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An article by Mike Parker, “Richmond Mayor Butt is Wrong on Rent Control,” has been getting a lot of play on Internet blogs the last few days. It begins by stating, “Richmond Mayor Tom Butt has set himself up to be the spokesman for landlords in a campaign against rent control in Richmond.”
First of all, I want to be clear that I am not a spokesman for landlords or any other interest group in Richmond. What I am is a spokesman for good government and rational public policy.
Mike Parker is a good writer and a persuasive editorialist, so I believe his points in his article copied below deserve a response.
· Averages. The first thing Mike tried to pick apart was my use of averages in discussing Richmond rents. He made the point that averages are meaningless unless applied on a neighborhood level. He demands data but provides none of his own. In fact, rent control advocates have, themselves, avoided any use of data other than averages that we all agree indicate an increase of rental rates in Richmond. What they rely on most, however, is anecdotal evidence, like “My rent is too damn high!” This is good for inciting political passions but not much use in setting sound public policy.
· Comparisons of Area Averages. Mike also states that rents are rising far faster than inflation, a precursor that he believes demands corrective action. Tying anything to the rate of inflation as a regulatory scheme is risky. We don’t actually know what the rate of inflation is in Richmond. Inflation rates are tracked on a regional basis, not a city or neighborhood basis, so there may be significant differences, city to city and neighborhood to neighborhood. It wasn’t so long ago that Mike and others were decrying the drop in real estate values that left many people in Richmond with underwater mortgages. In the past couple of years; however, those same residences have soared in value by as much as 100%, raising them back above water and making them attractive for investors and new homeowners to purchase and rehabilitate. – not to mention restoring our city’s coffers with real estate taxes to provide essential services. Under Mike’s logic, we should have found a mechanism to keep those home values in the basement, or at least suppress values to match the Consumer Price Index. You can’t have it both ways – economic recovery and more employment while suppressing the real estate rental market.
· False Causation. Mike accuses me of using false causation for holding up rent control in San Francisco, Oakland and Berkeley as examples of failed policies. He writes that “…It was the rising rents in Berkeley, SF, and Oakland that forced them to adopt rent control.” The fact is that these cities adopted rent control decades ago in 1978-79, and rents have gone both up and down in all three cities in the last 35 years, along with economic booms and busts. There is no data to support the conclusion that rent control has increased the availability of affordable housing in these cities. In fact, most reports show the opposite. The one thing it has done successfully is create expensive bureaucracies supported by fees imposed on landlords. In 2012, the Alameda County Grand Jury was critical of the Berkeley Rent Stabilization Board:
A highly critical report by the Alameda County Grand Jury has found that the Berkeley Rent Stabilization Board is a “self-sustaining bureaucracy that operates without effective oversight and accountability.”
This rent board pays Jay Kelekian, its director, $183,000 a year to oversee a $4 million budget and manage just 21 employees – which is more than the city Berkeley pays its director of public works, who oversees 326 employees and has a $90 million annual budget, according to the report.
“The executive director makes an exorbitant salary that comprises nearly 5% of the entire budget of the agency,” according to the report. “The Grand Jury finds this unacceptable and concludes the board needs to reprioritize services and to reduce costs, not only in its administration but in services to the citizens of Berkeley.”
The rent board also pays its board members an “excessive” $500 a month and provides health benefits, according to the report. BRSB also spends $50,000 a year on a Sacramento lobbyist.
· Minimizing Who Would be Helped. Mike agrees with my conclusion that a relatively small number of rentals would be affected by rent control and that that the levels of controlled rent would be reset every time a new tenant moves in. He believes it is better to help a few than to do nothing. Again, with no data to support it, he concludes that “3000 plus units probably house over 10,000 people, who are disproportionately the working poor.” Regardless of what side you take in the rent control debate, there is little evidence to back up Mike’s conclusion, but there is a lot of anecdotal evidence (the kind Mike favors) that people who may not have the greatest need cling to rent controlled apartments as an investment, forcing the truly needy to compete in the rest of the market that rent control has forced to rise to artificial heights. Take a look at San Francisco Rent Control Study.
· Market Economics and Windfall Profits. Ah, the windfall profits argument. A person deserves only the level of profit he has earned. On one level, this is a compelling proposition, but it is not well applied using the same averaging that Mike both embraces and criticizes. Owning real property is not like owing savings bonds, where we know what was paid and what the interest rate is. People overpay and underpay for real estate all the time. Some spend a lot of money keeping their investments up, and others are slumlords who milk them dry. Trying to put everyone in the same box and calculate their fair profit is impossible, but that is what rent control schemes typically try to do. Recognizing the individual differences, complex and expensive regulatory bodies are created to try and sort it out. In the end, it largely fails.
· Graph Data from Haas Institute. Mike wrote, “The reality is that most landlord’s charge the highest possible rent they think they can get anyway, because they can and do charge the maximum they can get people to pay. Rent control at least limits the ability to increase the rent yet more unreasonably, after the renter has moved in.” While this might seem to be reasonable conclusion of how the marketplace works, Mike has no data to back up this conclusion, and there is lots of evidence that his conclusion is inaccurate There are many reasons that many landlords do not push rents as high as they can go, the most common of which is to simply hang onto a good tenant. A bird in the hand is worth more than a bird in the bush. Taking a chance that a rent increase might cause a turnover forces a landlord to incur the costs of advertising for tenants, cleaning painting and carpeting, interviewing tenants, foregoing rent for weeks or months and possibly ending up with a worse tenant. Conversely, there is evidence that landlords under rent control automatically raise the rent the maximum amount every time they can legally do it so that they don’t forego the opportunity to do it later.
· Rent Control and Development. Mike cites the Costa-Hawkins act and development activity in San Francisco, Oakland and Berkeley as proof that rent control does not discourage development of new housing. Those cities are growing their housing stock, and Richmond is not, because rents are much higher in those cities, making them more attractive to developers. Those cities have inclusionary zoning that requires affordable housing to be built when market rate housing is built. Because rents are so low in Richmond, no market rate rental housing has been built here in over a decade. Rent control, even though it does not affect new housing, acts as a deterrent to development simply because it signals an anti-business culture. Ask any housing developer.
· Stable and Diverse Neighborhoods through Rent Control. Mike argues that with rent control “Our community thrives on stability and diversity, not constant churning and homogeneity.” There is no basis for the conclusion that without rent control, a community will become less diverse and more homogenous. Racially and ethnically, Richmond is about as diverse as a city can get, and it got this way without rent control. How rent control will increase or insure diversity is not clear. Cities also need to be economically diverse to be healthy, and rent control discourages that economic diversity. San Francisco with rent control is rapidly losing its diversity.
· Problems with Rent Control. What do I agree with Mike about? I can buy most of his final statement, “Rent control does not come close to solving the whole problem. Other policies are needed. We need to raise the income of poor families through training and jobs programs so that they can afford to live in higher cost housing. Tom is right that we need programs to build more affordable housing. It will likely take a federal program to build enough.” Instead of focusing on regulation to artificially suppress one component of a complex marketplace, I favor polices that lift up people and provide education and other resources that will enable them to better compete in an open market:
o I played a major role in obtaining the $35 million Promise Program funding that is intended to guarantee a college education for every Richmond high school graduate who can afford it and wants to pursue it.
o The Chevron benefits agreement also includes millions of dollars for job training and job development for Richmond residents.
o I have advocated for programs that will increase CalFresh enrollment for the approximately 4,000 low-income Richmond Residents who qualify but are not enrolled. This will provide some $5 million to families for nutritious food.
o I support initiatives for attracting more low-income and market rate housing to Richmond.
In summary, I do not believe rent control is sound public policy.
· Rent control will not stop the manifestation of gentrification.
· Rent control will not eliminate blight. If often creates a disincentive and financial burden for owners to improve and maintain their properties.
· The average rent in the City of Richmond is significantly lower than the surrounding rent controlled cities: Richmond $1492, Berkeley $2897, Oakland $2674 and San Francisco $3458.
· Richmond’s $7M budget deficit exhibits the city’s inability to financially support a rent control ordinance and rent control board, i. e., Berkeley $4M; San Francisco $1.5M.
· Only 20% of the rental housing stock in the city will be covered under a rent control ordinance. A large number of these qualified rental units (duplexes, tri-plexes, four-plexes and small apartment communities) are individually owned and operated by retirees, who depend on their rental income to supplement their pensions and/or social security retirements. Many of these owners are contributing members of this community who have spent their lifetimes working hard and giving back to Richmond.
· Investor interest will be lost, depressing the market value of aging rental housing.
Tom Butt
Mike Parker: RICHMOND MAYOR BUTT IS WRONG ON RENT CONTROL
Posted by Radio Free Richmond 15sc on April 30, 2015
Richmond Mayor Tom Butt has set himself up to be the spokesman for landlords in a campaign against rent control in Richmond. The jump in Richmond rents the past few years, reflecting trends in the Bay Area, has produced new calls for the progressive city council to respond with rent control and “just cause” eviction requirements.
Mayor Butt has written several articles in his widely read E-Forum attempting to debunk rent control. He reprints articles that repeat the doctrinaire free market supply and demand theory as though the housing markets of today were not rigged and distorted by banks and wealthy speculators. Additionally, the Mayor’s arguments are classic examples of misusing numbers and logic.
1. Averages:
Tom’s first written attack came in response to a tenant protest over rents being raised by 20%. Tom’s defense of an increase from $1000 to $1200/month is a classic case of manipulating data to support an argument .Tom argues that the new rate is reasonable because it is still below the average rent in Richmond.
It is a misleading comparison. Average includes the wealthier neighborhoods in Richmond –Pt. Richmond, Hilltop, El Sobrante, North and East. These are mixed in with much lower rents in neighborhoods like the Iron Triangle, resulting in an “average” value that is not relevant for any specific neighborhood.
A more appropriate figure (and one which realtors use) would be to compare rents for “comparable” apartments in the area. And even this measure doesn’t tell us it’s a fair rent but that demographic pressures (i.e. people moving into Richmond) might have forced up all rents.
Tom does not provide us with an appropriate comparison. Interestingly, at the city-hosted meeting on the housing element on April 9, a landlord who has apartments in several areas of Richmond and was at the meeting to argue against rent control, stated that the going rate in the same Iron Triangle area was about $1000/per month
2. Comparisons of Area Averages:
Tom keeps presenting tables to show that current Richmond rental rates are significantly lower than elsewhere in the Bay Area. Somehow he thinks this proves that we don’t need rent control in Richmond. On the contrary, the graphs and tables he uses support moving quickly on rent control. Since rents are higher and climbing quickly in other communities in the area, it means that there will be increasing movement to the Richmond area.
Rents in Richmond are rising far faster than inflation. In the last few years, we have seen working people pushed out of San Francisco as rents and housing values become among the highest in the country. Unless we want Richmond residents to be priced out of their homes and Richmond to become a homogenous community of only those who can afford high rents, we have to move now to protect our residents—not after the rents become unaffordable.
Tom’s argument is like saying that we don’t have to worry about an outbreak of flu in San Francisco until we have the same sickness rate here. When you have advanced notice of something bad coming, wise people use the time to prepare.
3. False Causation:
Tom keeps repeating the argument that rent control doesn’t work because San Francisco, Berkeley and Oakland, all of which adopted rent control and just cause ordinances decades ago, have not been successful in slowing spiking rental rates that soar far above those of Richmond. (E-forum 4/13)
This argument is like the argument that hospitals don’t help people because everybody in them is sick. It is sickness that causes hospitals to be built. It was the rising rents in Berkeley, SF, and Oakland that forced them to adopt rent control. As a result of state laws written to protect landlords at the expense of renters, the coverage is unfortunately limited, but at least rent control has kept the rents in older buildings more affordable than in the rest of those cities.
4. Minimizing Who Would Be Helped:
Tom’s latest argument is designed to show that under rent control only “a relatively few tenants could benefit initially but over time will dwindle “ (Tom’s emphasis). He then goes on to correctly show that because of the pro-landlord state legislation “only … 3,158 [Richmond] units would be subject to rent control”
Tom tries to reduce this number further by pointing out that when these units are vacant state law allows the landlord to raise the rent to the current market value. While rents in these units would go up, at least new tenants who moved in to them would be protected by rent control and would be assured that the landlord could not unreasonably increase the rent as long as they remained in the unit.
But, if rent control will apply to a relatively small number of units, as Tom argues, what is his problem? We can estimate that these 3000 plus units probably house over 10,000 people, who are disproportionately the working poor. Why would we not protect those whom we can? Why lead a campaign that denies protection for these individuals and families?
Yes, unfortunately state law prohibits us from helping more of our residents. How about helping to change the state law?
5. Market Economics and Windfall Profits:
Classic free market economics says the market, if left alone, should reach an equilibrium, where the market price will reflect both what people can pay and the cost to produce the product or service. In the case of housing, cost includes a payment for the work of the landlord and a “reasonable” return on the landlord’s investment (profit).
So what happens when demand picks up? In the case of housing, the landlord’s cost stays the same, but the amount she/he can and will charge goes up. The landlord makes more profits. The greater profits are supposedly the incentive for developers to build more housing to get the higher profits, and as the housing supply increases, the price goes back down until only normal profits are made.
Economists call the higher profits made during the period before the market returns to equilibrium “windfall profits.” Windfall profits are not “earned.” They may well be the result of luck or the result of speculation.
Richmond rents had been fairly stable for years and were not reduced during the economic crash of 2008. They started rising rapidly in 2011. (They have risen about 26% in the last 4-year period.) The rents rose far faster than costs. (The general inflation rate was a bit over 6% and the Urban Consumer Price Index for the Bay Area rose 10% in the same four-year period. This difference between the rising costs and the much higher rising rental prices is windfall profits.
Graph data from Haas Institute
There are many reasons that the supply of rental housing is not built quickly enough to fill demand and bring rental rates down to a more reasonable rate—these include a lack of space as well as a lag time between development of the need and construction of new rental stock. In addition, as the demographics of the Bay Area change with increasing wealth, developers find luxury housing far more profitable and there is less available investment for affordable housing. In other words, the growth and demographic shift in the Bay Area create huge demands and keep windfall profits very high.
Tom’s argues that rent control means that “new renters often pay the highest possible rent as landlords struggle to make up losses” The reality is that most landlord’s charge the highest possible rent they think they can get anyway, because they can and do charge the maximum they can get people to pay. Rent control at least limits the ability to increase the rent yet more unreasonably, after the renter has moved in.
Rent control also includes a way to insure that fair landlords are able to cover costs and get a fair return on their labor and investment.
6. Rent Control and Development?
Does rent control slow down development?
The state law (Costa-Hawkins) that exempts housing built after 1995 guarantees that rent control does not apply to new rental units. A glance at San Francisco, Oakland, and Berkeley should be proof that rent control does not stop development.
7. Stable and Diverse Neighborhoods through Rent Control
The main reason to support rent control is that in the Bay Area the housing market is producing windfall profits for some while driving renters out. Our community thrives on stability and diversity, not constant churning and homogeneity. Stability means you get to know your neighbors, can work with them to make the neighborhoods safe and work together to improve the neighborhood.
Diversity means a richness of backgrounds and experiences and valuing of all our residents. We want homeowners and renters to take ownership of the community, not see themselves as transients or forced to be transients. That means we have to help protect both homeowners and renters against rapacious banks, speculators, and a government which only bails out the rich.
Tom says there are few winners and many losers with rent control. Stable communities mean most of us win. And all of us who care about economic justice and diversity win. When renters can spend more of their money on immediate needs, the money circulates in the local economy. And who loses? A few landlords. Where is the evidence that rent control stops development and discourages business? In San Francisco or Berkeley, or Oakland?
8. Problems with Rent Control
We will need to work together to create an effective rent control program designed to protect lower income residents. We will need to find ways to prevent the development of a “shadow market,” to finance implementation and smooth running of the program, and to take measures to make sure that fair and inexpensive procedures are available to both renters and small landlords.
We will have to figure out how to make sure that landlords do not allow controlled units to fall into disrepair. We will have to figure out the best response to the California-given right (Ellis Act) to landlords who want to convert to condos to get around rent control.
Yes, rent control also may provide some difficulty for some good landlords. But we need to keep in mind how difficult it will be for thousands –who already pay too much of their income for rent– to cope with run-away rent increases.
Rent control does not come close to solving the whole problem. Other policies are needed. We need to raise the income of poor families through training and jobs programs so that they can afford to live in higher cost housing. Tom is right that we need programs to build more affordable housing. It will likely take a federal program to build enough. But while we work to get these programs underway, rent control can help relieve some of the economic pressure and help a significant number of people.
Mike Parker is co-coordinator of the Richmond Progressive Alliance. The RPA has a long history of supporting Rent Control. He can be reached at mparker@rts-tech.com It has not yet taken a position on specifics of a rent control proposal. Follow this debate by signing up to receive the Richmond Progressive Alliance Newsletter athttp://www.richmondprogressivealliance.net
Reposted from Beyond Chron.
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