Thursday, April 21, 2016

Housing: Part 138 - The illiberal core of human nature

Here is a great article from, by Kim-Mai Cutler, from back in 2014.  It is a really good primer on the housing problem in the San Francisco area.  Tons of information.  A lot of the article is on local details that are at a different scale of the problem than the frame of reference from where I have been working.  But, one part caught my attention, regarding the way people think about prices.

Earlier in the summer of 1978, a cantankerous former small-town newspaper publisher named Howard Jarvis led a “taxpayer revolt” as property prices were soaring, threatening to throw home owners out of their homes because of rising tax bills. Jarvis’ idea was to cap property taxes at 1 percent of their assessed value and to prevent them from rising by more than 2 percent each year until the property was sold again and its taxes were reset at a new market value. 
One argument that Jarvis used to rally tenant support for Proposition 13, was that he promised that landlords would pass on their tax savings to renters. 
They didn’t. They pocketed the savings for themselves. 
Tenants were furious, and rent control movements erupted in at least a dozen cities throughout California, from Berkeley to Santa Monica. 
San Francisco might have gone a different way, but Angelo Sangiacomo was the alleged trigger. The Italian-American landlord, who was born and raised in the Richmond District, demanded across-the-board rent increases of 25 to 65 percent in seventeen hundred apartments in March of 1979. 
Amid the outrage, Feinstein pushed for a 60-day rent freeze that would ward off the rise of a tenant-backed mayoral challenger. 
Both policies have had far-reaching and unanticipated ripple effects.

The key part here is, "he promised that landlords would pass on their tax savings to renters. They didn’t. They pocketed the savings for themselves.  Tenants were furious, and rent control movements erupted in at least a dozen cities throughout California, from Berkeley to Santa Monica. " followed by follow-on policy responses that worsened the problem even more.

Rent/Income levels will reach an equilibrium point that has very little to do with property tax rates.  How could they?  Lower property taxes will mostly just increase the Price/Rent ratio because gross rent will generally be set by tenant supply and demand, and lower property tax will increase the net income to the landlord.  (So, yes, right off the bat, this law made the source of the problem worse, as a direct effect.)

In an Open Access city, lowering rates would raise home prices, inducing more building.  This would lower rents on existing homes.  But, since the problem of rising property taxes on windfall unrealized profits was a problem specifically caused by inelastic housing supply, the fact that the problem existed at all was a good sign that the proposed solution would fail.

This idea that prices are a reflection of the moral generosity of those who are considered to be powerful (the buyer, in the case of labor; or the seller, in the case of housing) is such a deep universal intuition.  It will always be something that has to be unlearned.  And, this isn't limited to economics.  We are born deeply illiberal.  It's amazing that modern liberal civilizations ever gained a foothold, let alone were sustained.

"Gay people should just find a nice girl to settle down with and stop pushing this issue in our faces."
"Mexicans should find jobs where they live and start respecting our border."
"Women should know their place.  Having a career isn't the only way to be successful."
"Stores should pay their workers higher wages.  Everyone has a right to earn a decent living."
"It's unfair that landlords didn't pass this tax cut on to their tenants."

All of these statements are illiberal statements in the same way.  It is basically Attribution Error at the social scale.  Any large group of individuals will behave, as a group, according to their relative set of needs and available opportunities.  You might as well consider it a law.  It is hard to conceive of it as a law, because the rules of the law change along with the sets of available opportunities.  But, as a general rule, if a large group of people are doing something you don't like, you can either live with it or change their available set of opportunities.

Getting angry at an entire state's worth of landlords because they didn't pass on a property tax cut is dumb.  Rents are a product of the available opportunities.  The way to improve opportunities for tenants in California is to build houses.  The problem is that after several rounds of illiberal attempts to fix problems caused by illiberal policies, California is now populated with a bunch of tenants whose current rents are unrelated to the current set of other housing options, a bunch of owners whose property taxes are unrelated to the property tax a new owner would pay, and millions of illiberal voters who don't get why this is a problem and whose solution to every problem is to put their illiberal thumbs down on the most salient targets.  The fact that many of these people refer to themselves as liberals only confuses the matter.

PS: Note that all those Californians were angry because they assumed that taxes on capital would be passed on to the consumer.  Yet, amid the ever-constant drumbeat about corporations paying more taxes, isn't it funny how that idea seems to disappear?  In that context, the assumption appears to be that corporations just have to swallow whatever tax is directly imposed on them.  Is the difference really that Californians thought there was some sort of multi-million person gentleman's agreement that landlords would deviate rents from their market levels after the property tax had been reduced?

Think of the Gordian knot of peculiar self interests California has imposed on itself at this point.  Practically every piece of property has its own peculiar tax rate and tenant rent based on the arbitrary path of ownership and tenancy of the property.  There is no market price for millions of properties.  Potential buyers and sellers all have different prices based on their own personal characteristics.  No wonder so many Californians think markets aren't working.

Note also that rent control basically conveys the same entry fee dynamic on renters that Closed Access policies impose on owners.  For a home buyer, Closed Access policies mean that you have to commit to owning an ever more over-priced property.  So, you have to pay more for a home today because the market presumes that rents on that home will be even more outrageous in 10 or 20 years than they are today, making your upfront entry fee even higher.

For renters in a city characterized by widespread rent control, their starting rent will end up moving to a much higher level than it would have been without rent control.  In a way, this is simply a matter of the supply problems that these policies create.  But, if you think about it from the demand side - the rent new marginal renters are willing to pay - they must be willing to pay more, because once they establish a foothold in an apartment, if laws prevent rents from rising at the market rate, then new renters will be willing to pay more to get into a unit, knowing that their rents will slowly fall over time, relative to the market.  So, whether they understand this or not, some new worker in San Francisco who is paying 80% of their wage on rent, may complain about their wages being too low for the local cost of living.  But, really, a good chunk of that rent is a prepayment on future below market rents.  Closed Access policies keep out marginal new entrants.  It's what they do.  How they do it may not always be obvious to those who impose the policies, but somewhere, eventually, prices will convey the information of Closed Access.


  1. Great podt.

    Maybe we can trick the libs.

    We say, "You want to make landlords lose lots of money and sell their buildings at a loss? Build lots and lots of more housing and run them bad guys into the ground! Rents will collapse!"

  2. Speaking of SF, there is an article in the SF Chronicle showing millennials seek more dense housing for the city.

  3. Yeah, I could not stop me to take a quick tour to TechCrunch- you mentioned and just getting back here again. Yeah, the article is very informative and worth to keep diving into. Anyway, I was very pleased to see you discussed about existing housing problem in San Fransisco. Needless to mention the city is super busy and fast growing in every sectors and the rising population is facing accommodation problem. There are many real estate and property management service working relentlessly to help the rendering people. The focus on housing price and tax issue you mentioned was very impressive and helpful. Thanks for sharing such important term in this post. For leasing, renting or property management in this area including San Jose. this page ( Utopia Property Management Evergreen )may be beneficial to the property hunters.