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Rent control and inclusionary housing policies are self-interested and harmful

"With the cost of California housing continuing to surprise even people who thought they were beyond such surprises, the pressure to “do something” has produced two notable “solutions”: inclusionary housing policies, requiring homes to be set aside for lower income families as a condition of building new homes, and campaigns to reinstate local power to impose rent control (as with the Affordable Housing Act initiative, on California’s Nov. 6 ballot as Proposition 10).

Beyond trying to hold down housing prices by law, those two approaches seem to share little. One addresses home ownership; the other, rentals. The loudest groups on the issues are different, and so are the mechanisms. However, there is an insufficiently noticed similarity: Both allow local political majorities (owners in one case; renters in the other) to advance their narrow self-interest while harming most of those they purportedly help. These regulations represent self-interested and harmful altruism.

The self-interested support for these policies grows from the distinction between their effects on current tenants and homeowners and the very different effects on future aspiring tenants and homeowners, far larger groups that are not yet residents.

The first group is primarily benefited by what will happen to rental and home prices in the near term. Lower rents help existing tenants; higher house prices help current homeowners.

The second group — aspiring renters and homeowners — is primarily harmed by the regulations’ effect of shrinking the housing supply in the longer term.

In other words, existing renters and owners benefit at the expense of future aspirants, who cannot vote on the policy because they are not residents.

Consider San Jose’s 2010 inclusionary housing ordinance, which requires housing developers of more than 19 units to sell 15 percent of the units far below market value (or pay a six-figure fee). This allows politicians to claim the mandated units as visible proof they are addressing housing availability, while the future harmful effects go largely unnoticed.

The below-market mandate obviously increases the costs of the new unsubsidized housing, which reduces demand from aspiring buyers. That, in turn, reduces the number of new units constructed and thus the future supply of homes. And it raises existing house prices as well. Potential first-time buyers are harmed, but existing homeowners’ wallets are padded.

Housing researchers have found just that effect from so-called “inclusive” policies (now in nearly 170 California cities and counties). With the large decrease in unsubsidized construction swamping the much smaller effect on mandated construction, such policies harm all buyers except those who win occupancy in new subsidized units.

Rent control follows a similar narrative. It benefits current renters at the expense of property owners by forcing down the prices of units. But by reducing or eliminating the profitability of rental housing, the regulation reduces the supply of rental housing over time via reduced new construction and maintenance, conversions to condos or to non-housing uses, etc. (Imagine how attractive Airbnb-type uses of housing would become if it could evade rent control.) That harms all future renters, even while the bonanza to current tenants continues. (This is why tenants under strict rent control almost never leave.)

Economists generally agree that rent control is harmful. Left-wing economist and Nobel laureate Gunnar Myrdal called rent control in certain Western countries “maybe, the worst example of poor planning by governments lacking courage and vision,” and socialist economist Assar Lindbeck asserted that “in many cases rent control appears to be the most effective technique presently known to destroy a city — except for bombing.”

With inclusionary housing policies and rent control, a local majority of voters is allowed to benefit itself while pretending to support those struggling to find housing. Such self-interested but harmful housing altruism is far removed from doing something good for society."

If you're interested in buying or selling an apartment building, please call Anie Mayelian at 818-915-9118 or send us an email!

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