlord, however, was only allowed to collect a much smaller amount for the apartment because it was under rent control. In effect the tenant was taking in $1200 in rental income on an apartment he didn't own. But he was legally free to sublease the rooms for any amount he wanted. The owner of the building, an elderly man, however was not so free. He was restricted to getting something like $700 per month for the entire apartment.

I suggested to the tenant that perhaps one reason the landlord was unable to maintain the building was that the bulk of income for living there went to the tenant and not the actual owner of the building. The tenant in question became rather agitated that I dared suggest that he clearly had no right to profit in renting out an apartment he didn't own, while the actual owner was forced to rent it out at rent-controlled rates.

The city did not manage to change the value of the apartment. They said it was worth $700 but the going rate was actually $1400. All the rent control legislation did was transfer that income from the actual owner of the building and gave it to someone who no investment and did nothing to earn it, but manipulate the law to benefit himself.

For an interesting drama/horror film about a man who uses San Francisco's housing laws to victimize a young couple see Pacific Heights. Trailer below.

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