Rent control problems

By John M. Lee

Have you ever tried solving a complex problem and had unintended

consequences after all is said and done? What did you do?

Legislators passing complex laws and ordinances encounter

these issues all the time. For example, our San Francisco Rent

Control Ordinance. It was created in 1979 when rents were increasing

much like they have been over the past few years. The key component is that annual

rent increases are limited, currently, at 60 percent of the Consumer Price Index (CPI).

The intent of the law was to keep housing more affordable

for tenants. But keeping rents at below the rate of inflation has unintended

consequences in the long-term, which we are dealing with today.

The policy is contributing to the current housing crisis.

From the landlord’s perspective due to rents being held at

artificially low rates, there is not enough return on investment to

do major renovations. So, with our aging housing stock many

properties are being neglected to the detriment of neighbors and

tenants.

Another consequence of rent control is that tenants who have

been in a unit might never move because the rent is far below

market value. This limits the rental supply on the market, thus

resulting in skyrocketing rents like we are experiencing. There

are even tenants who have purchased properties but decide to

stay in their existing rental unit while renting out their purchased

property because it makes economic sense.

The tenants who have been renting their units for a long time

are enjoying the benefits of low rents, but the younger tenants

who are just starting out are paying higher rents while having to deal with a

very low rental inventory.

The questions that beg to be asked are: Is rent control supposed

to help all tenants or only those who have been in a rental unit for a long time?

And, should there be a mechanism whereby tenants who are in a high-income

bracket should not qualify for rent control benefits? The answers

to these questions can provide the basis for better rent control legislation.

Unintended consequences not only occur on the local level but

on the state and national levels also.

For example, the taxation on the sale of a principal residence.

Prior to 1997, a homeowner could sell his or her home and

take up to two years to purchase a home of equal or higher value

without paying any capital gains taxes. In 1997, the law was eliminated

and a new law was passed whereby the first $250,000 of gain if the taxpayer is single,

and $500,000 if married, are excluded from taxes. Any amount over

this is taxed at the capital gains tax rate.

At the time, the amounts seemed generous. However, in today’s market many

home sellers have gains larger than that amount on their home and would

have a tax liability if they were to sell. In addition, because Proposition 13 limits their

property tax to a two percent increase per year, they might have to pay

more property taxes annually if they were to sell and buy something

else. So, the decision often times is to hold a property instead

of selling. This once again limits housing inventory, and results in

higher and higher prices.

The unintended consequence with rent control laws is that we

have fewer and fewer homes for sale, limiting the supply and resulting in higher prices.

Our current housing crisis did not happen overnight, but it is a

result of a good economy, the City being a desirable place to live and laws that had

good intentions but fell short on solving a complex problem. It will take a

lot more brainstorming and tough decisions to correct this situation.

John M. Lee specializes in the Richmond and Sunset districts.

For real estate questions, call him at (415) 447-6231.