The opponents of Prop. 10, which would allow cities to expand rent control, have another academic study they’re touting to make the strange case that rent control is bad for tenants (and in this case, for small businesses).
This one’s out of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, and is written by Kenneth Rosen, an emeritus professor who runs a real-estate consulting firm.
You can read his argument here. Rosen got his PhD from MIT, but his argument is pretty simplistic. He says that that value of rental property depends on the expected return on investment, and rent control lowers the expected return, so it lowers the value of property, which means that property tax revenues could fall. And since landlords have less money to spend, that will hurt local economies and small business.
Overall, if potential rent growth is reduced, a buyer today would receive less income during the years that they own and operate the property, and less money when they decide to sell the asset in the future … If over an extended period of time expenses grow faster than rental income, the value of the income and value of the property will ultimately deteriorate to zero. At some point, it will cost more money to operate the property than it generates in rental income. The real, inflation-adjusted value of a rental property only holds up if income (not just rents) grows at least on pace with inflation. Overall, small differences in rent growth accumulate over time and lead to large differences in the value of the property, and price that a buyer is willing to pay today.
I have no PhD, and I never went to MIT, but it’s not too hard to see the fundamental fallacy in his argument. In fact, Rosen’s argument are so dumb it would be funny if the future of tenants in the state weren’t at risk.
When a small landlord buys rental property in California, that person has to project the existing rents, the existing taxes, the future maintenance costs, and any other possible expenses, and the existing rent has to cover all of that plus a reasonable return. If it doesn’t, the small landlord won’t get a mortgage; the banks check all of this out.
Property taxes don’t go up under Prop. 13. Mortgages are typically fixed monthly payments. Depreciation and maintenance are easy to project and are part of any investment decision. (Nobody with any sense buys a building that they haven’t paid a contractor to inspect; major repairs are known in advance and included in the calculations. That’s just how it works.)
The only way rental property is purchased at a price that can’t be justified by existing rents is if big speculators buy buildings assuming they can get rid of rent-controlled tenants and jack up the rents.
But they don’t play into Rosen’s study.
And he leaves out a huge factor. Landlords aren’t the only ones who spend money in a local community and support local small business. And the idea that cities will lose money because property values fall under Prop. 10 is utterly disconnected from reality.
So I sent Professor Rosen a note:
I have read with interest your papers on Costa-Hawkins. I have a question:
In your analysis, you argue that rent control hurts property values (and thus could lower tax revenues) and hurts small businesses.
However, 100 percent of the rent-controlled stock in San Francisco, and I believe in CA, was built pre-1995, most of it pre-1979. Those buildings are assessed at, and pay property taxes at, a level far below their true market value thanks to Prop. 13. It seems very unlikely that any of the owners of these buildings would be able to successfully appeal for lower property taxes on the basis of stricter rent control laws, since their taxes are already so far below market.
It’s possible that future projected taxes on new buildings – in the unlikely event that any city imposed rent controls on new buildings – could be lower, but the current market is so high right now that again, with all of the factors that play into the value of a building, I have trouble understanding how rent control could reduce property taxes, certainly not in a city like SF.
I’m also curious about your argument that rent control will hurt small business. I think it’s pretty clear that rent control is, in essence, a transfer of income (and to some extent, wealth) from the landlord class to the tenant class. It’s also clear that while some tenants are richer and make more money than some landlords, overall, the landlord class is wealthier than the tenant class. This is particularly true with large property groups, which have been increasingly buying up rental property in the Bay Area.
It seems to me that basic economic theory has always shown that putting more money in the hands of less-wealthy people stimulates the economy, esp. small local businesses, since those people are more likely to spend their money (instead of saving/investing). So rent control should be a good thing for small local businesses, since it will put more money in the hands of their customers.
Also: I was here from 1981-1994, when Berkeley had vacancy control. None of the horrible things you talk about (lack of maintenance etc.) actually happened. But one could certainly argue that small businesses in Berkeley did quite well; in fact, one could argue that Berkeley in that era lacked the overall income to support things like the birth of the Gourmet Ghetto – but the increase in disposable income that tenants had helped that happen. (I have no hard data on this, but I think it’s a reasonable argument.)
I’m wondering why you didn’t discuss the potential benefit to small business of rent control.
Also, I’m curious if this was a UCB study or something paid for by an outside group.
The distinguished professor has not responded