Most of the media has been covering the current story of soaring rents. Recently we published a report stating that California rent is too high for the average worker to afford and, drum roll, that increasing supply was not helping!
Since many of our readers took an obvious (if perhaps a little caustic) interest in this piece, we thought we’d delve a little deeper.
The simplest response to the problem of skyrocketing rents is to increase supply. In pure theory this works, but the reality of the situation is not so simple. For one, supply of rental housing has increased quite rapidly in some of the most in-demand areas of California, including the Los Angeles metro region and the Bay Area. However, the bulk of these new developments are in luxury housing, with builders attempting to cash-in on the fervent demand and job growth in these very particular areas. Herein lies one major problem with the notion of increasing supply when it comes to real estate: you can always build more houses, but you can’t build more San Francisco.
That is, unless you build up. This is another historically frustrating truth regarding California’s urban regions: they all suffer from highly restrictive zoning laws that curtail new, affordable developments. San Francisco, for instance, would perhaps benefit the most from residential high rises. But many of their residential developments are capped at a paltry 40 feet!
The simplicity of supply-side thinking also falters when factoring in the dynamic impact of comps. Imagine a builder who constructs a mid-tier multi-property development in a not-so-nice neighborhood, says Eric Belsky of the Joint Center for Housing Studies at Harvard. As soon as the building goes up, the rents on the surrounding properties will increase in kind. Thus, affordable housing may have been created for some, but it actually increases rents for others.
Rent control was, in part, created to solve problems such as these. And it works in some neighborhoods. But rent control ties residents to one apartment for life. This can be a veritable death sentence in today’s economy, which rewards mobility and flexibility. People need to move to find jobs, and when they do so they find they can no longer afford the rent since wages are not keeping up!
As the New York Times recently pointed out, there is one major metropolis that has solved the problem of unaffordable rent: Singapore. Here’s how they did it, according to the Times:
“The Singapore solution required drastic action of a sort that most other places could not countenance: In the early 1960s, the government started building big, uniform apartment buildings, then pushed workers to move out of overcrowded shophouses and huts. Some herded their livestock along to their new flats. And at first, many residents were afraid of the higher floors.”
This is almost unthinkable in the American cultural imagination. The notion of “choice” is so deeply ingrained in our psyche, the idea of being funneled into uniformly built government housing might just be the impetus for revolution.
Really, those who clamor for either more regulation of landlords and enforcement of affordable housing laws on one side and those who demand a completely unfettered real estate market unrestrained by the big bad government both have the equation backwards. Jobs drive real estate and the lopsided nature of our rental market is merely reflective of the lopsided nature of our jobs market.
In other words, our current rents crisis is a class issue much more than one of simple supply and demand.