Rent Control Makes For Good Politics And Bad Economics

Tyler Durden's picture

Authored by Gary Galles via The Mises Institute,

One needn’t read very much about public policy before coming across some statement to the effect that “bad economics makes good politics.” This statement is clearly untrue when good politics is defined as furthering mutually beneficial arrangements, as good economics is central to that task. But the statement is often true when good politics is defined as attracting 50%-plus-one votes on some issue or candidate, which is a much different standard, leaving plenty of room for government-imposed harms to be imposed on citizens.

Few issues reflect this divergence between “good” politics and bad economics more clearly than rent control. One of the most universally accepted propositions among economists is that rent control produces a host of adverse social consequences with its large involuntary redistribution of wealth and suppression of market prices as communicators of information and incentives. Despite that, it has been adopted as policy in many places and times — and now is a good time to revisit these issues, as efforts are currently underway in several states (including California, Oregon, Washington, and Illinois) to repeal existing statewide restrictions on rent control.

How Rent Control Destroys Value 

Rent control takes a large portion of the value of residential properties from landlords. It does so by removing owners’ rights to accept offers willingly made by potential renters. And the value of the rights involved are large. For example, after Toronto imposed rent control in 1975, affected building values fell by 40% over five years, and a decade ago, such losses were estimated at $120 million annually in Santa Monica. A law like rent control, which can take half or more of each apartment’s value from the landlord, harms them just as much taking away half of their apart­ments, even though the latter is recognized as theft. Those stripped property values are given to current tenants, whose resulting bonanzas are shown by the fact that those under strict rent control almost never leave.

Rent-Controlled United Decline in Quality and Quantity

By taking away so much of the effective ownership of rental housing from owners, rent control creates several other additional adverse effects. Without owners’ ability to capture the value of their buildings, the rental housing stock deteriorates in both quantity and quality. Reduced incentives for maintenance and repair erodes existing rental housing. Further, owners retain little incentive to construct new rental units, bringing new apartment construction to a virtual halt, taking with it local construction jobs and tax revenues. Rental units are also converted to condos and non-housing uses to escape the burdens rent control imposes. All of this reduces rental housing availability, which worsens the problem of inadequate housing rather than alleviating it.

Rent control also increases discrimination and landlord-tenant hostility. Owners who can no longer be compen­sated for increased costs created through crowding, water usage, potential damage, or reduced probabili­ty of actually paying the rent — or any other unattractive tenant charac­teristic — have sharply reduced incentives to accommodate those who might impose them. This is why rent controlled areas, rather than helping those of low and moderate means, become increas­ingly popu­lated by higher income tenants with few children. Further, tenants bla­me “greedy” land­lords for not providing the services they desire, and landlords view tenants as the enemy engaged in an ongoing rip-off, even though rent control is the real culprit.

Rent Control Creates Black and Gray Markets 

Rent control’s artificial restrictions on mutually agreed upon exchanges also lead to evasion attempts, such as under-the-table payments, agreements to renovate apartments or upgrade appliances at private expen­se, personal connections, etc. Not only do these alterna­tive forms of competition favor higher income renters, rather than “the poor” (who populate rent control rhetoric but far less of the housing available under it), they lead to rent control boards to stymie such at­tempts. That enforcement, as well as the costs land­lords must bear both to defend them­selves and comply with its edicts, consumes a great deal of resour­ces that could have been put to productive uses. 

Despite such an overwhelming case for rent control being bad economics, why has it not been equally politically unattractive? The essential reason is that in cities where rent control is imposed, existing local renters, who are the recipients of the value taken from landlords, form a political majority who approve of that theft, vote for it, and go to great lengths to rationalize and defend it as part of “the wonders of democracy.”

Rent control offers current tenants perhaps the greatest economic returns of any policy they could use their majority power to enact. Not only do they save what can far exceed $1,000 a month compared to what market prices would be, they are also awarded what amounts to life tenure. If you saved $1,000 a month and stayed 10 years, that would be $120,000, while staying 21 years would generate over a quarter million dollars in benefits. And many long-term tenants have saved themselves far more. What other political act offers local renters so great an economic benefit in exchange for their votes?

Rent control’s “pro renter” rhetoric also allows a powerful form of misrepresentation. Rent control benefits current renters, but it does not benefit renters overall. It harms all renters and potential renters who aren’t already in rent-controlled units. It harms all those who seek to rent apartments after rent control is imposed, mainly finding “no vacancy” signs instead. But they don’t get a vote in the communities to which they'd like to move. Even though those who are eventually successful in finding a controlled unit have been harmed, once there, they don’t want their finally-achieved good deal halted. Rent control also harms renters in surrounding communities, as the restricted supply of available units raises rents there, as well. But they don’t get a vote, either. Rent controls also harm those who rent houses, which are usually exempt, because rent control’s reduction in housing availability leads those rents to be bid up as well.

Rent control also involves unusual characteristics that weakens and divides opposition.

The Long-term Effects of Rent Control 

Because housing is durable, there is an unusually sharp dichotomy between short-run and long-run effects. The short-term effect of imposing rent controls on the available supply of rental units is quite small. Proponents can focus only on the immediate effects to argue that objections are unsubstantiated. However, the cumulative effect of ongoing rent control is very large, leading many economists over the years to recognize its ability to decimate the supply of urban housing.

Property owners, who might be expected to be unified in opposition to the threat to property rights rent control poses, are also subject to divide and conquer techniques.

Not only are rental housing owners far outnumbered by current tenants, many of them live outside the jurisdiction considering rent control, undermining their voice. And if they raise money for an opposition campaign, their efforts against the harm that would be imposed on them can be easily demonized as proof of how much they rip off tenants whenever they are given a chance.

Some Property Owners Benefit 

Property owners are also split in other ways. Owners in neighboring areas, who would otherwise tend to side with those in the jurisdiction considering rent control, due to the similar threat posed against them, can be bribed away because the reduction of housing supply “next door” increases their demand and raises their rents. Owners of commercial property, who are usually exempt from rent control, can benefit from higher rents for their properties due to the influx of higher income residents rent control brings. The restriction in supply of rental units in an area also raises the price of owner-occupied homes, undermining their support against rent control.

Rent control can give current tenants massive windfalls taken from owners by their dominant majority vote. That also means politicians who cater to that politically dominant majority can more easily acquire and maintain power. The fact that current tenants benefit at the expense of those in nearby areas and all other future prospective tenants can be masked by pretending current tenants interests are the same as all actual and prospective tenants. Rent control also splits owner opposition to the threat of expropriation by exempting commercial uses and houses in the jurisdiction by increasing the value of their properties, as does the spillover gains they capture from the reduced supply of rental housing nearby. That combination goes a long way to explain why, in majority renter areas, the truly bad economics of rent control frequently translates into “good” 50%-plus-one piracy politics.

 

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New_Meat's picture

governator moonbeam said that raising the min wage would be bad for employment.

then he signed the bill

 

Donald Trump's picture
Donald Trump (not verified) New_Meat Apr 10, 2017 7:49 PM

There's always a place rent-free: JAIL.

Pretty much resemblances the communist utopia. Union fans would love it.

Until the unionized guards get upset for pampering your ass and start chimping out.

Like in France

VIDEO: Paris Prison Guards Burn Tires, Clash with Riot Police Outside Europe’s Largest Jail

http://dailywesterner.com/news/2017-04-10/video-paris-prison-guards-burn...


Oh la la ! Ce n'est pas possible!

bob_bichen's picture
bob_bichen (not verified) Donald Trump Apr 10, 2017 7:50 PM

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ares_xtreme's picture

That's the place where we should throw all those pushing $15 /h  laws.

 

bob_bichen's picture
bob_bichen (not verified) ares_xtreme Apr 10, 2017 8:00 PM

ares_xtreme  <<<  CHRONIC SPAMMER!!!

Mr Blue's picture
Mr Blue (not verified) bob_bichen Apr 11, 2017 3:17 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

Grandad Grumps's picture

They control every other price, controlling rents would just seem logical to AI.

divingengineer's picture

It is sad to see. Massive displacement of seniors, especially older women on their own, in th Bay Area. I see them living in their cars, old motor homes, even in the woods.
Tech workers have driven the cost of housing too the moon. Landlords eagerly turn them out on he curb to move in the dorks and raise the rent to levels they never dreamed possible.
It makes you hate the Shylock landlord class after a while.

Nameshavebeenchangedtoprotecttheinnocent's picture

You've obviously never been a landlord. I guarantee that you would behave the same way, if you were in the same circumstances.

When you buy a property in a stable rent area, you are most likely to just break even, or earn a very small amount for your troubles. Believe me tenants almost always bring trouble with them, in one way or another. If you have good tenant, you can live with the stability, but you won't get paid much. Still, it gets old after a few years. Really old.

(if you're lucky, your area will start to see RE prices and rents go up at some point) When that area starts to gentrify, or starts to see RE prices and rents go up, it's pretty hard to sit back and be barely paid for the shit you have to deal with when you see others getting a lot more for their units. After a while, you welcome the possibility of tenants moving out, as you can finally raise your rents and finally start to get paid for the shit you have to deal with. 

(the flip side of this is owning a building in an area that starts declining. You get murdered financially)

Those people you see living in cars, motorhomes etc. probably didn't get kicked out, unless they stopped paying rent, or caused other types of trouble, (which is a real possibility). Some of them got displaced for any number of reasons and got caught in a market that left them behind. 

The smart ones move to an area they can afford and re-start their lives. Many refuse to leave and end up homeless.

Not all LL's are bad. Not all tenants are angels. 

divingengineer's picture

The landlords here just seem out for blood, they raise the rent until you move out, they don't seem to give a fuck.
I'm glad I'm not a Bay Area landlord, I don't think I have it in me to bleed people so mercilessly.
I'm sure the old people I see did stop paying rent, who but professionals could afford $2,400 to $3,200 for an apartment in a no name east bay town, 30 miles from work and a stagnating salary.
It's a social disaster unfolding in front of us, mass homelessness here.

Bigly's picture

I wish i still had my 488/ mo west hollywood apt. Awesome location.  Non controlled units in that bldg are probably 2400.

Alas, LA sucks.....

LetThemEatRand's picture

"It was clear from the start that Trump only cared about implementing two policies: trade restrictions and immigration restrictions. Given this platform, military conflict was only a matter of time."  - the Mises Institute https://mises.org/blog/war-continuation-trumpism-other-means

As usual, the Mises Institute says some things that make sense while simultaneously diving off the deep end of fantasy or intentional oligarchy advocation with other shit.  Trade restrictions and immigration restrictions have NOTHING to do with bombing Syria.  Only the Mises Institute would try to conflate these separate issues.

But I'll give Mises Institute that rent control is stupid.  

nmewn's picture

Looks to me like they got it right, Trump never proclaimed himself as "the peace candidate" in fact he said he was going to rebuild the military...very bigly.

Trump is a nationalist, an America Firster in every respect. He's made that abundantly clear over & over again. OUR job is to prevent him from doing stupid shit like sending cruise missles into Syria.

Obama & Hillary started that horseshit, Trump has the ability to just walk away from it and let Assad & Putin kill the bastards. 

None of that is "our" problem.

847328_3527's picture

I wish he and the Repugnicans would nix the Obamacare penalty and issue tax breaks for the middle class. I no longer care what anyone does over in the middle east as long as he shuts our borders down from those countries.

I'll be really pissed if he now says to import a few million rapefugees!

MEFOBILLS's picture

The Georgists and Classical economists understand rents much better than do Mises monks.

Land and Buildings do not follow supply and demand curves.  Further there is rent from site location.  Land is fixed, and hence cannot be considered normal supply when there is excess demand.  (demand pushes housing prices ergo housing bubbles)

Land and natural monopolies must be taxed, while production is to be untaxed.  For example, it is proper to tax site value but is improper to tax labor.

An example: government funds a commuter rail project.  Government taxes the whole of the population to pay for it.  The winners:  Those who own land along the route.  Their land value and site value increased, but on the backs of the entire population.

The proper way to develop the rail would be to issue debt free money, build the commuter rail, then drain the debt free from future money supply, in the form of land taxes and rail fees.  Land taxes would go up in proportion to the increase in site value of land along the rail route.

This is non trivial.  The railroad robber barons became oligarchs through this land pricing mechanism, and then attempted to control the country.  Railroad barons got rich through theft: improved land along the routes, and charging monopoly pricing.

The Chinese are buying up Vancouver lands because there are not enough punitive taxes to restrict their activity.  Hence, the locals get screwed, driving up their cost of living, which then affects the health of overall economy.

hobo with a shotgun's picture

This housing bubble is going to get popped one way or another.

chosen's picture

The landlords in California have screwed the tenants by doubling and tripling rents in the last couple of years.   Unfortunately for landlords, renters are in the majority when it comes to voting, especially voting for rent control laws.  Payback is a bitch.  If you triple your tenants' rent in a couple of years, they will hate your fucking guts, and will happily vote for rent control.

The few cities in California that have rent control have plenty of new rental units available, the problem is they are all at the very high end of rents.   There is lots of construction going on, but, as I say, it is mainly for the high end renters.

As for what economists think about it, who gives a shit what economists think.  It is a bankrupt profession.  Only a fool would listen to what an economist says about anything.

 

847328_3527's picture

There's no doubt rent control is needed in some places like SF. Even better, tax all foreigner buyers when they purchase a property similar to many other countries like Grand Cayman where I remember reading they tax foreign buyers 20% of the purchase price.

DontGive's picture

Hold your horses. Where have rents doubled/tripled in 2 years, or are you just spewing anecdotal drivel out your dick suckin' hole?

chosen's picture

I know its difficult to believe if you live in Shithole, Indiana.

Fascal rascal's picture
Fascal rascal (not verified) Apr 10, 2017 8:03 PM

Blah, blah, blah...

Rent control. Bad are everywhere.

So was playing kickball with kids and friends tonight on property I own.

Awsome acre back yard.. It's why me and wifey bought the joint.. 60's house.

It was good. Good lessons.

Tried to teach little ones kicking ball, running to base and yelling ghostman on first.. May not be fun, but can win "the game".

Taught them to have fun, sucker that kicker into continuing onto 2nd base for a chance to get them out..

Lots of lessons and discussion am not going to share.

Good stuff.

MEFOBILLS's picture

Read my post above.  

In a georgist tax scheme, the land taxes would go up to the point where new opportunities would make themselves available.   For example, no empty apartments with absentee landlords, as they would want to make enough to pay taxes.

In those areas that are highly desireable, taxes would go up so that landlords would sell, or develop.  Developing would put in high density housing, thus allowing the taxes to be paid.

With regards to government on weights and measures... that is their job.  Money is the medium for transaction... and it also is the governments job, as expressly stated in Constitution.

(Allowing private banks to issue the money in the form of loans, is not what the framers had in mind.)

By not taxing the site value, the excess is pledged to the banker in the form of usury.  How?  People bid on property pushing prices.  Basically, whoever can take out the biggest loan wins the bidding war.  The usury on the money then vectors to banker.  Price bidding is going to be higher if the land tax is lower.  The bank captures this in ever larger loans, which pushes housing prices.

It is much better to tax the land site value, this then lowers prices, and the income stream goes to government.  The government is then able to untax other things.  Not sending money to bankers should be a priority - since their function in society is parasitic.

 

silentlurker's picture

I live in the SF Bay Area, have rented the same apartment for 20 years. Thanks to rent control I am paying 1/3 of "fair market" rent of several thousand dollars a month. Rent control is abosolutely evil (granted I benefit from it), but as noted, the control structure leads to all kinds of very bad behaviours. (Noble sacrafice aside, living in California I will take any advantage I am legally entitled to.)

I see this as one more reason to get the government out of every aspect of citizen's lives with the exception of National Defense and ensuring Interstate Commerce (I remain on the fence about the National Government's role in standard coinage and weights and measures.)

rlouis's picture

Excellent article.

Also contributing to the deterioration of existing housing is the huge impact of limiting annual increases to artificial inflation indexes.  When allowable annual increases are averaging 1.5% and inflation is running 6.5% the cumulative effect over 10 - 20 years makes new roofs, stairways, and bathroom repairs a black hole of negative returns.  I saw this recently on a re-roofing project that cost $10,000 in 1996 and is $30,000 today.  Bringing a fully depreciated property up to current code is another costly endeavor.

One additional cause contributing to high rents, and limiting the supply supply of affordable housing, are high development fees (taxes) and restrictions on development.  If government didn't create so many roadblocks there would be greater supply, putting downward pressure on rents.

It's especially sad to see tenants give up their dreams and opportunities to keep a rent subsidy. 

When the bubble bursts it is going to be a nightmare in many places - they are going to look like Detroit in a very short time.

 

Richestpoorman's picture

Bologni , high rents and realestate values are being driven up by artifical money in the former of 0 percent interest rates for the 1%.. Land is simply more expensive (artificially) for common wage earners to afford. What's  not understood is we're really in a 50 year asset bubble the 1% refuse to let deflate.

847328_3527's picture

COLA for old folks SS has been zero or close to zero for 10 years while the old folks' food, etc have risen 8%-12% per year. Basically, the fed/Obama and Bush starved old Americans to death.

DontGive's picture

Minu's make a bundle on each new build. Here it's 45K+ for new build in permits alone. Regardless if a mid-range or high-end McMansion. What do you think developers are going to build given the opportunity?

Houses Depreciate's picture

 

This housing bubble is going to get popped one way or another.

Silver Savior's picture

Landlords will pay us to live in their houses they will be so worthless! 

LightBulb18's picture

Yes but our rulers own 90%+ of all the land in the united states, which these economists dont talk about unnaturally inflating the cost of living beyond the standard of living for greater and greater percentages of people. desperately trying to fight back while legitimate discussion is censored, because people wont like what they hear, is A stretch to basically call people stupid who dont get "economics".

Houses Depreciate's picture

Why buy it when you can rent it for half the monthly cost?

 

Buy later after prices crater for 65% less.

Richestpoorman's picture

Sorry but author knows very little about economics. First rent is a tax by the idle wealthy on the workers, there's zero benefit to the rental scheme to society only the 1% who demand higher returns with no risk and no work like starting a real business that actually employs people. Secondly the banks have bid up assets beyond any real recognition, there's zero price discovery, prices based on phony money printed by banks loaned out to elitist, which in turn artificially drives up rent. Read up on the dark ages, that's where we're headed. If landlords were crushed with taxes, and the stock market taxed proportionately savings would be used to create real businesses with real profits and real wage growth and real property values and real rents etc. The key is  to get real eh?

Houses Depreciate's picture

Partially true.

The only path forward is falling prices.

khakuda's picture

I can tell you in NYC the monthly difference in rent can be several thousand dollars for a the same apartment. I paid over 3 times what the person right below me paid. No longer able to afford it, I had to move to the suburbs and now endure 3 hours of daily commuting and she is still there living like a queen. Thanks corrupt rent control policies.

My favorite still was the old woman who illegally rented out her rent controlled apartment at market rates for 6 months and a day, thus avoiding NY and NYC taxes and covering her rental costs in both NY and Florida. She bragged about it every time she returned to NYC.

Richestpoorman's picture

No sir thanks phoney realestate values driven up over 50 years of fraudulent banks and elitist owners. There only agenda is to capture as big of percentage of gdp in the form of interest payments to the 1%. Once we left gold standard they had cart blanche to jack up land. Where there's easy interest to be made 99% get f'd

Silver Savior's picture

I think tenants should be able to do what ever they want if they rent. I think they should be able to have 10 people move in and share the rent no questions asked.

The Gray Man's picture

Interesting stats from the Department of Commerce on welfare in the US...

https://freeamericannational.blogspot.com/2017/04/welfare-stats-from-dep...

Fascal rascal's picture
Fascal rascal (not verified) Apr 10, 2017 9:00 PM

Just. Fucking. Move.

As is done in all big dem cities.

Let them have it.

In most instances it will go to shit then get it for a steal..

Or.. is that already the plan...?

Posa's picture

Blah- blah from degenerate Vienna-School, market fundmentalists... no landlord is going to the poorhouse... regulatory intervention such as rent controls occurs when the market fails to deliver essential public goods (such as housing and health care)... and in particular, the US is inundated with massive money laundering via real estate speculation, from unsavory criminal elements around the world... which the rent seeking landlord class and corrupt banking and poltical figures encourage, thus creating a real-estate asset bubble (aided by the Fed as well).

As with healthcare, when corruption and market fairure align to destroy the public welfare, emergency action (such as rent control) is necessary... heal the underlying problems... and maybe a functioning market returns... otherwise, suck it up...

Houses Depreciate's picture

With record numbers of amateur landlords cash flow negative, are you sure?

Silver Savior's picture

Oh amateur landlords are the worst. I think I am going to throw up.

Silver Savior's picture

I like the idea of rent control but it does no good because even rent controlled residences are still too expensive. Inflation on housing has ran rampant for so long nothing will help besides a reset. It's a very bad deal no matter what. 

I am working on fixing this bullshit once and for all I am planning to buy a shitty peice of land and get a factory built home put on it. I might just camp out there in the meantime. No more slumlord money black hole. I really do think landlords will be questioned in the afterlife. 

Silver Savior's picture

House and property can be bought with one silver dollar after the crash? I think that's a fair trade. Like a 90% Morgan or peace dollar. Damn thats still a lot of silver to give up!

Batman11's picture

Dickhead Austrian economist.

Imagine a Chinese wage covering a Western cost of living.

The US has led the way with soaring housing, healthcare and education costs, pricing its labour out of global markets.

The minimum wage must cover the cost of living.

Rents must come down or the US must go protectionist, these are the choices.

Rents rise, the minimum wage goes up.

The Nobel prize winning economist, Angus Deaton, has highlighted the US problem, rent seeking.

“Income inequality is not killing capitalism in the United States, but rent-seekers like the banking and the health-care sectors just might” Nobel-winning economist Angus Deaton

He has missed US student loan costs, but he’s getting there.

rent slave's picture

Joe Pesci would say:Always the landlords.

The distortions created in the economy over real estate subsidization are enormous.Congress thought that all single people would continue to live in Ma Bailey's boardinghouse.WRONG.

Last of the Middle Class's picture

If we start a list of the things that make for "good politics" and "bad economics" it could take a while and probably involve some 95% of our politicians.

Stan Smith's picture

Rent Controls suck all around.   They just do.   They can heavily influence the market -- depending on the number of units -- in an certain areas.   They dont really "work" unless your one of the lottery winners who gets to live in an rent controlled apartment.    For everyone else, it pretty much fucks the market up.   Sometimes a lot, sometimes a little.   But rent controls do indeed fuck things up, make no mistake about it.

Renting is for suckers,  but the reality is no one builds entry level housing -- for owning or renting -- anymore.    Thanks to FED policy, there's just no money in it right now.   Or at least very little.    Why not build mid to upper-mid (or flat out high end) housing or condos or apartments where developers can at least squeeze out some money.   If folks think their dollars go as far as they used to, they are correct.  Again, thank FED policy along with who knows how many umpteen state and local laws to make living in housing of any kind prohibitively expensive, especially when it comes to starters and enders.

 

Houses Depreciate's picture

We're renting a nice big house and it's half the monthly cost of buying it.

 

Why buy it when you can rent it for half the monthly cost?

Insurrector's picture

When Massachusetts voted to end rent control, which was largely in the cities of Cambridge and Brookline, a few things happened:

  1. Rental prices in and around those two cities went up much faster than the rest of the state
  2. Many owners of rent control property had purchased the properties at rent control prices, and made huge amounts of money in the selling after rent control ended

What was strange is that rent control was local to only Cambridge and Brookline, but the voters outside of those communities, who were not affected by rent control, nevertheless voted it down.  The moneyed interests greatly outspent the rent control supporters.  Owners of rent control property made a killing.  Over the next decade, many Cambridge residents, who did not live in rent control property, were forced to move because of the escalating prices for the rental market in both Cambridge and neighboring towns.

MIT researchers David H. Autor, Christopher J. Palmer and Parag A. Pathak, wrote a paper called Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts about it.  Here is an extract:

We measure the capitalization of housing market externalities into res-
idential housing values by studying the unanticipated elimination of
stringent rent controls in Cambridge, Massachusetts, in 1995. Pooling
data on the universe of assessed values and transacted prices of Cam-
bridge residential properties between 1988 and 2005, we find that rent
decontrol generated substantial, robust price appreciation at decon-
trolled units and nearby never-controlled units, accounting for a quar-
ter of the $7.8 billion in Cambridge residential property appreciation
during this period. The majority of this contribution stems from in-
duced appreciation of never-controlled properties. Residential invest-
ment explains only a small fraction of the total.