Friday, September 6, 2013

Greedy Landlords?

This recent article in the San Francisco Magazine argues they are not, or at least are no greedier than tenants.  Economists view everyone as self-interested (landlords, tenants, priests, nuns...) so the position taken in this article does not come as a shock to us.  However I like this article because it is a fairly good introduction to the way rent control works in San Francisco.

San Francisco's version of rent-control is not the "hard" version that is described in most economics textbooks (e.g. here, in Figure 4.10), but rather is of the "soft" variety, which "...regulates rent increases for tenants in properties built before 1979—some 171,609 units, or about 70 percent of the rental stock in San Francisco."  (emphasis added)

This means landlords are free to charge whatever they want when the tenant first moves in, but rent increases may not exceed those allowed by the SF Rent Board. 

This got me thinking.  How much would a multifamily building sell for it is was built in 1980 compared to an observationally equivalent building that was built in 1978?  Obviously we would expect that the 1980 building would sell for more given owners of those buildings face fewer constraints.  I hope one of my student who is looking for a term paper topic will try to quantify this effect!

Another interesting question is, How much would an apartment rent for today if it is in a building built in 1980, compared to an observationally equivalent unit that was built in 1978?  I would expect the 1978 unit would rent for more, as tenants receive an additional amenity in the form of lower future rent increases.  A regression study that controls for other factors should be able to quantify the value of this amenity.

I quickly reviewed some of the available Census data and while it cannot be used to answer the precise questions mentioned above, was nevertheless informative.

I created this figure using data downloaded form the American Factfinder, for San Francisco and San Jose.  Surprisingly, the median rent is nearly identical in both cities ($1,388 versus $1,390, in SF and SJ, respectively; this is not shown in the figure.)  However the figure above documents big differences in the rent that different types of tenants pay.

In both cities, tenants who have been in their units longer pay less.  However the difference is much more pronounced in SF than in SJ.  A renter who moved into their apartment in 1975 pays on average $781 in San Francisco versus $1,045 in San Jose.  On the other hand, a renter who moved into their apartment after 2005 pays on average $1,642 in San Francisco versus $1,439 in San Jose.

So a resident who just moved to the Bay Area would pay more if they moved to SF rather than SJ, but a resident who moved here twenty years ago is likely paying less in SF than in SJ. Surely SF's rent control laws are the reason why.