What We Periodically Relearn About Rent Control

In this issue:

• What We Periodically Relearn About Rent Control—The problem rent control aims to solve is just not amenable to little tweaks: people need housing long before they've saved enough money to buy a home for cash, so they're going to use some mix of borrowing to buy a house or paying to live in one somebody else owns. The payoff from bad policy shows up on a lag, which makes it easy to argue about and hard to fix.
• Backstops—Cash is being rapidly redistributed to hardware companies, who are redistributing it right back.
• Complements and Substitutes—Uber and Waymo are natural allies as a business, since one of them provides fixed supply and the other one can be more responsive. But when they talk to regulators, they're natural enemies.
• Personality Hire—A very cyberpunk retelling of the classic story where a company ruled by programmers finally hires someone less technical to talk to customers.
• Commoditization—Nvidia wants to support the labs that aren't #1, but could be.
• IPOs—You can't direct an effectively unlimited supply of funds through the narrow aperture of an underdeveloped capital market and expect boring results.

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What We Periodically Relearn About Rent Control

When I talk about policies, I like to focus on second-order effects. That's a lot of syllables, so if you're in a hurry, just say "effects," because most of the impact of a law like this is not its upfront redistributive impact—tenants pay a little less, landlords earn a little less—but on how labor and capital get reallocated in response. Rent control:

1. Lowers the return on owning residential real estate.
2. Raises the uncertainty of that return; once there's some rent control, it's easier to extend it to other units, or to adjust its parameters. And since it disincentivizes maintenance—the landlord doesn't capture the upside any more—it leads to later regulations, which may or may not match what tenants were willing to pay for.
3. It also means that a portfolio of properties in a given city is less diversified than it used to be, because there's a common factor for returns. Someone who owns an apartment building in a city is making a bet on that city's macroeconomy, but they're also making a smaller bet on which neighborhoods will become or remain trendy. Property owners can diversify that risk by owning buildings in different places, but if there's a common factor that affects returns citywide, they miss that.

Which doesn't mean you can't do it. Environmental regulations have a similar effect on the chemical industry, adding a new core competency they need to be good at and making their results more correlated because they're sensitive to changes in laws, which adds up to a higher cost of capital and a lower supply of chemicals. Non-carcinogenic drinking water is a pretty good trade for that.

The existence of market rent is not that kind of externality, though. Rent is a price signal about the opportunity cost of living in one place rather than somewhere else; it's a way to tell you that if you insist on taking up some of the very finite stock of housing supply that's within walking distance of, say, OpenAI's headquarters, then you'd better get busy doing something valuable enough that you're the high bidder for that real estate. And, by the same token, that if you don't have some very short list of places where you can do whatever it is that you want to do, you can optimize your real estate spending more for cost and local amenities rather than optimizing for location and then somehow solving for cost.

There is a potential negative externality here: many of the things that make cities interesting places to live aren't all that lucrative. The existence of trendy, expensive brunch places implies (for now) the need for people to bus the tables, and it's also a bit perverse that the cities with creative scenes are also the cities where you can earn the median American household income and still pretty much qualify as a starving artist. This tends to make expensive cities a bit spikier, bland in some ways but incredibly interesting if you happen to care about whatever industry drives up those rents. One reason you overhear so much about GPUs and RSUs and the like in SF is that many of the people who work in the city and don't have those interests do have long commutes, so there are fewer hours in the day where they're ambient.

In theory, a partially rent-controlled city can solve for this: maybe the bankers and lawyers and traders in New York pay a little more rent, and the novelists and indie rockers pay a little less. But in practice, it's incredibly hard to target these people with low rent. San Francisco has a live/work building program, whose original intent was exactly this: a building gets exempt from some zoning restrictions, but the tenants need to be artists. I actually lived in one briefly, and the way the building manager explained it was that the definition of artist had been loosened to basically anyone who had any kind of business that was remotely creative-adjacent—and that the way this business was audited was that the city would sometimes check in and see if everyone had bought a business license ($50), but would give them a grace period in which to get the license even if they didn't have it. If you zoomed in on the building in Google Maps, you'd see a little confetti of non-operating dance studios, LLCs for ostensible freelance writers who had day jobs at Dropbox, etc. San Francisco wanted to be welcoming to artists, but did not want city hall employees spending their days interrogating the question of What Is Art, so what they ended up doing instead was very moderately increasing the housing supply in exchange for making everyone participate in a slightly grubby ritual of pretending to be an artist while working in tech.

In a way, a city that has a creative scene but prices out creative types is just doing its job; the goal is to enforce an up-or-out model where, if you're going to insist on not just being a novelist but being a novelist in Brooklyn, you'd better get cracking and publish something good or, sooner or later, you're moving back home (sometimes, this means an artist who couldn’t make it in Brooklyn and is forced to move all the way back home to the Upper East Side) It's just Baumol's cost disease, for rent rather than wages. And the market in creative talent keeps getting more efficient, because there are so many online channels now; people can and do Substack their way to a book deal. And then they can move to the big city and hang out with the other successful artists.[1]

Maintaining a city's character is one macro argument for rent control. The micro one is basically that, but instead of being at the level of career paths, it's at the level of households. It is, in some sense, unfair that if you rent in a city, and your income goes up but doesn't keep pace with the cost of living, you'll eventually have to leave. It would be nice to have some protection against that.

All true. Not only is it true, but we can quantify just how nice it would be by looking at the down payment and mortgage payment for buying rather than renting. There is no rule preventing anyone from getting the exact bargain rent control offers—a fixed price, and certainty that your home will be yours. But, especially in places with rent control, it's murderously expensive. Slowly giving a subset of leases the economic characteristics of a mortgage is basically piecemeal redistribution of a down payment's worth of economic value from the landlord to the tenant. And if tenants either didn't prefer this in the first place (or they would have bought) or treat it as a default expectation, this is wealth-destroying in the sense that we're taking some resources that society has produced (in this case, the right to stay somewhere at a given price even if market rent rises) and redistributing it to someone who doesn't want it. It's wealth-destroying in exactly the…