The myth of rent control subsidies
EDITORS NOTES It's as if someone has some kind of auto-respond system: Every time I write about housing or rent control, one of the trolls who comments on the Guardian Politics blog complains that landlords are "subsidizing" longterm tenants.
That's a complaint I've heard plenty of times before — rent control is a "subsidy" because property owners have to allow the use of their property for a lower rate than the current market might allow.
And it's completely wrong.
In fact, it only takes a basic understanding of economics to realize that in many cases, tenants are subsidizing their landlords. That's how the business works.
You don't have to read Karl Marx to learn that in a capitalist system, the owner of a business typically pays his or her employees less than the value they bring to the operation; the difference is what's called "profit." It's how American capitalism works.
Same way, when a landlord signs a rental agreement with a tenant, the rent he or she charges is typically enough to: (a) cover that tenant's portion of the building mortgage; (b) cover expected maintenance costs, and (c) provide the owner with a profit. Not that many landlords go into the business to lose money, or to break even.
I have a friend who bought a multi-unit building in the East Bay a few years ago, and it's a great deal for him: He lives in one unit, and the tenants in the other units pay enough rent to cover most of the mortgage. So my friend's housing is practically free. The tenants are subsidizing him.
Now: Add in rent control, and what do you get? The same exact situation. At the time a landlord and a tenant agree on a lease, the payments are adequate to cover the landlord's costs plus a margin of profit. (Otherwise the landlord would be a fool to sign the lease.) Over time, the rent goes up a little bit every year. The landlord's mortgage either stays the same, or, these days, goes down after a refinance at the lowest rates in history. The landlord's next biggest expense — property tax — goes up by less than the allowable rent increase most years. So every year, the tenant pays the landlord more than it costs the landlord to provide the housing. Every year, the vast majority of landlords in San Francisco make a profit.
Yes: a rent-controlled unit prevents someone who bought a building years ago and has longterm tenants from making even more of a profit. It is, and should be seen as, a way of limiting profit on rental property to a reasonable amount, not to what a speculative market could bring. That's fair; housing is a public right, and should be regulated a little like a public utility. (PG&E gets to make a profit every year, but not an unlimited profit.)
But like workers in a capitalist system whose product of labor subsidizes the profit of the owners, tenants in San Francisco are subsidizing landlords. That's how the private housing market works.