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out of communities whose rents and home prices they can no
longer afford? They move into communities in the surrounding
areas”nearby if they can afford it or farther away if they cannot.
If their jobs are still in a high-rent city like San Francisco, then
they commute, often from considerable distances. In any event, as
the exodus from high-rent communities continues, housing prices
are then forced up in the communities to which the displaced
population moves.
At one time, high housing prices in San Francisco drove many
people to relocate across the Bay in Oakland or other parts of
Alameda County. But, after a while, this increased demand drove
housing prices up in Alameda County to levels that many people
there could not afford, and so they moved farther inland to find
housing within the range of their incomes. For example, a story in
the San Francisco Chronicle in 2003 began:

Each morning at 4:30 am, Frank Montgomery rolls down the dri-
veway of his brand new home to begin the 70-minute trek to work
at a Sunol water filtration plant in Alameda County.

Far from being atypical, this commuter represented a growing
trend. Data from the U.S. Bureau of the Census showed a 49 per-
cent increase between the 1990 and 2000 censuses, in the number
110 APPLIED ECONOMICS


of people commuting from seven outlying counties into the nine
counties in and around San Francisco. "Many of them endure
hours-long drives on congested highways," according to the San
Francisco Chronicle. Two of the most distant counties in this
group”Santa Cruz County and San Joaquin County”sent more
than 26,000 and more than 34,000 people, respectively, on the
long commute into the San Francisco Bay area.
Mr. Montgomery was all too typical. He was, incidentally, nev-
ertheless paying $267,000 for the home from which he spent more
than an hour each way commuting to work in Alameda County.
But that was still much less than what he would have had to pay to
live in Alameda County or the other counties bordering San Fran-
cisco. While the average price of homes in San Francisco was more
than half a million dollars in 2003, it was just over $400,000 in
Contra Costa Country, on the other side of Alameda Country, and
was below $250,000 in still more distant counties in California's
interior valleys. Sales agents out in the valleys report that most of
those who are looking for homes in new subdivisions there "are
Bay Area residents thrilled by the idea of paying less than
$300,000 for a 2,000-square-foot house."
The prices are lower out in California's valleys, not only because
they are farther away from San Francisco and the ocean, but also
because the restrictions on building are not as severe as they are on
the San Francisco peninsula, where anti-growth forces have more
political influence. Moreover, the time required to get permits to
build is usually less in these more conservative areas, where there
are not as many anti-growth activist groups to make objections and
not as many officials who have to give their objections great
weight, in view of their lesser political strength. The old adage
"time is money" applies especially in real estate, where millions of
dollars are invested in home building that can be brought to a halt
while even unfounded complaints about "environmental impact"
111
The Economics of Housing


are investigated. Meanwhile, builders who borrowed these mil-
lions have to continue paying interest on all this money, and even-
tually those costs are recouped in higher apartment rents and
higher home prices.
Even in the central valley, however, a rapid growth in popula-
tion, due to people displaced from in and around San Francisco,
has produced a rapid growth in housing prices, though not to the
levels found in coastal California. In just five years, the average
price of a house out in Merced County”more than a hundred
miles from San Francisco”rose from $96,000 to $166,000. One
sign of the economic reasons for population displacement is that,
while the black populations of San Francisco and San Mateo
County have declined significantly in just one decade”as has
the black population of Los Angeles, Marin County, Monterey,
and other coastal communities”out in the valleys it is the white
population which is expected to be overtaken soon by the various
minorities moving in, and to become a minority themselves.


Rent Control

One solution to the problem of "affordable housing" that many
find attractive is rent control. It shares both economic and political
characteristics with other forms of price control. Its political ad-
vantage is that its goal is attractive, so that it gains the political
support of those who think in terms of desirable goals, rather than
in terms of the incentives and constraints created”and the conse-
quences of such incentives and constraints. Those who do not
think beyond stage one find rent control especially attractive be-
cause the good effects come immediately, while the bad effects
come later”and persist for decades.
Among the consequences of price controls in general have been
(1) a shortage, as the quantity demanded increases and the quan-
112 APPLIED ECONOMICS


tity supplied decreases, both in response to artificially lower prices,
(2) a decline in quality, as the shortage makes it unnecessary for
the sellers to maintain high quality in order to sell, (3) a black mar-
ket, when the difference between the legal price and the price peo-
ple are willing to pay becomes large enough to compensate for the
risks of breaking the law. These same consequences have recurred
again and again, for all sorts of different goods and services whose
prices have been held down by law, in countries around the world,
over a period of centuries, among people of every race, and under
governments ranging from monarchy to democracy to totalitarian
dictatorship. It should hardly be surprising that similar things hap-
pen in the housing market when there is rent control.
Perhaps the most basic principle in economics is that people
tend to buy more at a lower price than at a higher price. Rent con-
trol enables people to demand more housing than they would
otherwise. In San Francisco, a study in 2001 showed that 49 per-
cent of that city's rent-controlled apartments were occupied by
just one person each. Similar patterns have been found in New
York City and in Sweden. One reason, then, for a housing short-
age under rent control laws is that more people occupy more
housing than they would in a competitive market, where they
would have to bid against others whose needs for housing might
be more urgent than theirs or who would have two incomes from
which to bid for housing.
The other reason for a housing shortage is that less housing gets
supplied at a lower price than at a higher price. Builders tend to re-
duce the amount of housing they build when their ability to re-
cover their costs from the rents they charge is reduced. Where rent
control laws are severe, there may be no new housing built at all,
except for government-subsidized housing where the taxpayers
make up the difference between the cost of supplying housing and
the rents that can be charged under rent control. Therefore one of
the consequences of rent control over time is an increase in the av-
The Economics of Housing 113

erage age of housing, as the building of new housing declines or
stops completely.
A study in San Francisco in 2001 found that more than three-
quarters of its rent-controlled housing was more than half a cen-
tury old and 44 percent of it was more than 70 years old. In
Melbourne, Australia, not a single new building was built in the
first nine years after World War II because rent control laws made
it unprofitable to build any. In Massachusetts, a state law banning
local rent control laws led to the building of residential housing in
some communities for the first time in a quarter of a century.
Usually, rent control laws do not apply to office buildings, so
there may surplus office space, with high vacancy rates, in the
same city where there is a housing shortage with virtually no va-
cancies available in rent-controlled apartment buildings. In some
places, rent control laws do not apply to luxury housing, so there is
a shift of resources from the building of ordinary housing for ordi-
nary people to the building of luxury housing that only the very
affluent or the wealthy can afford. A study of rent control in vari-
ous countries in Europe concluded: "New investment in unsubsi-
dized rented housing is essentially nonexistent in all the European
countries surveyed, except for luxury housing." Such shifts to lux-
ury housing help explain one of the supreme paradoxes of rent
control”that cities with rent control laws typically have higher
rents than cities without such laws. San Francisco, after decades of
severe rent control laws, has had the highest apartment rents in
the nation, with the rent on two-bedroom apartments averaging
more than $2,000 a month.
Not only does rent control reduce incentives to build new hous-
ing, it reduces incentives to maintain existing housing. Painting,
repairs and other maintenance activities all cost money. In a com-
petitive market, landlords have no choice but to spend that money,
in order to attract tenants and keep their apartments filled. Under
rent control, however, there are more applicants than apartments,
114 APPLIED ECONOMICS


so there is less need to maintain the appearances of the premises or
the functioning of the equipment that keeps the heating system
and other systems working. In short, existing housing tends to de-
teriorate faster, as a result of reduced maintenance under rent con-
trol, and replacements are built more slowly, if at all. Declining
numbers of rental units available after rent control laws were
passed have been observed in various American cities, as well as in
Canada and overseas.
Where rooms, apartments or houses are rented where the land-
lord lives, such housing units are particularly likely to be with-
drawn from the market when the rent is kept too low to
compensate for the inconvenience of having someone else living in
the same apartment, or upstairs in a duplex, or in a backyard bun-
galow. Within three years after rent control was imposed in
Toronto in 1976, 23 percent of all rental units in owner-occupied
dwellings were withdrawn from the housing market. When rent
control in London was extended in 1975 to cover furnished rental
units, the number of ads for such units in the London Evening
Standard fell 75 percent below the number of ads the previous year.
All these experiences from various countries tell the same story:
People supply less at a lower price, while other people demand
more at those lower prices, thereby creating a shortage.
Shortages tend to spawn black markets, where illegal payments
are made, in order to get more than is available through legal chan-
nels. Bribes to landlords or building superintendents to be put at
the top of waiting lists have been one common form of black mar-
ket activity under rent control. Other forms of illegal activity in-
clude landlords' abandonment of buildings after the services they
were legally required to provide cost more than the rent they were
legally able to collect. The New York City government has found
itself in possession of literally thousands of abandoned buildings,
as landlords fled underground to escape ruinous losses. Many of
The Economics of Housing 115

these buildings have been boarded up, even though they are per-
fectly capable of providing much-needed housing, if maintained.
The number of housing units in abandoned buildings in New
York City is far more than enough to house all the homeless peo-
ple sleeping on the city's streets.
Although rent control is often thought of as a way to protect the
poor from unaffordable housing, only the poor who initially occu-
pied the rent-controlled housing benefit. Those who are on the in-
side looking out”whether rich or poor”benefit when rent
control begins. Later, others on the outside looking in benefit only
to the extent that they are relatives or friends of the initial benefi-
ciaries and have the rent-controlled housing passed on to them
when the original occupiers leave or die. Some outsiders bribe the
original occupiers to get the rent-controlled apartment. In any
event, the actual connection between income and the benefits of
rent control are tenuous. More than one-fourth of the households
in rent-controlled apartments in San Francisco in 2001 had in-
comes of $100,000 or more.1
As with other forms of price control, rent control does not re-
duce costs. Many rent control advocates are in fact often also ad-
vocates of other policies which increase the cost of building and
maintaining housing. These include policies mandating various
amenities that must accompany housing developments, including
bike paths, open space or recreational areas to be used by city resi-
dents in general, rather than just by the tenants of the develop-
ment itself. Providing such amenities can be the price that
developers must pay in order to get building permits, but ulti-


1
Incidentally, this was the first empirical study of rent control commissioned by the city of San
Francisco. Since rent control began there in 1979, this means that for more than two decades these
laws were enforced and extended with no serious attempt to gauge their actual economic and social
consequences, as distinguished from their political popularity.
116 APPLIED ECONOMICS


mately it is the tenants in such developments who reimburse the
developers by paying higher rents.
Often the same local authorities who impose rent control also
impose environmental requirements that are not only costly in
themselves, but whose technicalities invite costly lawsuits by those
claiming that the requirements have been violated. Restrictions on
what building materials will be permitted, how much construction
workers must be paid, and other requirements all add to the cost of
housing. If rent control does not permit recovery of these costs,
then the building of housing can be expected to decline or to stop
entirely.


HOUSING "REFORMS"

For more than a century, political and social movements in various
countries have promoted laws and policies which over-ride the de-
cisions made by tenants, landlords, builders, home buyers, and oth-
ers involved in the private marketplace. One of the most common
of these interventions have been "slum-clearance" programs. Other
interventions include laws intended to either promote or prevent
the racial segregation of housing, as well as the direct building of
public housing.


Slum Clearance
Whether called "slum clearance" in the nineteenth century or "ur-
ban renewal" in the twentieth century, government programs to
demolish housing considered unsatisfactory by third party ob-
servers have displaced vast numbers of low-income tenants, often

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