A San Francisco rent control parable
In a few months, I plan to leave San Francisco for good, and I may very well rent out my apartment. In fact, given the recent surge in rent prices, I would be a fool not to.
So when I put it up for rent this Fall, I expect I will get some qualified applicants. But, let us say, for the sake of argument, that I only get these two:
Wanda is a quiet but friendly woman in her late 50s. She has spent the last decade working for UCSF in their accounting department doing bookkeeping. She makes a nice salary, and will receive a good pension when she retires in a few years. She doesn’t smoke, owns no pets, and basically keeps to herself. Wanda has great credit and can easily afford the down payment.
Kyle is a charismatic software designer in his mid 20s. He works at a popular startup, and makes a lot of money. He is originally from Boston, and may eventually move back there. Kyle owns no pets, and he insists that he can keep the home clean. He has great credit and can easily afford the down payment.
Now, in a free-market scenario in which the government does not meddle, then I would probably offer the apartment to Wanda. In fact, it would be a no-brainer. While Kyle may seem like a nice guy, there is no way to know for sure. What if he throws parties every weekend? What if his frat brothers come over and blow lines off my counters, while performing makeshift UFC in the kitchen? Nobody is allowed on our rooftop, but I doubt that he will obey that rule.
So, my gut would always lean towards giving the apartment to Wanda.
But thanks to government meddling — and the barbaric practice of “rent control” — I may be economically obligated to offer the space to Kyle.
In fairness, it isn’t because I like Kyle. As mentioned, I would prefer to have Wanda. But as a landlord, I have to fear the specter of Wanda hanging out for 30 more years. Rents have increased 30 percent in the last two years — and they may increase another 30 percent over the coming years.
Am I supposed to miss out on all that appreciation and income potential?
What happens if it is the year 2020, and rents have increased 100 percent in the last seven years? Am I supposed to be okay with Wanda still paying me a hair above her original rent?
The problem with a tenant like Wanda is that she has a high propensity to hang around forever. Kyle, in contrast, will eventually get hitched, have a couple kids, and decide that he wants to move to a bigger (and more trendy) part of town. Maybe he will return to New England, since those East Coasters rarely stay in Cali forever.
Wanda? She is less likely to leave with each passing year.
Now, of course, anything can happen. Maybe Kyle stays a bachelor for life and never leaves, while Wanda makes millions in the lottery and goes to Pac Heights. But the statistics are what they are. Rent control forces a landlord to go with Kyle.
So, here are a few reactions that you might have to this story: “Bryan, such discrimination is illegal.”
Yup. And this is all hypothetical.
“Fine, even if rent discrimination is hard to prove, it is wrong. You are evil.”
Am I being evil? Is it wrong to try and maximize the value of one’s assets? Remember that I am going to have to pay for my kids to go to college one day. Losing out on thousands of dollars per year could limit my own retirement. And with all due respect to Wanda, her life is her life. It’s not my job to prioritize her retirement ahead of my own.
“If you raise rent, and Wanda leaves, where will she go?”
To a cheaper part of San Francisco. If she can currently afford to live in Russian Hill, then maybe one day she will have to live in Lower Nob Hill or some place slightly cheaper. In a worst case scenario, she can move to a nice suburb in the East Bay. Perhaps it is not ideal, but this is far from sending her to Siberia.
The truth is that rent control hurts everybody. That is why 93 percent of Economists — even liberal, progressive, Wall Street-hating economists — oppose it.
In a San Francisco that did not have rent control, Wanda would be everybody’s first choice to have as a tenant. She would have no problem getting a home within her budget. Sure, she might have to move every once in a great while, but so what? Instead, the best apartments are going to Kyle, because he won’t hang around for that long.
Also, I would be far more inclined to buy another home in SF as an investment if it weren’t for rent control. As it is, though, I would never do such a thing. I’m only leasing out my apartment, because I am moving towns. Building homes as a source of income is a great idea... just not in San Francisco. That’s why our housing stock is basically flat.
Anyhow, Silicon Valley’s rent control problem is everyone's problem. It did not affect me until recently — but now it does. And it just hammers home how idiotic it is.
Anybody who supports rent control is either (a) uneducated, or (b) benefiting from it. And, unfortunately for our future, (a) + (b) > 50 percent.