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Towards NUANCE^TM on "modern rent control" using logic, reason, and Diamond.
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Some of the people who like to imagine themselves as attacking the modern orthodoxy on rent control like to talk a lot about "NUANCETM ".

Where the "NUANCETM " mostly boils down to a) obfuscation that amounts to essentially pretending that levels of bindingness in rent control has no impact on the level of benefits to existing tenants while lowering the costs to landlords, the costs to potential tenants, and the general distributional problems; b) new housing is not effected cause the law says so; c) investment is a good in and of itself; and d) housing is housing so long as the total number of units didn't change it is actually not impacting anything.

a)bindingness

I was spurred to write this miniRI by this discussion between u/flavorless_beef and u/fattymccheese (parts a) and b), although all parts have been bouncing around in my head in response to multiple discussions/readings) over in askeconomics, where they do a decent enough job of getting down to my first point, "More or less binding rent control is more or less impactful in all the benefits and the costs". To be clear, while old style rent control (all apartments have rents frozen forever and no way to escape) almost certainly was net negative, it is entirely possible that if we knew elasticities, to any precision, of the expected responses to proposed policy limits, and weights to put on the welfare of all involved, there may be an optimal "modern rent control" policy regime.

b) new housing

But, I want to push back on flavorless_beef's assertion that since "modern rent control" normally exempts new construction it has no impact on new construction (a position I, not to long ago, before much thought, also held). Obviously, as first order, since it is generally an explicit exemption it is a reasonable assertion but, think about it a bit and move to second (and later) orders and I am no longer of this belief, as of now, for two reasons.

  1. Once rent control is existing what keeps it from being expanded to newer buildings? When San Francisco passed its original rent control law in 1979 it exempted new buildings and apartment buildings with 4 units or less. At that time you would have told me that this policy would have no impact on apartment buildings with 4 units or less. Why should I have faith in that? As it turns out in 1995 they changed the terms and if I bought a building with 4 units or less in 1994 based on your assertion, I likely got hosed. At least by 1995 we were talking about old (pre-80) buildings. The Berlin attempt at rent control, and the initial San Francisco law, when instituted, controlled brand new (or newish, 6 years old in Berlin) buildings well within the building life and even pro forma timelines. Why should I, as a builder, have any faith that the age limit will not be adjusted within my investment time horizon? Or, at least, that is now certainly a risk I have to take into account, no?

  2. Where are our new buildings meant to go? Typically a city exists with buildings well before rent control policies are implemented. Typically rent control is meant to control units in apartments and other denser forms of development. In as much as new apartments are built on the urban fringe, yes, I will accept that those are not on this second/third order impacted by "modern rent control". But, more typically the urban process is of densification (presuming the city and buildings in it already exists) in response to increasing land pricing pressures (zoning opens up a whole different dimension here and I would always attack "modern zoning" before "modern rent control" but two wrongs don't make a right). The process of densification is sometimes constrained by "modern rent control". If the existing buildings have protected tenants that protection keeps even new development from happening, or at least hinders it (you have to just wait until everyone leaves). Or, not because some "modern rent control" policies give landlords an out and allows evictions if the intent is to redevelop or change the apartments status from rental to ownership.

c) investment

So now we find that "modern rent control" often gives an out from under rent control. Merely invest in demolition and new development, or change the ownership status. Diamond et. al. even finds that certain newly rent controlled units were significantly more likely to switch ownership status from landlords to owner-occupiers and that that ownership status switch was likely to be associated with a new investment/rehabilitation expenditure. Ah-ha, is this our needed NuanceTM ? Does this not destroy the economics 101 belief based solely on "ancient rent control" that rent control always leads to a loss in investment and maintenance? Is it not proof that "modern rent control" leads to investment in the housing stock, and that is good? I say no. I say all we really need is the REAL NUANCE that we pick up in economics 201 that "investment" is not inherently good in and of itself.

  1. In absurdum, imagine that "modern rent control" allowed units to escape rent control merely by the "investment" in a $10,000 gold plated toilet in each bathroom. Is rent control thus good, overturning all economics 201 understanding, because it actually leads to "investment".

  2. In reality, what happens in Diamond, is that housing bound by rent control that was perfectly serviceable as rental housing stock is renovated to be suitable for owner-occupancy, while exactly similar housing (except for 1 year older) was not. Suggesting that the value actually added by the "investment" is not above its costs, except for in as much as it allowed the units to escape rent control, any more than we would expect the actual value of gold plated toilets to be above their costs in the absurd example above. In 1980 units tenants were willing to pay enough to make that hold true. In 1979 units tenants were not allowed to pay enough to make that hold true and thus housing stock that had been in the rental market was removed and placed in the home-owner market.

d) housing is housing

Despite the prediction of the old saying about "ancient rent control", the 4 unit and less apartment building market in San Francisco was not as if it was bombed off the face of the earth between 1994 and 1996. So, yeah sure a little bit more nuance than offered in that old saying is required these days. This thread of the argument is a little weird to find myself making because I am definitely on "MOAR HOUSING, I don't care what type it will lower all prices in all markets" of the great zoning YIMBY/NIMBY debates. But I find the other side here just as awkward for "modern rent control" proponents. Implicit in their arguments around this subject is that it really does matter who gets the benefit from the housing, with a very strong weight on existing tenants, and a typically assumed by me (in that it is not necessarily as obvious but, I know who I am talking to) to be even more of a weight on the poorest of existing tenants.

So, I am on board with housing is housing by and large but, in as much as my beliefs about their generally ill-hidden weights are correct, it seems a weird stance for people who may weight existing tenants and existing poor tenants above all else to take. That something leading less rental housing and more owner occupied housing, is fine actually, given how those housing types are distributed amongst the population.

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