L.A. To Worsen Housing Shortage With New Rent Controls

Tyler Durden's picture

Authored by Ryan McMaken via Mises Institute,

Los Angeles, home to one of the least affordable housing markets in North America, is now proposing to expand rent control to "fix" its housing problem. 

As with all price control schemes, rent control will serve only to make housing affordable to a small sliver of the population while rendering housing more inaccessible to most. 

Specifically, city activists hope that a new bill in the state legislature, AB1506, will allow local governments, Los Angeles included, to expand the number of units covered by rent control laws while also restricting the extent to which landlords can raise rents.

Unintended Consequences

Currently, partial rent control is already in place in Los Angeles and landlords there are limited in how much they can raise rents on current residents. However, according to LA Weekly, landlords are free to raise rents to market levels for a unit once that unit turns over to new residents. 

This creates a situation of perverse incentives that do a disservice to both renters and landlords. Under normal circumstances, landlords want to minimize turnover among renters because it is costly to advertise and fill units, and it's costly to prepare units for new renters. (Turnover is also costly and inconvenient for renters.) 

By limiting rent growth for ongoing renters, however, this creates an incentive for landlords to break leases with residents — even residents who the landlords may like — just so the landlords can increase rents for new incoming renters in order to cover their costs of building maintenance and improvements. The only upside to this current regime is that at least this partial loophole still allows for some profit to be made, and thus allows for owners to produce and improve housing some of the time

But, if this loophole is closed, as the "affordable housing" activists hope to do, we can look forward to even fewer housing units being built, current units falling into disrepair, and even less availability of housing for residents.

Why Entrepreneurs Bring Products to Market

The reason fewer units will be built under a regime of harsher rent control, is because entrepreneurs (i.e., producers) only bring goods and services to market if they can be produced at a cost below the market price. 

Contrary to the myth perpetuated by many anti-capitalists, market prices — in this case, rents — are not determined by the cost of producing a good or service. Nor are prices determined by the whims of producers based on how greedy they are or how much profit they'd like to make. 

In fact, producers are at the mercy of the renters who — in the absence of price controls — determine the price level at which entrepreneurs must produce housing before they can expect to make any profit. 

However, when governments dictate that rent levels must be below what would have been market prices — and also below the level at which new units can be produced and maintained — then producers of housing will look elsewhere. 

Henry Hazlitt explains many of the distortions and bizarre incentives that emerge from price control measures: 

"The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it. With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit. If, as often happens, the government finally recognizes this and exempts new housing from rent control, there is still not an incentive to as much new building as if older buildings were also free of rent control. Depending on the extent of money depreciation since old rents were legally frozen, rents for new housing might be ten or twenty times as high as rent in equivalent space in the old. (This actually happened in France after World War II, for example.) Under such conditions existing tenants in old buildings are indisposed to move, no matter how much their families grow or their existing accommodations deteriorate."

Thus, 

"Rent control ... encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space."

Rent

 

Not surprisingly, when we look into the current rent-control regime in Los Angeles, we find that newer housing is exempt, just as Hazlitt might have predicted. Unfortunately, housing activists now seek to eliminate even this exemption, and once these expanded rent controls are imposed, those on the outside won't be able to bid for space in either new or old housing.

Newcomers will be locked out of all rent-controlled units — on which the current residents hold a death grip — and they can't bid on the units that were never built because rent control made new housing production unprofitable. Thus, as rent control expands, the universe of available units shrinks smaller and smaller. Renters might flee to single-family rental homes where rent increases might still be allowed, or they might have to move to neighboring jurisdictions that might not have rent controls in place. 

In both cases, the effect is to reduce affordability and choice. By pushing new renters toward single-family homes this makes single-family homes relatively more profitable than multifamily dwellings, thus reducing density, and robbing both owners and renters of the benefits of economies of scale that come with higher-density housing. Also, those renters who would prefer the amenities of multifamily communities are prevented from accessing them. Meanwhile, by forcing multi-family production into neighboring jurisdictions, this increases commute times for renters while forcing them into areas they would have preferred not to live in the first place. 

But, then again, for many local governments — and the residents who support them — fewer multifamily units, lower densities, and fewer residents in general, are all to the good. After all, local government routinely prohibit developers from developing more housing through zoning laws, regulation of new construction, parking requirements, and limitations on density. 

And these local ordinances, of course, are the real cause of Los Angeles's housing crisis. Housing isn't expensive in Los Angeles because landlords are greedy monsters who try to exploit their residents. Housing is expensive because a large number of renters are competing for a relatively small number of housing units. 

And why are there so few housing units? Because the local governments usually drive up the cost of housing. As this report from UC Berkeley concluded: 

"In California, local governments have substantial control over the quantity and type of housing that can be built. Through the local zoning code, cities decide how much housing can theoretically be built, whether it can be built by right or requires significant public review, whether the developer needs to perform a costly environmental review, fees that a developer must pay, parking and retail required on site, and the design of the building, among other regulations. And these factors can be significant – a 2002 study by economists from Harvard and the University of Pennsylvania found strict zoning controls to be the most likely cause of high housing costs in California."

Contrary to what housing activists seem to think, declaring that rents shall be lower will not magically make more housing appear. Put simply, the problem of too little housing — assuming demand remains the same — can be solved with only one strategy: producing more housing

Rent control certainly won't solve that problem, and if housing advocates need to find a reason why so little housing is being built, they likely will need to look no further than the city council.

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localsavage's picture

supply and demand...just enforce immigration laws and LA rental rates will come back to reality.

Art Van Delay's picture

I'm sure the illegals will shoulder the burden once they make it a sanctuary

Kinda like in S Texas. And who would know better how to fix it than Nancy Pelosi. She even tries to teach a cowboy how is done:

https://www.youtube.com/watch?v=5CrBMPc4LH8

AVmaster's picture

Lived in LA(van nuys) for 4 years.

Lived in rent control apartments entire time.

They just discourage you from signing up for another year lease. Raise rent no matter what.

 

Oh, and those illegals you are talking about?

This is what they do: A homeowner has a house and a "guest house"(which is often times a converted garage). They then pack that second "house" with as many hispanics as they can. I saw 20 packed into a converted two car garage one time...

LowerSlowerDelaware_LSD's picture

Since garages don't have toilets and showers that's got to be nasty.

kavlar's picture

When SHTF, it'll be real ugly.

Son of Loki's picture

Require 20% down and solid credit to buy a house and the RE market will self-correct eventually like it did after the crash in the late 1980's. Also, whomever writes the mortgage loan MUST keep at least 20% of it so they don't shove all the losses of their bad loans onto taxpayers.

It's shameful that people like Mozillo were never sent to jail for life.

Mano-A-Mano's picture

People should self-police.

Don't buy until you can. 50% down. 5-year, maximum 10-year, mortgage.

armageddon addahere's picture

Meanwhile the idiots borrow to the hilt and bid up the prices while the sensible people are frozen out of a booming market. By your rules the average person could afford their own home when they are about 90.

Itinerant's picture

Typical von Mises narrative. He's talking about producing housing, and land lords as producers.

The cost of housing is not determined by production costs since much of the stock was paid off in your grandfather's days, save for a little depreciation/maintenance [much less than is actually written off]. The price is determined by bidding for location. The value of the location is determined by market forces and goes up as public and private amenities increase (metro, water, roads, communication, services, etc). The amenities are not the product of the land lord but of society as a whole. The actual price is determined by what a bank is willing to lend as a mortage. In general the highest bidder will be the person with the lowest cost of interest, since the costs of servicing the mortgage must be passed through to the market.

There is only one way to do something about the bidding spiral: tax the location. Taxing means 2 things: [1] The government funds itself with money that would otherwise go to the banks, and therefore doesn't need to take as much sales tax of income tax; after all, the value of the location does not belong to the banks, but was produced by the public at large; [2] The value of the land/location will diminish, since part of the income stream is diverted to taxation, and its collateral value to a bank diminishes.

And of course more housing, but that is somewhat of a no brainer: besides, you cannot produce more location.

Houses Depreciate's picture

Incorrect.

The price of housing is founded on input costs (lot, labor, materials and profit).

armageddon addahere's picture

The price of housing like everything else is set by supply and demand. You could easily find houses in unpopular locations for sale for a fraction of their input costs, and others in popular locations selling for multiples of their input costs.

Input costs in relation to market price will influence how much new housing gets built but that is about it.

Houses Depreciate's picture

Incorrect.

 

The price of housing is entirely founded on input costs. Those costs don't vary more than 5% irrespective of location.

Turbo_diesel's picture

Yeah, housing price is always cost plus fixed margin. Nothing to do with location, location, location, mortgage rates, etc. And price doesn't determine equilibrium between supply and demand. LOL

bob_bichen's picture

RE: chronic SPAMMER Son Of Loki, kavlar, techies-r-us, lexxus, stizazz, mano-a-mano, etc.   (ALL THE SAME PERSON REPLYING TO HIS OWN COMMENTS)

You have NO IDEA how troubled this individual, the Spammer With One Hundred Log-ons, really is.  He has trolled and spammed his website crap on here forever, always with the same macabre conversations with a long series of "imaginary playmates." It really is quite perverse and whoever "he" is, he seems to really get his rocks off voting himself up arrows and replying to his own comments, and also appears to have no life beyond making off-topic comments with his link to the SPAM-, TROJAN-, VIRUS-INFESTED  "biblicisminstitute,wordpress,com"  (sometimes disguised as a short-URL  http://wp.me  )

He shares this pathology with "Audio Feeline " "blue fin" AKA "TrollAndDump" (formerly known as XYTHRAS - since banned) whose "dailywesterner,com" is, if anything WORSE than the biblicism fetishist, also SPAM-, TROJAN-, VIRUS-INFESTED.

Other ZHers  may wish to take one minute to send an email to abuse@zerohedge.com requesting that all of the "imaginary friends" (in the list below; copy and paste)   be permanently banned for spamming.

As you do that, use your imagination to try to conceive of what type of whackadoo would spend their life in pajamas, fake eyelashes and high heels, eating stale chips and drinking cheap soda from the dollar store, popping zits, and spamming zerohedge. 

Many of the following have been banned but, like crabs and cockroaches, they just seem to come back.  The "short list of imaginary playmates" includes:

Audio Feeline
blue fin
TrollAndDump
XYTHRAS

Son of Loki
kavlar

mano-a-mano

letsit
lexxus
tazs

techies-r-us

stizazz

lock-stock

beauticelli  
mofio

santafe
Aristotle of Greece

Gargoyle

bleu

oops

lance-a-lot
Loftie

toro
Yippee Kiyay

lonnng
Nekoti

SumTing Wong

King Tut
Adullam

espirit

rp2016

Holy hand grenade of Antioch,

etc. etc. etc.

espirit's picture

Followed your last two or three hundred posts on ZH. Seems you are one repetitious COINTELPRO mutherfucker.

Not sure if this is a new technique, giving up your other half-lives. Or perhaps Soros pays a-nickel-a-click.

 

 

http://cryptome.org/2012/07/gent-forum-spies.htm

    

 

 

buckstopshere's picture

It's like the underground railroad but for illegals making their way north.

DeadCode2k's picture

Van Nuys looks like freaking Tijuana lol.
I am Hispanic and I know how they live it is embarrassing.
There is never any parking on the public streets because 20 Mexicans live in one house and multiple cars parked on the street.
Also they breed like roaches!! ????

buckstopshere's picture

If you run surveillance on those homes, you may be witnessing a prostitution ring.

The prostitutes all live under one roof. The pimp provides food and shelter.

buttmint's picture

...address?

Phone numbers?

 

sarc\

Dog Will Hunt's picture

I saw 20 packed into a converted two car garage one time...

No shit.  You were in Van Nasty.  

Buck Johnson's picture

That makes sense, damn and they wonder why LA rents are so high. 

 

 

TeamDepends's picture

Mastrionotti: Fink. That's a Jewish name, isn't it?
Barton: Yeah.
Mastrionotti: Yeah, I didn't think this dump was restricted.

ebworthen's picture

And End the FED!

Who is to blame for inflation?

The FED, and Yellen, Bernanke, and Greenspan, and CONgress, and the dark forces of D.C. and the Wall Street Harpies and Warlocks.

The rent is too damn high, and those fucking immoral Satan worshiping banksters and bankster lackeys are to blame.  No such thing as a market, free market, or money.  Tear it all to the ground, burn it to Hell and back, and hang the money-changers!!!

SmittyinLA's picture

You don't understand, increased rents is the goal of immigration (duh)

FredGSanford.'s picture

Why can't liberals understand?

Anarchyteez's picture

Cuz that requires deductive thought.

Something they're immune to from indoctrination.

LowerSlowerDelaware_LSD's picture

They emote.  They don't think.

And they know that there are a LOT of stupid people who will keep voting for them as long as they (falsely) promise FREE SHIT!

divingengineer's picture

It's a proven strategy.
Dispensing truth and tough love is....dicey.

silverer's picture

They're wired that way. Honestly. They say your political affiliation can be predicted with a DNA test to about 85% accuracy.

divingengineer's picture

Hmm, Planned Parenthood might be of use after all.

Anarchyteez's picture

Shit! You ought to read what Seathell just did!

These liberal idiot fuckwads are now making you rent to the first person to fill out the application! Liberals just can't stand people owning their own property!

Fuck you all.

Skateboarder's picture

"Equality" through tyranny, a liberal's idea of utopia.

TheLastTrump's picture

no fucking way lol

 

the progs here are all quiet, probably jerking off on this thread

 

out

 

 

buckstopshere's picture

Rent controls will pop the real estate bubble faster.

divingengineer's picture

Are you shitting me? S.F. has been doing rent control since at least 1979 that I know of and it is off the hook.

Sanity Bear's picture

Is this a bad time to ask what happened to those millions of units of housing "shadow inventory"?

Mazzy's picture

I wonder how many members of these Rent CONTROL Boards in various liberal cities also "coincidentially just happen to" own rental property?

Sledge-hammer's picture

Was in California in January visiting relatives.  I was born and raised in the Bay Area and San Joaquin Valley.  Went to L.A.  What a dirty, shabby, run-down, hell-hole.  It reminded me of Iraq and Afghanistan except that there were fewer foreigners in Iraq/Afghanistan, and I felt safer in Iraq/Afghan.  Can anyone explain the attraction to the place today?  I understand its attraction in say as recently as the 60's, but today, pshaw.   

buckstopshere's picture

The coastal regions of LA are the only good areas.

Ten miles inland and it's all ghetto and illegals.

chosen's picture

The coastal towns are okay.  Pretty much anything beyond three miles from the coast is a shit-hole.

buttmint's picture

...send all illegals to East Palo Alto.

In fact, cheap rent---East Palo Alto fits the bill!

Xena fobe's picture

The only ones moving to CA are third world immigrants.  And LA reminds them of home with all the ethnic colonies. 

inosent's picture

I think central bank money policy is the real source of price inflation, no matter where you find it.

buckstopshere's picture

During the housing bust the Federal Reserve bought trillions of dollars worth of mortgage-backed securities with money printed out of thin air.

Most of that new money ended up in bubbly real estate markets.

laomei's picture

Deport the illegals, end section 8, problem solved