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News + PoliticsThe flaws in Stanford's anti-rent-control study

The flaws in Stanford’s anti-rent-control study

Two economists argue that rent control raises housing costs -- but that assumes we allow speculators to evict tenants

Economists who believe in free-market solutions generally don’t like rent control, because – by definition – it distorts the market. So we’ve seen a long list of academic economists – including even Paul Krugman, who ought to know better – arguing that rent control hurts tenants.

Rent control is only a problem because of the loopholes in the law. Photo by Gerard Koskovich

The latest salvo in this battle comes from Stanford University, where two assistant professors of economics, Rebecca Diamond and Tim McQuade, and grad student Franklin Qian, have authored a report on rent control in San Francisco.

Their conclusion, not surprisingly given the tendencies of academic economists, is that rent control drives up housing prices. We have heard this hundreds of times.

But it’s rare to see an in-depth study and a single city, much less San Francisco, so the data and analysis will no doubt be cited as the housing wars continue to heat up.

So far, the Stanford study hasn’t gotten much mainstream press, although Curbed picked it up. I suspect that’s in part because it’s pretty hard to read, as most academic economics papers are. If you enjoy equation sets like this

You will have a blast reading Diamond’s and McQuade’s piece of work.

But its conclusions are pretty clear – and from my perspective, some of them tend to support rent control.

The authors find that tenants in rent-controlled buildings stay in their units longer – and that’s particularly the case for older households. That means rent control helps preserve existing vulnerable communities and allow seniors to age in place – something that most of us can agree is good for a city and for society as a whole.

The problem comes when they look at the impacts of rent control on housing costs as a whole.

On average, we find that in the medium to long term, the beneficiaries of rent control are between 10 and 20 percent more likely to remain at their 1994 address relative to the control group. These effects are significantly stronger among older households and among households that have already spent a number of years at their current address. This is consistent with the fact both of these populations are less mobile in general, allowing the accrue greater insurance benefits.

On the other hand, for households with only a few years at their current address, the impact of rent control can be negative. Perhaps even more surprisingly, though, the impact is only negative in census tracts which had the highest rate of rent appreciation. This evidence suggests that landlords actively try to remove their tenants in those areas where the reward for resetting to market rents is greatest.

The authors propose that the government provide some sort of rental insurance to help tenants stay in place – as opposed to requiring landlords to keep rents at a stable level.

We find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging between $3100 and $5900 per person each year, with aggregate benefits totaling over $423 million annually. These effects are counterbalanced by landlords reducing supply in response to the introduction of the law. We conclude that this led to a city-wide rent increase of 7% and caused $5 billion of welfare losses to all renters. The substantial welfare losses due to decreased housing supply could be mitigated if insurance against large rent increases was provided as a form of government social insurance, instead of a regulated mandate on landlords.

The study looks at buildings with four or fewer units that until 1994 were exempt from rent control. Those buildings constructed after 1980 still are exempt.

That, Diamond told me, provides a credible database: “We take advantage of the quirky 1994 laws that allowed us to compare rent controlled buildings to similar ones not under rent control.”

 

There are some stunning findings: “absent rent control,” the study notes, “essentially all of those incentivized to stay in their apartments would have otherwise moved out of San Francisco.”

Which tells me that rent control has prevented massive displacement.

But the crux of their argument is that rent control drives landlords to force out tenants so they can raise the rent — and that drives up costs for everyone.

In the process, they point out that rent control has been a significant transfer of wealth from the landlords to the tenants in the city.

We find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging between $3100 and $5900 per person each year, with aggregate benefits totaling over $423 million annually. Over the entire period, tenants received cumulative benefits of around $7.6 billion. Most of these benefits came from protection against rent increases and transfer payments from landlords.

A lot of economists who look at cities would say that’s a good thing: In general, shifting money from people who are most likely to save or invest it (landlords) to people who are more likely to spend it (tenants) increases economic activity, particularly for small local businesses.

It makes sense: the richer you are, the less likely you are to take an additional $100 in income and go buy groceries or shoes for your kids. That money instead goes into the financial sector, where taxes are lower and economic impacts are slower. You don’t improve the economy and create jobs by giving more money to the rich.

Not all landlords are rich, of course; not all tenants are poor. But overall, the landlord sector is wealthier than the tenant sector, especially these days when more and more residential property is owned by larger corporations.

So what’s the problem? The Stanford economists say that rent control gives landlords incentives to evict their tenants or turn apartments into TICs, raising overall housing prices:

However, we find losses to all renters of $5 billion due to rent control’s effect on decreasing the rental housing and raising market rents.

The study lists all the ways landlords get around rent-control – Ellis Act evictions, owner move-ins, buyouts, etc. The idea: If you limit rents, landlords will find some way to get around the law and raise prices.

A new report from Tenants Together, a statewide renter-advocacy group, notes that the Stanford study blames the rise in housing costs on rent control – not on the loopholes in the law that speculators use:

The authors blame rent control, rather than speculator creation and abuse of loopholes around rent control, for the displacement of tenants. That is a political choice, not an academic one.

 More:

The authors refuse to entertain the possibility that rent control is not functioning fully due to loopholes, without which these landlords would have had not few, but no ―ways of removing tenants‖ for speculative gain. It is worth noting that all rent control laws, including San Francisco’s, already allow landlords to evict tenants who fail to pay rent or otherwise violate terms of their leases, as well as allowing ―owner move-in evictions where landlords seek to move into the home. What is at issue here, and the authors seem fine with, is the idea that landlords should have even more ways to evict tenants for speculative gain amidst a housing crisis.

There are a lot of reasons why rents have been soaring in the Bay Area – not just in cities that have rent control, but in cities that don’t. One big reason is that San Francisco and Peninsula cities have approved (and encouraged) a massive increase in tech office space and thus jobs – without any concern for the fact that the region had nowhere near enough housing for those jobs.

But the Stanford folks still want to blame rent control.

I emailed Diamond and asked her whether the problem might be the loopholes in the law, not the concept of rent control:

What if the state and the city closed the loopholes you mention (owner move-ins, the Ellis Act, and buyouts) and the city imposed rent controls on vacant apartments? Would SF not get all the benefits of rent control without the negative impacts you found?

Her response:

In a world where a city prevented all types of evictions, prevented condo conversions of all kinds, and even went so far as to limit rents on vacant apartments, landlords would still find some legal alternatives to mitigate their huge financial losses. Granted, my research papers looks at hard data and is not based on interpretation or speculation. However, to think about what would happen in this alternative scenario of extreme rent control, I must speculate since there is no data to look at. 

There would be zero maintenance and upkeep of the apartments. Likely many apartments would simply be left vacant, as the meager rents would not even compensate landlords for simple maintenance, taxes, and costs to screen tenants to rent. Further, in the long run, some tenants will move out of their rent controlled units for personal reasons, and at this time owners could sell of the units for owner occupants, even without evictions or formally converting to condos. Further, no developer would ever consider building new rental housing in this environment, since these extreme rules would signal that new development would likely be brought under rent control in the future. This would lead to the few apartments available for rent to cost extremely high prices.

Actually, we do have data on this. In the 1980s, Berkeley and Santa Monica had rent controls on vacant apartments. None of the things Diamond talked about happened. I was here.

That’s because there’s another factor at play: The price of rental housing (as any market-fearing economist should know) is based on the likely return. If you make it possible for speculators to buy rent-controlled property, evict the tenants, flip it, and make a fortune, the price of housing will go up.

If you strictly control rents and evictions, the value of that housing goes down. So does its price.

Landlords in Berkeley were not impoverished by effective rent control. They simply made less profit than they would have in a speculative environment. They made, for the most part, a reasonable return on investment – since the price of the property reflected the existing and future (stable) rents, the (stable) property taxes, the (stable) mortgage costs and the (predictable) maintenance. If the rents weren’t high enough to create a profit, that building simply sold for less. And the landlords who had owned for years had very low property taxes thanks to Prop. 13, and had set their original rents at a level that would allow them a reasonable return.

Diamond told me that

Yes, Berkeley and SM had vacancy control, but still Ellis Act evictions were allowed, as were condo conversions and owner move ins. 

Actually, I don’t think we saw a lot of Ellis evictions in Berkeley in the 1980s. What we saw were stable rents and a lot less displacement.

Dean Preston, director of Tenants Together and an author of that group’s study, told me that

Unfortunately, her response confirms that this professor doesn’t have a clue about rent control and substitutes industry generated talking points for facts.

Specifically, she speculates that with real rent control “landlords would still find some legal alternatives to mitigate their huge financial losses.” She assumes “losses.” Why would there be any reason to believe landlords would suffer losses?  Landlords made plenty of money under vacancy control before Costa Hawkins.  Moreover, the cost of rental housing would reflect the regulated rents, so landlords would not need to pay so much to buy property under such a system.  What she really means is that landlords would suffer losses by not earning the maximum amount of profit they otherwise would, a common real estate industry talking point to oppose any regulation.

She next claims that with real rent control “there would be zero maintenance and upkeep of the apartments.” This didn’t happen in cities with stronger rent control. Whether repairs get made is usually more a function of the strength of state habitability laws and local code enforcement than the rents. Landlords operating slum housing across the state, especially in non-rent control cities, are making a killing right now and do not invest it back in the property absent strong code enforcement. As a general matter, landlords make repairs when they are forced to.

Next she argues, “likely many apartments would simply be left vacant, as the meager rents would not even compensate landlords for simple maintenance, taxes, and costs to screen tenants to rent.” Perhaps she is not aware that every rent control law, as required by the state constitution and Supreme Court cases, requires that landlords get a fair return on their property.  So the situation she describes is not only unlikely, it is pretty much impossible.  Landlords who couldn’t afford taxes or maintenance because of the rents would get relief from the local rent board or court.

What real, effective rent control does is treat housing as a regulated utility. Landlords have the right to make a reasonable return on their investment – but not to make a killing because speculators find ways to evict tenants. It’s a transfer of wealth from the land-owing class to the renter class — which a lot of us would define as a move toward economic equality.

That’s the real argument here – and the professors at Stanford seem to be missing it.

Tim Redmond
Tim Redmond has been a political and investigative reporter in San Francisco for more than 30 years. He spent much of that time as executive editor of the Bay Guardian. He is the founder of 48hills.
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34 COMMENTS

  1. Why is this article commenting on a study (and a CurbedSF article) from 5 months ago?

    When even home ownership is subject to impermanance – the Kelo Decision voiding a home owners rights so a public agency could give her property to a private entity – why do renters feel they have a right to permanent residency (with limited costs that home owners must pay)?

  2. Difficult tenants and rent control are different issues.
    “Someone with 2-4 units in and area increasing in value and long-term tenants have an incentive to evict and convert”—sure, unless there are laws against it, or they are not the evicting type.

  3. You argued I am against rent control, I elaborated on my stance. What phantom argument am I inventing here? One again you compartmentalize my beliefs in order to dismiss my argument. “Oh, well you’re a right-wing Libertarian, so THERE!” “Well, now you’re AGAINST rent control. Gotcha!” Very good. I’m sorry my opinions on these things do not fit into the easy to dismiss categories that you’re so used to rallying against. You can cite me if I’m wrong, but I’m pretty sure the only group I’ve lumped you into is the “progressives”, which you identify as being a part of. I’ve never called you a NIMBY, have I? What labels have I applied to you that you haven’t applied to yourself (besides the conspiracy theorist jab, I don’t think you’re actually wearing a tinfoil hat but you’re getting there)?

    So NBER receives corporate donations which then sponsored the study at Stanford. It’s all part of Johnson & Johnson and ExxonMobil’s master plan to secretly (but like, not secretly) fund studies to influence the public on economic matters. Oh how deep the rabbit hole goes. Keep going. There’s hundreds of rent control related studies out there. I’m sure you can prove that all of them are paid off and fake.

    Think about the tactics you’re using to try to disprove academic consensus. Think about what you’re saying. It’s denial of science. Period. Climate change deniers do the same exact thing.

  4. Once again you exaggerate and argue against phantom arguments. I should have been more broad in my assertion however, to include other financial interests such as investment banks.

    The study was sponsored by NBER
    https://www.nber.org/CorporateSupporters2017.pdf

    Also, the UrbDeZine article has many citations from credible sources so you don’t need to have heard of them.

  5. What did happen was that vacancy control regulation contributed to lower rents and

    longer tenure by tenants. However, there were also fewer new rental units created in these areas than in the comparison areas and apparent conversion of a portion of the housing stock from rent to ownership.

    The shift away from rental units and the increase in home ownership was found in three of the four cities: Berkeley, Santa Monica, and West Hollywood.

  6. It depends. I know someone with around 10 units with street level retail. He has had average turnover and has no problems with rent control. On the other hand some one with 2-4 units in and area increasing in value and long-term tenants have an incentive to evict and convert. One reason for mom and pop getting out of the business is onerous tenant protections. Professionals have the knowledge and resources to deal with difficult tenants.

  7. “Actually, we do have data on this. In the 1980s, Berkeley and Santa Monica had rent controls on
    vacant apartments. None of the things Diamond talked about happened. I was here.”

    What did happen was that vacancy control regulation contributed to lower rents and longer tenure by tenants. However, there were also fewer new rental units created in these areas than in the comparison areas and apparent conversion of a portion of the housing stock from rent to ownership.

    The shift away from rental units and the increase in home ownership was found in three of the four cities: Berkeley, Santa Monica, and West Hollywood.

  8. If you could expose Standford’s research team here as being paid off by real estate groups you’d really make a name for yourself. I’ve never heard of UrbDeZine (camelcase is theirs) but I have heard of Stanford.

    So an unnamed real estate group or groups have so much influence and play in this country that they’ve planted fake researchers into one of the most respected and prestigious higher learning institutions in the world in order to fudge numbers in an obscure article against rent control so that they can slyly convince the public that it can have unintended consequences? And they’ve done this over and over and over again? How are you not a conspiracy theorist?

    And I don’t know if my feelings on rent control can be summed up as simply as for or against. I’m for keeping it the way it is now because removing it or fucking with the current tenant’s who rely on it would be awful for reasons you definitely understand as well. I’m against expanding it because I believe the unintended consequences that these Stanford people put forth make sense, and is real. Sort of like, the damage from rent control is already done, so just let it naturally phase itself out over time.

    Having lived in many rent controlled apartments throughout the years I know first hand the problems they talk about, like landlord’s neglecting the property, the devious tricks they pull, and the fact that they’ll either find a way around it or just stop being landlords all together and see the rental stock deplete. I do think it’s unfair that rent control only benefits people based on timing and luck rather than means. I know people who can afford market rate who have rent controlled apartments; that doesn’t seem fair to the people who really “need” rent control. I think rent control would be fine if reformed, and from my understanding repealing Costa Hawkins would open the door for a reform (or at least a real debate), and so I’m open to repealing that as well.

  9. Yes, the story of decontrol is that rents went up immediately, including in the units that never had rent control.

  10. “Their conclusion, not surprisingly given the tendencies of academic economists, is that rent control drives up housing prices. We have heard this hundreds of times.”

    This really sums it up. This is so analogous to climate change denial it could almost make a good Onion article. Despite being told “hundreds of times” by “academic economists” of this, it still isn’t true, because a few people from tenants advocacy groups say it isn’t. Oh, real rent control just hasn’t really been tried yet… right.

    Why are these academic economists lying? What motivates such nefarious tendencies? Over and over and over again they produce these fallacious and dangerous reports on rent control, but why?

  11. Lets not listen to the experts ’cause Tim knows better than them. After all what do elite ivory tower professors know about Rent Control

  12. I think it was furniture for a long time, but in the last decade or so:

    –Stools and more
    –Plant it Earth
    –Massive rent hike w/ vacancy around 6-7 years ago
    –La Urbana
    –Barvale

  13. Yes, because people staying longer in rent controlled apartments is bad because having long-term neighbors creates stable neighborhoods. Or something.

  14. Diamond says, “Granted, my research papers looks at hard data and is not based on interpretation or speculation.”

    It’s is as if she doesn’t realize that economics is a social science that relies heavily on interpretation and speculation. Doesn’t matter how complex her equation is, she’s not extracting DNA here.

  15. You have a lot more fluctuation in general as leases are more commonly transferred along rapidly gentrifying corridors.

    Every second or third business on Divisadero now has a gentrification story. A prime example is 661. Long a string of working class businesses, it’s now on it’s second yupped out, small portion restaurant iteration in 5 years. And don’t even tell me Barvale is going to last.

  16. What studies are you referring to for the income disparity?

    “As a result smaller landlords have been gradually pushed out of the market as they are forced to sell their property to larger landlords.”—Why would they? Being a small landlord is not a money-losing business, even under rent control, as Tim has pointed out.

  17. “…embarrassing…fauxgressives…denialists…failures…out of your depth…laughable…not data…not reporting…not even facts…ideology…biases…not credible…scares the crap…”

    So what’s your point?

  18. “Pop-ups” are another development, a cute term for short leases in a hot market, which fill in those gaps in the speculator’s progress.

  19. When rent control laws are passed — and if they get expanded — they will not likely be for new construction built after passage. It’s just that rent control right now is limited to buildings built before 1979, and there has been a lot built since then. Maybe not enough to satisfy the never-satisfied YIMBYs, but, quite a bit, and a lot more already in the pipeline.

  20. Yeah, and funny how commercial landlords tend to hold properties vacant, waiting for the big-fish to come and pay the big bucks — and all without rent control.

  21. It makes sense that if you have cheap rent, it would be difficult to give it up.

    Isn’t is generally accepted that price controls reduce the supply? Wouldn’t that impact the price?

  22. Pushing forward some bullshit idea that old NIMBY’s caused the STATE WIDE housing crisis is the real joke here.

  23. I’m aware, I’m saying that studies on SF rent control have not specifically compared income between rent control beneficiaries and tenants in general. Studies in NY and elsewhere have though.

  24. Correction: the Stanford study is 100% about rent control in the city of San Francisco. SF is the city they studied.

  25. Cambridge, MA provides a story of decontrol. Apartments were being left vacant. How about we use subsidies and public housing instead and build more housing so there will be no more displacement?

  26. There are few things more embarrassing than watching SF fauxgressives act like climate-change deniers when it comes to evaluating the costs and failures of the housing policies they put in place.

    Tim, you’re out of your depth, and your ignorance beclowns you. Saying ” I don’t think we saw a lot of Ellis evictions in Berkeley” and “None of the things Diamond talked about happened. I was here.” is simply laughable. Your anecdotes are not data. They’re not reporting. They’re not even facts. Your ideology wouldn’t last 5 minutes under peer review. Plus, you have a reputation for ignoring or misrepresenting facts that don’t conform to your biases, sp you are not a credible critic of the Stanford study.

    Mostly what this 48H piece does is to confirm that the Stanford study scares the crap out of the crusty Old Left. As well it should. It puts the lie to the role you have played in encouraging evictions and making San Francisco less affordable.

  27. Tim is well aware of the concept of means testing. It’s just that it must never be discussed. I’ve seen tenant activists moved to threaten violence at the mere mention of the concept.

    Thanks to 48hills for the summation of the Stanford paper, good job as always. I do feel the need to point out a couple of things. First is that I don’t think Dean Preston is an economist and, second, whenever I go to Berkeley, I’m struck by how run down all the rental housing looks.

  28. The problem with rent control, at least in the eyes of left-leaning economists, is not just that it distorts the market for housing. The main issue is that its benefits are assigned based entirely on luck and timing rather than on actual need. It has not been studied specifically in SF but in other cities with rent stabilization (what we would call rent control) the median income of beneficiaries exceeds the median income of the city as a whole. The largest beneficiaries of rent control will always be the middle and upper class as they are the ones with the most time and resources necessary to find and secure rent controlled units.

    The solution proposed by the authors of the Stanford study, a social insurance program, is worth looking at though it seems that Tim didn’t understand it. Rather than give everyone rent control regardless of need it would be more equitable to give people subsidies according to their need. The subsidies would be funded from some sort of tax on landlords based on the size/value of their holdings. This would be more efficient as it would not waste money on those who are well off enough not to need rent assistance and would have the added benefit of not encouraging consolidation on the part of landlords as it would spread the burden more evenly than rent control.

    One of the most interesting, in a morbid way, long term effects of rent control in SF has been the concentration of wealth to larger landlords. Landlords with larger property portfolios are much more able to absorb the costs of rent control as they rely far less on each individual unit for income. As a result smaller landlords have been gradually pushed out of the market as they are forced to sell their property to larger landlords. This is part of why we now have a rental marketplace that is mostly dominated by a relatively small number of large groups.

  29. We have another familiar situation with no rent control: commercial spaces can’t be rent controlled in California. In effect, they only stay rent-controlled for the duration of the lease. And commercial rents do rise in California. That may be responsible more than any other factor for long-term businesses closing down in San Francisco and other gentrifying places.

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