When more people want something than there are available, prices increase - until the price increases enough to ration the available supply to the highest bidders.
For those calling for rent control, they are advocating a different method of rationing the available apartments... leaving multiple interested people for one apartment. Why is the non-price way of rationing better than rationing based on who is willing to pay the most? Some people still won't be able to live where they want to live, it just won't be because they can't afford to.
> Why is the non-price way of rationing better than rationing based on who is willing to pay the most?
It's not. But rationing by price has little advantage if you're not going to allow anybody to build more housing: the basic benefit of the price mechanism is that higher prices recruit more resources to employ towards increasing supply. But if you're going to fix supply though a NIMBY-dominated political process, then every dollar of increased rent is going to end up in the pockets of property-owners, not budging the supply of housing, to the unallayed detriment of renters.
This is a both a partial explanation of why NIMBY-ism is so pernicious and of why capital (foreign or otherwise) is so strongly attracted to NIMBY-dominated, supply-constrained markets like the Bay Area.
The quality of commentary on these issues in the press and in the political process is abhorrent. If anyone with a basic understanding of economics is interested in learning more about the economics of rationing, I recommend starting with Economic Analysis of Property Rights, by Yoram Barzel [0,1].
I'd argue that higher prices also mean the resources are consumed by those with the greatest need (as demonstrated by willingness to pay).
Take another example. After Katrina hit, some stores got investigated for "gouging" on water. Obviously, water is a necessity of life, post-Katrina municipal water supplies were unavailable in many areas.
Now, imagine that it was selling for $1/gallon two weeks prior to Katrina. What's the "best" price for the water to sell one day after Katrina? $1/gallon will likely yield rampant hoarding and scarcity of water for someone who might need it. Allowing the price to float will ensure that someone who really needs water will be able to buy it, though the price might be $5/gallon. I'd rather have thirsty people paying $5/gallon and drinking clean water than having a few AHs having hundreds of gallons of surplus water and no water available for sale. This is how I view rent control.
This would also serve as a strong pull signal to get more water into the area, but I suspect that was already underway.
Allowing the price to float will ensure that someone who really needs water will be able to buy it
That isn't going to be true in the extreme. Three people need water. Two are wealthy, one is not. The two wealthy buyers bid up the price to the point the non-wealthy buyer is priced out o the market. Without some for of rationing (or a change in supply), the non-wealthy buyer dies from dehydration.
Yes, you're right, more or less. (And this is the reason I edited my post to claim "little advantage" rather than "no advantage" from increased prices, possibly after you replied to it.)
But analyzing the effect you've described is much more difficult than analyzing the effect of price increases in a market in which supply is not artificially constrained: some people have more or less money than others, and are more or less ready to spend it on this or that, for various reasons. And it is not nearly as straightforward to say that there will be a social benefit (in whatever sense you prefer) in letting the highest bidder claim a resource when the proceeds will go fully into someone's pocket rather than when they are likely to lead to higher production of the resource, and thence to an obviously greater social benefit from its higher consumption.
Of course, I expect that you are right in at least the sense you meant: in the presence of a constraint on supply, the price mechanism will still broadly incentivize people who derive a greater benefit from consuming the resource actually to consume it: higher rents will mean more tech types in the Bay Area.
I must point out here that nothing happens in isolation. Higher rents in the Bay Area will incentivize employers to move jobs elsewhere, all else equal. (I have seen several instances of this is my home, Kansas City, which is becoming a popular place to park back-office jobs for San Francisco firms of national scope.) And, yes, providing that incentive to move out is a good thing, relative to the theoretical alternative of paying higher rents without that option, and consequently transferring resources to property-owners with no net social benefit. But it's still a poor alternative to letting higher prices do what they want to do in the absence of artificial constraints: increase supply of a resource whose higher consumption benefits society on net.
Still, if you want to limit development and push people to move to Kansas City because San Francisco's rents are too damn high, please, do. It's a much more appealing place than costal ignorance would lead you to believe, and we will welcome the newcomers.
Thanks for the book recommendations. Obviously, I haven't read them yet, but I think my next point will still be valid.
In situations of natural fixed supply, think real estate in times square, water after Katrina, rare collectors items - the price is still extremely important for rationing. And the price does lead to the highest value activities performed.
For example, in times square, you see mass market wide popularity businesses - you don't see niche computer parts stores (which you might if rent was capped at $500 per store per month). Nothing to do with NIMBY.
In this case, if rent control was established, people that would be willing to commute from further away might end up living closer, while those who want to pay more to commute less may be forced to live further away. Exactly the sub-optimal economic situation.
A market-based approach would make a lot of sense in a world that doesn't have Prop 13. Then property owners would be forced to balance their objections to new development with the fact that the lack of new development will push up property values and increase property taxes. But with a cap on property taxes, existing property owners are free to block, stall and otherwise prevent new development without any financial disincentive.
As you've pointed out, supply and demand explains all. But supply has been limited by forces that need to be fixed. We either need some financial pressure that convinces property owners that new development is in their best interests or we need to stop giving existing property owners input on new development. Because demand is increasing, whether we like it or not. And in the face of that, there are only two options, build more or let rents spike. When even Google employees are feeling the pain of high rents, it's obvious we're not striking the right balance between those two options.
It's annoying to see the focus on stuff like rent control when the underlying cause is so clear. Prop 13 is at the core of these problems and needs to be addressed directly rather than tangential half measures like rent control.
There's also the argument that economic diversity is good for everyone. Non-market solutions to maintaining space for people of different income levels in the area might have positive externalities.
Just as a fun thought experiment, let's say we price all the service workers at current income levels out of the market so they all move away. At some point, people will be willing to pay more for service work due to a strong demand for limited services.
It almost seems pernicious to have low income housing since it allows employers to get away with lower wages to cover an artificially low cost of housing, at the same time, service workers retain a poor quality of life because outside housing everything else is expensive.
Your first point is definitely correct, one example (a mix of factors) would be the $17+ wages for Walmart and fast food workers in North Dakota energy boom towns(1).
Your second point is interesting, but I suspect only partially correct. I imagine subsidizing service workers to live in low income housing does allow businesses to pay service workers less in those areas. However, if those low income housing units were not the service workers best option - they wouldn't live there. So I would imagine overall that it does help the service workers, not hurt them.
Because you've turned a "neighborhood" into an "investment property." Neighborhoods develop culture. Investment properties develop nothing other than capital that leaves the neighborhood.
What happens when the Silicon Valley boom is over? What happen to those neighborhoods? I guess that's not your problem.
This is utter nonsense. There's no evidence that neighborhoods made up of renters are any more or less "cultural" than neighborhoods made up of, well, you haven't really articulated an alternative have you? Do you expect everyone to purchase a home, and not have renting at all?
Generally areas regarded as having a vibrant culture also correlate with high percentages of renters -- because they're in cities. Areas with high percentages of homeowners and low percentages of renters tend to be suburbs.
In any event we can answer your question of what happens when the boom is over because we've already lived through two tech booms in this area. The answer is: Prices fall and folks with investment properties will lose some money but not much else changes. Homeowners get hurt a lot more than renters when bubbles pop.
> What happens when the Silicon Valley boom is over? What happen to those neighborhoods?
When the supply of SF housing overtook demand in the late 1960s, and this oversupply led to incredibly-affordable rooms, it brought about the Summer of Love.
I grew up in California, went to Berkeley, and worked in there for years, but I couldn't stand the backwardness of California's homeowner cabal anymore and moved out of state. In my new state, there's no rent control, no NIMBYism, and homes and neighborhoods are beautiful and affordable. Sure, there's more room to grow here, fewer people, and a smaller economy, so it's not a completely fair comparison, but take a moment and look on a satellite map at how much land in the bay area is completely undeveloped, most of it on hillsides. I'll move back if California ever embraces progress and growth (not going to happen in my lifetime).
Regarding remote work, I've been working remotely here at satellite offices of bay area companies for 7 years at 3 different companies and it has sucked. You're treated like a second class citizen by employees at the mother ship, and the conference call technology (webex) is abominable -- half duplex, compression artifacts, and good luck understanding what an engineer with a heavy asian accent is saying while he's 12 feet from the microphone across all of the garbage technology that delivers his voice to your ear. The only way it would work is if everyone would wear a headset, and whether it's conscious or not, employees at the mother ship would much rather keep you, the remote office guy, in the twilight and not jeopardize their jobs. Never again for me if I can help it.
And FWIW, if you are in favor of price controls (minimum wage, rent control) the Commanding Heights documentary is an excellent retort (starting at minute 50): https://youtu.be/w9ms2WOZi74?t=50m6s
> Sure, there's more room to grow here, fewer people, and a smaller economy, so it's not a completely fair comparison, but take a moment and look on a satellite map at how much land in the bay area is completely undeveloped, most of it on hillsides.
To say it's not a fair comparison is putting it rather lightly. Those are the three biggest factors that influence pricing.
Your entire premise is that Bay Area rents are high because of an excess of "completely undeveloped land". That defies credulity and is far from evident from satellite imagery.
But take a moment and look on a satellite map at how much land in the bay area is completely undeveloped, most of it on hillsides.
Because... unlike certain other parts in the U.S. (or California, even) people in the Bay Area recognize the value of maintaining at least a few tiny shards of open, undeveloped space -- and have, over decades and generations, fought hard to preserve these spaces?
It's not NIMBYism -- it's common sense, and basic ecological awareness.
In DC its a lot better. Lots of people work remotely, or handle contract jobs, so there isn't a whole lot of politicking because the roles are pretty much set---hardly anyone gets fired unless its a cost-cutting measure from the owning conglomerate which politics doesn't help with, and contractors know they don't offer any loyalty to their companies.
Every time one of these articles appears it seems like the comments always mention prop 13, rent control, NIMBY and environmental regulations, and a difficult permitting process as the underlying reasons for the high rents in sf. It seems pretty obvious that if the market had its way the whole area would look like Tokyo.
Why can't we move beyond this and say "OK keep your 100 year old row houses and vineyards", lets continue to decentralize tech and create a world where moving to sf is not required to work in a startup?
I work remotely in SF. I live here because I like not owning a car, walking and biking most places, and non-tech things to do. I'm just lucky I can afford it. The solution is to build more good US cities that aren't car centric. I'm not aware of any. Build a from scratch city with a target of at least 250k residents on the California coast and I'll move.
I don't know how many people think similarly, but there's still a lot of non-tech people in SF.
The best way i've seen this framed is: in all of the US, there are only about 2,000 blocks of housing with sufficient density & walkable services to support car free living. This is some of the most sought after and expensive real estate in the country, but zoning codes won't allow more of it to be built.
Example zoning restrictions: mandatory building setbacks, mandatory parking requirements, mandatory building separations, maximum units per building, 1 or 2 story maximum heights, high minimum lot sizes.
Note: a significant % of those 2,000 blocks are in San Francisco.
Poorly recalling from my memory. Given that a "block" is a variable metric, the actual number is less important than the concept that it is a static. There are only ~5 cities in the US with > 1,000 of these blocks: NYC, Boston, DC, SF, Chicago (Philadelphia?, Baltimore?)* AND with a transportation network that makes car-free living possible. Developers would build more such areas if zoning allowed.
* Forgive my ignorance for being from the West Coast. Even in SF its difficult to live car free if you don't live on BART or Muni Metro.
As somebody who lives in Portland it still seems very much "car centric". There are some people who are able to get along without a car. There are others who can commute via bus or bike.
But it's really difficult to get around without a car. What sucks is that the city is making it more difficult to get around by limiting the number of cars on streets (Glisan, Division, heading into town on Burnside, soon Foster) without providing much in the way of alternatives. Buses aren't running more often and they don't have protected right-of-ways that would let get around traffic jams.
I'll agree that what they're doing on NE Broadway, protecting bicyclists, looks good. But they're doing it that very rarely.
Most of these lose on weather, culture or proximity to the ocean for me.
All of SF isn't easy car free, but I live downtown. SF could have significantly better mass transit. In order to get completely car free in my lifetime would probably require opt in to a new city due to people who have jobs related to things that should be removed.
NYC is too dense and the main prominent industries appear to be wall Street, advertising, and fashion which are not things I like. Car traffic is also pretty horrible.
You can easily extend that across the river to Arlington, VA. There's extensive public transportation. Cycling is taken seriously. Maybe the City of Alexandria, too; but, not the "Alexandria" part of Fairfax.
>> The solution is to build more good US cities that aren't car centric. I'm not aware of any.
NYC is definitely not car-centric or even car-friendly. Indeed, the non-car-centric zone there is considerably larger than SF's. Other cities like Washington DC and Boston are not too different so long as you don't venture too far from downtown.
The weather and people there are crap if you're used to the west coast. Winters suck and the rudeness of NYC people is insufferable in the long run for me.
Seattle? Downtown maybe. The east side (across Lake Washington) is very suburban, and not particularly suited to car-free living. I lived there car-less for a couple of summers and got into alarmingly good shape biking up and down the eastside hills.
What's wrong with making San Francisco more like Tokyo? Do you know how much economic productivity is lost because zoning regulations prevent further densification that is otherwise desired?
I'm not against making it look like Tokyo, I agree that it would be more productive if it were more dense. I don't live there so it isn't my problem.
I do think that it limits the amount of economic growth and could hurt the national economy. I think it could also make it easier for other countries to leap frog us in terms of software but that is very speculative.
There's a lot of room between SF now and Tokyo. Even moderate increases in density and building housing stock. It's not a binary choice of the status quo or a dystopian nightmare.
Is Tokyo a dystopian nightmare? The density offers a high quality of living while controlling expenses for all but housing (which is understandably expensive). The mass transit there is world class, and so you don't need to own a car with all of its attendant costs. You can buy cheap groceries to cook at home. The standard of living and options for things to do is better than living in the country once you account for the higher average salaries in Tokyo.
I live in Manhattan and it's the same here. Rent is expensive (but not horribly so if you have roommates or an SO). Everything else is reasonable.
... And the inefficiency of delivering services to a large, low-density population; and the societal burdens of municipalities designed around automobiles as the primary mode of transportation. Air quality, sedentary lifestyles, loss of wildlands, and so on.
If street construction and maintenance were paid for solely by usage...
Wouldn't that be nice? If SF is unreasonable, we'll just take our ball and play elsewhere. :)
But how to make it happen?
There is an awful lot of resistance to hiring remote staff. I checked the latest "Who's Hiring?" post here at HN and of the top 10 postings, only 2 were open to hiring remotely.
yea I agree that remote is a big part of the solution. Despite all the talk about how easy it is to "work from anywhere" remote still has a lot of pain points. Where I work we can do it one day a week but it sucks when people are dialing in to a meeting. Remote Desktop and ssh aren't really that great. I'm thinking we need fiber to the curb and VR fueled telepresence that is able to convey nuance and emotion when interacting with co-workers.
Yeah, it basically requires a lot of structuring the way people work together to make it so that remote workers are first class citizens in meetings etc. Otherwise, remote workers miss way too much of the context that comes from informal chatter at the office and end up being isolated from the main flow of things.
We can barely even teleconference people into formal meetings in a way that works consistently and isn't a huge pain, I think we're a very long way from remote work being a solution for a large percentage of workers.
There's something to be said for being in close proximity with a lot of other people working in the same profession. I came from working in tech for 8 years before moving to Silicon Valley and it's a world of difference.
In other words, Country Music will always exist outside of Nashville, but if you make Country music, Nashville is the place to be.
People don't move to Nashville or Hollywood to be near colleagues; they move there to "make it big". I'm sure the same is true of most who ingress into SV. At least programmers can move to pretty much any big city and find a job paying upper middle-class wages (and can do pretty good living anywhere with decent Internet working remotely)
The city wouldn't have to look like Tokyo; we could end the housing crisis by increasing the supply by 30%, and we could do that by replacing just 6% of the city's single-family houses with six-story apartment buildings. The other 94% could be left alone, as could every other parcel in the city, and nothing over six stories would be necessary.
Because despite all the talk about "disruption" tech is still surprisingly conservative. Things are changing though. I've seen a huge increase in the number of companies willing to consider remote work in the last couple of years.
Has any place every imposed rent controls, but later removed them?
Some of those quoted in the article speak of rent control as a temporary measure, to buy time while other more permanent solutions to be brought to bear. Does that ever happen?
San Francisco did this in a way, rent control exists, but only for buildings constructed before 1970? (Not sure of the date) This effectively meant it was "temporary" because any new buildings wouldn't be covered, which will eventually mean that as buildings are replaced or built new there will be less and less rent control available in the City.
1979, and that rule comes from a state law called Costa-Hawkins which prohibits any California municipality from requiring rent control on any new unit constructed after then. The intention was to spur construction by offering a carrot to anyone who built a new (and presumably bigger) apartment building.
The unforeseen consequence is that now city planning commissions in places like SF simply don't issue demolition permits anymore for pre-1979 apartment buildings.
> The unforeseen consequence is that now city planning commissions in places like SF simply don't issue demolition permits anymore for pre-1979 apartment buildings.
Is that even legal? It's one thing to use zoning for city planning as a general guideline, or to require permits to ensure work is done safely; but people ultimately have rights to their property.
Has it been taken to court before? It's borderline a violation of the Takings Clause:
"private property [shall not] be taken for public use, without just compensation."
State can take from citizen with just compensation via eminent domain, so people really do not have rights to real estate. They have rights to market value of property.
"The unforeseen consequence is that now city planning commissions in places like SF simply don't issue demolition permits anymore for pre-1979 apartment buildings."
That isn't true. There's a well-defined process for it -- demolition is one of the few just causes for eviction here, and the planning department only has to take rent control into consideration as one factor when issuing new permits -- and it happens regularly in SF:
Demolition permits are also so routinely issued for rent-controlled buildings in NYC that landlords are using it as a tactic to push out rent-controlled tenants:
Gabriel Ng & Architechs Inc. wants to build two new structures on the large corner lot at 26th and Clement. Each building would have three units, with three-bedrooms each. The project sponsor argued that there’s a need for family housing in the city, and that six new units, which most likely would be sold as condos, would help the crisis.
But to make room for one of the buildings, the project calls for the demolition of an existing apartment building with two smaller rent-controlled units. And that’s something the city isn’t supposed to allow. In fact, when the mayor with great fanfare issued his housing directive in 2013, he made it clear that demolishing existing rental housing should only be allowed in unusual circumstances.
[T]he 4-3 vote in favor was directly in defiance of city policy and the mayor’s directive regarding the preservation of existing rent-controlled housing.
In the past year, the Planning Department has repeatedly refused to approve projects that involve a loss of rental units [...] The mayor has directed the Department to adopt policies which encourage the preservation of existing housing stock [as] the city’s highest priority.
Trinity demolished buildings by civic center, but were required to move the people there into the new buildings at the same rent controlled rates. So it isn't true in a strict sense, but effectively it's true.
There have, however, been a number of major fires in older apartment buildings in the past couple of years; at least two resulted in the whole building being condemned. I'm sure it's just coincidence.
A big example is the almost-universal rent control in the USA during WWII to help keep wages down and production up. This was an emergency measure designed to be temporary (although there was never a guarantee it would be).
Which is famously why the U.S. ended up with health insurance tied to one's employer-- a workaround to the limits of price controls (employers could offer this additional perk, but not additional money).
Yet another unintended consequence that continues to impress generations later. (I wonder why they didn't simply let wages rise.)
If by "improve" you mean "allow for skyrocketing rents and push the poor and most of the middle class further away from the city," yes, it did. I'm currently moving from Somerville, which adjoins Cambridge and is often called "where everybody moved when the rich people pushed them out of Cambridge" to Malden (some distance away by bus or car) because the rental situation has continued to deteriorate for everyone except the landlords.
It also kicked off (pedantically read as "shortly preceded") a building boom in East Cambridge, which was a depressing and sometimes dangerous place when I graduated (1 year before rent control ended) and is now largely transformed, with lots more commercial and significant residential construction/renovation.
There hasn't been much high-density apartment building construction (North Point and one in Central Sq are the only two I can think of), so naturally a place where demand increases faster than supply sees rising prices in a free market.
Well admittedly, the Boston area also has some of the country's most baroque zoning, permitting, and general NIMBYism laws -- just like the Bay Area. So it's horrendously hard to just build more housing, even though basically none of Cambridge outside Kendall Square's industrial area has elevations higher than three or four stories.
This argument always comes up, and it is a bad one. No, no one has a right to live in any particular place. It's the same thing as the people who fall back on "but but First Amendment" when somebody's saying "you're an asshole." Nobody's saying it isn't legal, but you can still be an asshole while acting legally.
If the best defense I could muster for something is that it is not literally illegal, I would be looking hard in the mirror. But that's just me.
I don't understand your response. You're talking about the 2nd Amendment and things not being literally illegal, neither of which address what I said. I'm not talking about the legality/illegality of squatting (which is the only thing that seems relevant to housing).
I see a lot of attitudes in regards to housing that I can only describe as entitled, which is unfortunate because it's a very negative word. But nothing else immediately comes to mind. Do people have a right to live in any given area, absent their ability to pay for it? I don't think so. There's no amendment for it. There's no laws for it. The closest applicable laws are those providing for rent control, but all that does is decrease the cost of living somewhere (at the expense of supply and housing quality) -- it still doesn't guarantee you a right to live there absent the ability to pay the lower rate.
There are lots of places I would love to live in but cannot because I either cannot afford it or am not willing to spend a very large percentage of my salary on it. It's a purely economic decision. How is there a right to live somewhere that is independent of your ability to afford it? Are you making an argument that if you are born somewhere, you have a lifelong right to live there at the prevailing rent at the time of your birth (adjusted only for inflation), and that this right should transfer to your children? That's really what it comes down to when people complain about no longer being able to afford living somewhere that they previously were able to live in. I don't think there is such a right, and it's certainly not reflected in any laws.
NYC has been gradually deregulating rent controlled and rent stabilized apartments as previous tenants move out or pass away. (The original intention was partly to make sure people on fixed incomes - especially the elderly - wouldn't lose their long time homes). I won't say that deregulation has done anything to improve the housing market tho. Supply and demand for land, the cost of construction, and the city's enormous population growth have far bigger impacts on the availability of housing, affordable or otherwise.
I didn't pay close to a million dollars for a house in San Mateo so to live next to people who need rent control. The peninsula is not Tuscany or London. Any significant local character was ripped up fifty years ago with the last of the orchards.
There's one city on the peninsula with rent control, and it's East Palo Alto.
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I have to wonder if the prices will be stagnant or falling by the time they put a ceiling in place. I don't see tech industry investment, or Chinese property purchases as likely to continue at the levels we've seen recently.
Unless you're right on top of a fault (like most East Bay hospitals are), proximity to the fault is less important than the rock and soils beneath you.
When more people want something than there are available, prices increase - until the price increases enough to ration the available supply to the highest bidders.
For those calling for rent control, they are advocating a different method of rationing the available apartments... leaving multiple interested people for one apartment. Why is the non-price way of rationing better than rationing based on who is willing to pay the most? Some people still won't be able to live where they want to live, it just won't be because they can't afford to.