
A New Real-Estate War in Silicon Valley - patmcguire
http://www.wsj.com/articles/a-new-real-estate-war-in-silicon-valley-1476829387
======
ThrustVectoring
If you want to fight unaffordable rents, you've got two real options. The
first is to do a revenue-neutral tax on landlords - preferably through a land-
value tax in order to remove incentives against building tall. The related
second choice is to lift development restrictions, up-zone things, and build
public transit infrastructure.

Rent controls are just a short-sighted way of giving hand-outs to people who
are politically connected or otherwise good at navigating bureaucracy. It's a
price ceiling, with all the classic issues of them: shortages, quality
reduction, search costs, deadweight loss, and misallocation of resources.

Shortages: More people want apartments than can get them.

Quality reduction: if you're in a rent-controlled apartment, the landlord
knows you aren't going anywhere, so why would they improve the building in any
way that they can avoid?

Search costs: joining a decade-long waiting list for an apartment. Fun.

Deadweight loss: Developers want to build places that people would benefit
from renting, but they don't, because it's illegal to charge rates that would
make them money.

Misallocation of resources: someone with a $400/mo rent-controlled apartment
in a prime location in downtown SF will keep it forever, even if they only use
it a couple weekends a year. Or people commuting from SF to Mountain View
can't trade apartments with people commuting from Mountain View to SF, since
they're locked into their rent-controlled place.

~~~
kspaans

        Deadweight loss: Developers want to build places that people would benefit from renting, but they don't, because it's illegal to charge rates that would make them money.
    

Is this because rent control would drag down market rents below the
profitability level for developers? Why can't the developer charge the rent
they want for new builds? Or is it because most developers expect some high
amount of rent inflation when the puts units on the market?

~~~
ThrustVectoring
Deadweight loss doesn't affect things that are already obviously good ideas or
obviously bad ones. It only affects things on the margin - the least
profitable units that developers would still be interested in building.

Suppose a developer can build as tall as they wanted to, but each additional
floor is more expensive: the break-even point is that each extra floor needs
$100/month additional rent per unit. If you use law to force prices $100/mo
lower, then the tallest floor doesn't get built anymore, because now it's not
worth building.

(And if rent controls don't actually reduce the rents that people pay, then
the controls aren't actually doing anything, so why have the overhead of the
law? If you're reducing prices by law, things that people want to buy at or
above the reduced price and sell at or below the market price don't get
traded.)

~~~
candiodari
Here's a lesson from a finance course that I thought was thoroughly non-
obvious: all change happens at the margin. For instance, interest rate changes
cause real estate appreciation or crashes by changing the decision of buyers
that are just on the cusp of being able to afford a home or not.

This is not a 100% rule, just 5 or 6 nines.

~~~
WalterBright
Such as with the $15 minimum wage - it's the marginal businesses that will
shut down, and the people with marginal job skills who will be shut out of the
job market.

~~~
kvb
In a toy economy that's definitely true, but the empirical results are mixed
in the real world, where there are lots of complicated dynamics.

~~~
WalterBright
Any business that buys inventory at $15 and sells it for $10 is going to go
out of business. What complicated dynamic would change that?

(Yes, I know that often businesses miscalculate the value of an employee, and
it may have other sources of profit that cover the losses, etc., but it
doesn't change the reality that the profit motive will squeeze such things
out.)

~~~
ArkyBeagle
People are not inventory.

------
WhitneyLand
Isn't supporting rent control a little like denying climate change?

When so much research and expert analysis shows something is bad, lay people
are somehow oblivious "eh, I just don't believe it".

Worse yet, why is it so easy for people to like the idea of rent control but
dislike the idea of cash assistance? If you want teachers (or whomever) to be
able to live nearby, fine then _just give them a cash subsidy_.

Giving out cash doesn't kill the market economy, allows the benefit to be
given out precisely, and anyone you want can pay for it via a tax - landlords,
rich people, sales tax, whatever.

Do nothing or do something, just don't do rent control which hurts everyone.

~~~
candiodari
It has the same problem as climate change: it directly and obviously impacts
their personal economics on a big scale. Global warming regulation makes
companies that employ millions say they'll have to start firing people, and
they will if it passes, and anti-rent-control measures mean a lot of current
San Franciscans would have to move because in the short term any change in the
regulations will cause their landlord to eject them (raise prices beyond what
they can pay, not that raise prices by itself wouldn't be enough).

People are always saying that it's bad that people don't vote for their own
self-interest but forget that there is a reasonable time horizon for
decisions, and it's not infinite.

For people living at the margin, for whom it matters most as they'll be the
ones affected, that time horizon is zero. At a zero time horizon the decision
is obvious : no to change ! Yes to more rent control !

The minimum time horizon for considering these economics would be the amount
of time it takes for new buildings to get built, which I imagine would be 2-3
years at least. If you consider the reasonable time needed for the building
supply in San Francisco to exceed supply, we should say this measure will only
start helping people when the market is oversaturated. That may never happen.
Realistically, anything less than 10 years seems to me a very long shot.

~~~
someguydave
" Realistically, anything less than 10 years seems to me a very long shot."

Except in the case of climate change the time horizon under consideration
should be more like 100 to 1000 years.

~~~
candiodari
This is known as a fallacy in economics. You should have a time horizon on
your decisions, and of course, it should not exceed, let's say, 10 years less
than your expected lifespan.

So something like 50-60 years is the longest considered timespan. Rewards on
that sort of timeframe have to be extreme (essentially 1.04 __50=7, as in 7
times ROI would be the risk-free rate. For an investment with minimal risk a
factor 30 or so would be required)

~~~
someguydave
Indeed, I was pointing out that anti-global-warming policies are not likely to
be economically viable on a living individual's time scale.

------
LandoCalrissian
Rent control is a terrible idea for controlling cost. This is basically
universally agreed upon by all economists. You just artificially reduce the
supply of housing because people in rent control places will not leave. On top
of that it actually makes it more difficult for low income people to rent
since you have to have a sterling rental history to get a rent control
apartment.

So you actually just exacerbate the situation. Rent control is one of those
things that sounds good at face value but once you think about it a little
more you realize it's a terrible idea.

~~~
markeroon
Well, for the people who have a tent controlled apartment it's certainly not
terrible for controlling cost. Be more specific.

~~~
withdavidli
They were specific to the situation you mentioned.

>because people in rent control places will not leave.

What kind of details are you looking for here? That they don't leave because
it's likely the lowest possible they would be able to find, and that the
tenants would be increasing their cost otherwise.

~~~
simooooo
Wouldn't another apartment they might move to also be rent controlled?

~~~
withdavidli
that's if there is one open. argument made is that people that have rent
controlled apartments don't leave for economic reasons. this would mean it
lessens the supply of rent controlled apartment in the area.

the competition for a place is high in the bay area, so even if they find and
apply for an apartment doesn't mean they'll get it. my personal situation is
worse due to me finding rooms instead of entire apartments. lived in 4-5
different places in last 4 years. I would get a response rate of ~5% from
craiglist when looking in SF, percentage better in the peninsula. Usually
competing against 10+ people viable applicants each time.

------
the_rosentotter
Rent control just creates an even less regulated, shady sub-industry of
subletting, where the lucky ones who got in under rent control basically keep
the apartment for life and skim the difference between what they pay, and the
real market value.

~~~
rhizome
In SF it's illegal to charge more than the actual rent to subletters.

~~~
TuringNYC
That's never stopped people in NYC. Not sure about SF, but I imagine it is
similar. The profit motive is too huge.

~~~
refurb
It's never stopped people in SF. I know a couple people renting extra rooms
and making a profit off of it. That is, their rent is zero and they actually
pocket money each month.

~~~
sroussey
So do I. Also in NYC, West Hollywood, and Santa Monica. And the subletter is
also getting a deal, so they stay quiet.

~~~
refurb
Exactly, the rent control can keep rents so low, that the subletter gets a
great deal even though their rent for one room pays for the whole house. Why
would they bring it up with the tenant board?

------
forrestthewoods
We have a pie. It only has a certain number of slices. Unfortunately there are
more people who want a slice than there are slices. That sucks.

There's a lot of way we could determine who gets a slice and who doesn't get a
slice. We could give slices to people who have been there longer. Or we could
let people who have more money and value the pie slice sufficiently high to
spend their money buy a slice. We could give some money to people who really
really want a slice but just can't afford it. We can debate and argue about
all the ways we could pick the pie slice winners.

But at the end of the day it doesn't matter. The exact same number of people
will get slices. And the exact same number of people will not get a slice. All
we're doing is picking winners and losers in different ways.

The only debate that matters is the one that grows the pie. We need more pie
so more people can have a slice. Taking a slice from Peter to hand to Paul is
an utter waste of time.

------
johan_larson
This sounds like a left-wing/market-sceptic attempt to solve a very real
problem.

I wonder what a more broad-based proposal would look like, one that also had
some right-wing/market-friendly features. The left gets rent controls, and the
right gets what? As-of-right construction? Relaxed zoning rules? Whatever it
is, it would have to be pretty major for the right to put up with rent
controls.

(By "the right" I mean pro-business democrats mostly, because we are taking
about a very blue area of the country.)

~~~
twblalock
As of right construction is probably the best solution, and it was recently
proposed by the governor of California, who is a Democrat and is generally
perceived to be very liberal.

The problem with the Bay Area is not just zoning -- it's the fact that even
when land is zoned for housing, all kinds of local advocacy groups can prevent
development by filing frivolous lawsuits and demanding further environmental
reviews (even when thorough environmental reviews were already conducted).

As of right construction would prevent many of those kinds of lawsuits.

Jerry Brown's proposal was probably the kind of compromise you are looking
for: as of right construction would apply to developments with a certain
percentage of subsidized housing. (The nice thing about subsidies versus rent
control is that they are means-tested, so you won't end up with high-income
earners taking advantage of rent control and low-income earners paying market
rate.) Unfortunately, his proposal did not get anywhere.

~~~
johan_larson
It would also help if the incentives shifted. Right now, cities make money on
business land use, but lose money on residential land use (on average). So
either residents need to lower their expectations of services, or start paying
more taxes.

------
spoonie
Question to landlords: does rent control hurt your bottom line?

I understand the opportunity costs of rent control: if rents in your
neighbourhood have gone up 50% this year you feel like a sucker if you can
only raise them by 5%.

Similarly you might put off minor renovations (that don't require the tenant
moving out) because you won't necessarily be able to charge more to make up
for the cost (apart from selling the property).

But is it common to rent out a property below cost, assuming you can make it
up later with rent increases? E.g. you just bought a property in Mountain View
so your mortgage payments are high, plus the cost of all of the new
appliances, and maybe it's an older house so labour and maintenance costs are
higher than the $4k/mo you charge in rent.

~~~
ThrustVectoring
Forget the cash flow of renting out a property for a second, and just consider
selling it. If you have an apartment with a tenant paying below market rate,
that property is worth less money to potential buyers because of the rent-
controlled tenant they'd be stuck with.

And buying or building real estate for speculative purposes is extraordinarily
common.

~~~
idlewords
No one has ever shed a tear for real-estate speculators.

~~~
tormeh
>real-estate speculators

Also called "every house owner in the western world".

~~~
hrunt
I'm a home owner in the Western world and I don't consider myself a real
estate speculator. I "bought" my house because I really, really liked it and
wanted it to be my home for a very, very long time. Buying the house gives
that a better chance of happening, as my payments will remain consistent and I
get certain protections as a homeowner I wouldn't otherwise have. Whether I
make money on it or not is immaterial to me as I don't plan to sell. While I'd
like the value of the home to go down (taxes), it hasn't influenced my
decision to stay in it -- so far.

I think a lot of homeowners feel this way and aren't in way "speculators", but
they're a non-vocal population.

By the way, I put "bought" in quotes because it often seems like I'm renting
it from the state.

~~~
shostack
Meanwhile most Americans first home purchase, if they can even afford one, is
not their forever home.

Due to all the handouts to banks through the mortgage industry that have in
part caused house prices to go up like they have (ie. QE), many first time
buyers have to leverage themselves to the hilt for their first underwhelming
home in order to hopefully one day sell for enough to let them ladder up to a
nice home.

People would much rather own their forever home and not have to worry about
selling at some point like you, but that just isn't the reality for most. So
speculation is almost forced in the sense that if you want to own your forever
home at some point, you have to play the leverage game.

------
11thEarlOfMar
High apartment and real estate costs are the outcome of a variety of factors.
I.e., it's a multidimensional equation. Attacking it by capping the rents is
like saying that we are going to legislate 2 + 2 = 3.75.

------
omarforgotpwd
The way to stop rents from rising is simple: Make sure there's enough new
supply of housing to meet new demand. A lot of people are moving to the Valley
but environmental / historical / construction / neighborhood regulations slow
down new housing because existing residents don't want their neighborhood
"ruined" by new residents and traffic. Attempting to solve rising rents by
legally regulating what the market can charge is not a great idea. It will be
even harder to find a vacant apartment as people hang onto their rent
controlled units, and landlords will have a big incentive to find a way to
throw people out of their homes to collect a higher rent as prices rise.
Basically existing residents get subsidized as new people trying to move in
get fucked over, which works perfectly for politicians who are not elected by
people who don't live here yet.

------
Mao_Zedang
Japan seems to be in vogue here on HN atm but I think we in the west could
learn from their zoning laws. All they do is set the maximum zone that can be
used.

[http://urbankchoze.blogspot.com.au/2014/04/japanese-
zoning.h...](http://urbankchoze.blogspot.com.au/2014/04/japanese-zoning.html)

------
tiredwired
I keep seeing stories about rents falling like this one:
[http://www.siliconbeat.com/2016/10/14/hard-believe-rents-
fel...](http://www.siliconbeat.com/2016/10/14/hard-believe-rents-fell-san-
jose-san-francisco/)

~~~
kspaans
I'm in a new apartment building (I'm the first tenant in my unit) on Ocean Ave
about a 10 min walk from Balboa Park. There are still a handful of units in
this building of about 30 units that are unoccupied, almost a year after
construction finished. Admittedly, most of the empty units are 2 beds, which I
can see being harder to fill than the 1 beds.

------
xfour
Mirror, non-paywall. [http://www.nasdaq.com/article/a-new-realestate-war-in-
silico...](http://www.nasdaq.com/article/a-new-realestate-war-in-silicon-
valley-20161020-01097)

------
sakopov
For those of you living in the bay area what's your take on the future of this
situation?

I'm genuinely curious because I think in a few years from now Denver will be
in the exact same boat.

~~~
Decade
My feeling is firm pessimism.

Upton Sinclair said, “It is difficult to get a man to understand something,
when his salary depends upon his not understanding it!” As the WSJ says, we
have “tenant organizations, unions and church groups” fighting to pass rent
control. They all face imminent declines in power if their constituents have
to leave. I guess they are hoping for breathing room, until either the economy
collapses or “permanent BMR units” can be built to help with the inevitable
churn. But rent control by itself makes the situation even worse for the
working class.

No amount of science and repeated real-world demonstrations seem to matter to
the self-appointed “soul” of the community.[0] The people are, on the whole,
just looking for somebody to follow, and the activists are indoctrinating the
kids early and often. Horrible legislation has a decent chance of becoming
law.

[0][http://www.theatlantic.com/politics/archive/2015/12/san-
fran...](http://www.theatlantic.com/politics/archive/2015/12/san-francisco-is-
confused-about-the-villain-thats-making-it-unaffordable/422091/)

------
poshli
No mention of Prop 13?

~~~
drewg123
I was thinking the same thing. Prop 13 is basically rent control for
homeowners/landlords. It _dramatically_ increases friction in the real estate
market, and increases NIMBY'ism by giving people huge incentives to avoid
doing smart things, like downsizing from a house into a condo due to tax
increases.

While I lived in Mountain View, I rented a house built in the 50s that was
renovated in the early 2000s (but renovated carefully to stay within the prop
13 guidelines). Houses up and down the street were selling for well over $1M,
and they were smaller and in rougher shape than our rental. I've recently seen
some houses in that neighborhood go for $1.4M So let's assume our rental was
worth 1.2M The landlord bought the house in the 70s. I just checked the Santa
Clara county property tax for this house: $1760.36 / year on an assessed value
of $130K. This is for a house whose market value is roughly 10x that!!

So an owner of a house has a roughly 90% discount on his property tax, but
only as long has he neither moves, nor improves his house. This causes lots of
older folks to remain in houses that are far too large for them. Like older
people everywhere, these people oppose "change". They want the neighborhood to
look exactly the same as it did 40 to years ago when they moved in. They don't
want condo or apartment buildings. The oppose new development of any kind.
Meanwhile, they pay next to no property taxes, and the schools are falling
apart, and there is no money for improvements that could help with traffic
(like more bridges over or tunnels under the Caltrain tracks) or other
services.

I'm so glad that I'm back to living in a sane market on the East coast, and
don't have to deal with this issue anymore.

------
shawnee_
_In all, the proposals ' opponents have raised more than $1.8 million against
the measures in the five cities, according to campaign finance records,
largely from groups like the National Association of Realtors and an array of
landlords including apartment giant Equity Residential. That far outstrips the
roughly $200,000 reported raised by various groups supporting rent control._

Real estate is a broken industry. Moreso in the Bay area, but the negative
effects there ripple outward. See:
[http://ecosteader.com/alternative](http://ecosteader.com/alternative)

In the Airbnb story yesterday, my comment (which was maliciously downvoted),
was this:

"Landlords and Realtors get their cut every time there's a turnover in
occupancy. Interestingly, this is the root problem at both ends -- from people
living in poverty (Portland's sidewalk tent campers who get shuffled around),
those suburbanites affected by the housing "crisis", and those who can afford
to own in any upscale hip-n-trendy neighborhoods where Airbnb rentals are
desperately sought. Those rooting for turnover are usually those who profit
the most from it.

Sure, people travel and need to rent rooms once in a while. People like to
rent while they're young and mobile, but the two use cases need very serious
and separate delineation from each other. Airbnb is pushing them more into
"overlap" territory. Airbnb's expansion into "subletting" was the kicker.

So, long story made short: it's an interesting economics problem I've been
working on solving in my spare time, as a very long and iterated side project
with Ecosteader (ecosteader.com). Some of the details emerging need a better
format for communication; however, the most clear thing to come from my
research is that people need to _own_, and they need to be able to transact
with each other directly. Middlemen (Airbnb is the middleman here) taking
significant commissions is part of the problem.

But the middlemen problem has sort of an obvious solution: to tax rental
income so aggressively that it's just not an appealing source of investment to
people who invest in rentals. Use the tax generated from over-inflated rents
to build properties for sale, and/or figure out a way to use that money to
grant-deed land on which people can build. This last option seems the more fun
opportunity to me, and is what I originally had in mind building an eco- site.

The homesteading movement needs to come back, adapted a bit for the 21st
century."

Disagree if you want... but explain how the problem can be solved better any
other way.

~~~
natrius
Most Americans do not have the savings required to own in cities. Ownership
might be a solution that works for you, but penalizing landlords penalizes
renters who can't afford ownership.

~~~
_delirium
Whether it's affordable to own in cities isn't entirely independent of what
restrictions we put on landlords. To take one end of the restrictions scale:
if being a landlord were simply banned, i.e. you could occupy property but not
rent it out, purchase prices of apartments in most situations would end up
lower. Copenhagen does that in large swathes of its property market, for
example, by requiring owner-occupancy in some categories of housing. And you
can clearly see the price differential: apartments in the buildings that allow
unrestricted rental have much higher purchase prices than otherwise similar
apartments in buildings restricted to owner-occupancy, by often a factor of
2-3x. (That isn't to say as a policy proposal this would fix SF's particular
problems, just that purchase prices aren't independent of landlords' role in
the property market, as prospective owner-occupiers have to bid against
prospective landlords in cases where landlordism is permitted.)

~~~
natrius
We agree with each other. Restricting rentals reduces competition for owning
homes, which lowers the price to purchase a home. You'll get more homeowners.
Everyone who still rents is worse off because the supply of rental housing has
been choked off. They will live in less desirable neighborhoods than they
would in a world without such restrictions.

------
sjg007
Rent control is going to happen. What it will do is set the price level where
it is currently at. It will only be for apartments and those built before 1995
and it will become hard to get into those apartments. Condos, SFH, duplexes
etc.. won't be affected but maybe those rents won't rise "as much".

------
edem
Can somebody TL;DR this one? I don't want to subscibe/register.

~~~
johan_larson
"Voters in five small and midsize cities in the Bay Area are set to decide
Nov. 8 on whether to enact various forms of rent regulation that would keep
rent increases for existing tenants pegged near the rate of inflation.

"Tenant organizations, unions and church groups are knocking on thousands of
doors in an effort to drum up support for measures designed to protect
apartment dwellers from runaway rents.

"On the other side, landlords and real-state agents are pouring money into
mailers and television ads in a vigorous effort to battle the initiatives."

You can get around the paywall by typing the title of the article into Google,
and clicking on the link to wsj.com.

~~~
edem
Thank you!

