There is a saying in advertising. If you want to know what the rest of the country will be doing tomorrow, watch what's happening in California today. This week we saw that in spades, as California passed two laws with enormous economic implications. One is very good, and the other is very bad. First, the good. SB 206, or the Fair Pay to Play Act, allows NCAA athletes to profit from their own images. The bill is a tremendous step toward economic equity. Unfortunately, though, California legislators immediately balanced out that very good bill with a real stinker, one to control rents.
Housing prices in California continue to rise because a lot of people want to live in California. Especially in those parts of California with great weather and high paying jobs. That's causing pain for those who currently live there and rent. To address the problem, California legislators have capped annual rent hikes at 5 percent. It's a mistake. If they'd left the market alone and let rents rise, builders would have chosen to create more rental housing, rehabbing old buildings and constructing new ones, and rents would have fallen on their own. Instead they've created a mess—they just don't know it yet.
Their motives are laudable. Markets are efficient, but they're not kind. None of us like seeing people suffer. And we all have mental images of fat cat landlords jacking up rents and throwing families out on the street, of poor people making four-hour bus commutes to minimum wage jobs or sleeping in their cars in front of their workplaces, of kids struggling to pay off student debt living six to a room. Those stories are poignant and heart-wrenching, and legislators felt compelled to do something. But of all the things they could have done—rent subsidies, public housing, high-speed public transportation, rent control was pretty much the worst alternative.
Rent control shrinks the rental pool as landlords take rental units off the market and convert them to condos. It discourages landlords from improving or even maintaining the rental properties that remain, since they cannot get a return on the investment. Even as it decreases the supply of rental units, it increases demand. With lower rents, more and more people will want to live in popular places, and there will always be a waiting list for any available property. Rent control encourages corruption, as in side-deals, illegal sub-lets and the like. I knew an executive in New York who had two apartments—the one she lived in and a rent control apartment she'd kept for twenty years as a closet, because it was cheaper than a storage unit.
But the most egregious problem is that rent control is simply unfair. Let's take an example. But instead of picturing some fat-cat Monopoly-monocled landlord, sitting in his high-rise office, feet on his desk, smoking a cigar and counting wads of cash, let's imagine an older person named Ethel, who lives in mid-sized California town and rents the apartment above her garage to a nice young couple, call them Bart and Becky, who make big bucks working for a major tech company. Now let's say that tech company decides to build its new headquarters just down the street from Ethel's house, and suddenly her garage apartment, which she was renting for say $2,500 a month, is now worth $5,000. That's great for Ethel, right? Now she can afford to go visit her grandchildren in Atlanta more often. Nope, it's great for Bart and Becky, because under the new law, Ethel can only raise their rent to $2,625. The apartment is worth $5,000 a month and the Bart and Becky are paying $2,625. In essence they're getting a rent subsidy of $2,375 a month. Now they can afford to vacation in Tahiti. And it's Ethel that's paying for it. Ethel is screwed, and are other nice young couples who want to move to the area. Legislators get incensed because rising rents are in essence windfalls for property owners. But rent control doesn't change the fact it's a windfall. It just changes who gets it.
But Ethel's no dummy. So she does the logical thing. She stops fixing the pipes and painting the hallways. She doesn't bother with an exterminator. She lets the property go in hopes that the couple will get fed up and move. But the young couple can't move, because in a rent-control world, there isn't anywhere else available for rent. Rent control is one of those things that sounds really good, but isn't. It's not good for Ethel or the young couple that wants to move into her apartment. It's not even good for Bart and Becky in the long term.
There are times when it's appropriate to intervene in markets. Rent control isn't one of them.
Sam Hill is a writer and former business executive. He served as Director of International Strategy for Kraft Foods and Vice Chairman and Worldwide Director of Strategy at DMB&B (now Publicis). He was also a partner at management consultant Booz Allen & Hamilton.
The opinions expressed in this piece are the writer's own.
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
