Price caps invariably kill supply.

(All of what follows is not a criticism of the usual rent control, but of the extreme form of rent control called “vacancy control.”)

Vacancy control aims to cap the price of rents to new renters. But capping the price of goods below market price always leads to inefficient use of those goods and the collapse of supply. Just look at the gas crisis of the 1970’s; where price caps turned a minor price adjustment into a disastrous loss of supply: (http://www.washingtontimes.com/news/2006/may/15/20060515-122820-6110r/) .

Apartments are no different: Price caps encourage inefficient use of gas (wasteful driving) and apartments (cheap rent means not having to rent out a spare bedroom, or using an apartment part time or as a weekend retreat.) And price caps discourage new supply (digging new oil wells or building new apartments or pulling super cheap rentals off the market). Price caps also create black markets and the reselling on of the goods at well above market price (illegal subletting/fraud.)

An example of price caps causing inefficient use of housing supply would be where a $1000 per month 2-bedroom apartment is occupied by a single person. But in a $2000 a month 2-bedroom you might find two roommates. This creates a home for an additional person and helps ease any housing shortage. And since more demand has been satisfied it will lower the market price of all other apartments throughout the city. Thus a higher price for one apartment leads to lower prices for all other apartments – it sounds irrational, but any economist will confirm it is completely rational.

If I were a landlord forced to rent out an apartment for $900 that should go for $2000 I would leave it vacant. The rent control fees, gas and water costs, maintenance and hassle means it just would make more sense leaving it empty. Plus if it is rented out at $900, then that renter will never, ever move out. Better to leave it empty and wait till a change in the law, or even demolish the whole thing. Thus price caps will have directly caused loss of supply.

It is also common that when a low rent apartment comes available it will go the well connected. (As, doubtless the wealthy and powerful were unaffected by the gas crisis). So much for the working class benefiting. https://www.dnainfo.com/new-york/20140430/new-york-city/rent-stabilized-apartments-are-being-occupied-by-millionaires-records-show

Price caps should only be constitutionally legal in a monopolistic situation. If all the apartments in Santa Monica were owned by one company then that would be a monopoly. But clearly it is not so, and there is brisk competition between all market rate housing providers. 

Once a tenant has rented an apartment, there is an argument that they could be protected from eviction or excessive rent increases, as moving apartments is a costly and difficult process. That is the current situation in Santa Monica. And there may be some merit, and little harm in the current milder form of rent control. - But vacancy control is utterly self-destructive.

Political rationale for strict vacancy control includes:

1. It costs nothing to legislate into place and, unlike the gas crisis, the damage is inflicted slowly and insidiously over time. Thus the renters who can’t find a home at any price don't understand why it's happening and can only cry out for more rent control, which would be like pouring gasoline on a house fire.
2. It sounds like you are helping the poor. (But often the wealthy and well connected get low rent places.)
3. Cheap rents for everyone! (How about gas as well? Which is just as essential to modern life.) But of course only a lucky few get the low rents and cheap gas. The rest face dry pumps and no vacancies at any price.
4. In Santa Monica the fees have created the Rent Control Board, a captive bureaucracy whose very jobs depend on the survival of rent control. This creates a powerful political lobby.
5. Renters already in low rent apartments feel trapped and are fearful of the loss of rent control. They think that vacancy control will give them a chance to move without high rents. (But they never will snag such a rare unicorn. And their buildings will be in ruins and facing demolition as the owners fight bankruptcy.). Those renters are captive voters of politicians who preach the vacancy control nonsense.
6. It is claimed that vacancy control will discourage owners from harassing low rent tenants into leaving. But in reality such cases are very rare, and Santa Monica has very strict laws and heavy penalties, even imprisonment, against such harassment. If such harassment were common we would see an army of owners being locked up but instead we see at most one or two relatively minor cases that get trumpeted by the city as an out-of-control wave of criminal harassment sweeping the city. That fanning of fear keeps renters voting for those who now trumpet vacancy control.

And when vacancy control has killed all supply, the next step is a government-managed waiting list. And then you end up with 20-year waits for an apartment, as currently happens in Stockholm, Sweden. https://www.theguardian.com/world/2015/aug/19/why-stockholm-housing-rules-rent-control-flat and http://www.bbc.com/capital/story/20160517-this-is-one-city-where-youll-never-find-a-home

The real cause of high rents is lack of supply, caused by restrictive zoning, gold-plated parking requirements, building offices at the expense of housing and high permit fees that cripple new construction.  Of course when new construction is proposed everyone protests, but more rent control gets loud cheers. But where will all those who don’t snag a bargain rent live when there is no new construction?

Trying to legislate away the loss of supply caused by price caps only makes things worse. The government has tried (many times in many different ways) to cap the price of gasoline and always ended up with dry pumps and fist fights in the resulting lines. The Swedes aren’t fools (apart from when it comes to rent control) and the best result they have come up with is 20-year waiting lists, and a huge black market of illegal subletting that leaves sub-tenants renting at gigantic markups with no protections. They tried it in Santa Monica before and ended up with crippled supply and decrepit ruins for buildings. “Oh it will be different this time!” They will cry. No it won’t. There is no way to avoid the inevitable consequences of what will happen.

Santa Monica in the 1980’s really was in a distressing state. We are lucky (no, very unlucky) to have a real example of what really happened when vacancy control existed in Santa Monica, and what will happen should it come back. Santa Monica really was called “Skidrow-on-sea.” The apartment buildings really were decrepit slums. There really was a ‘demolition derby’. People visiting from other cities really were appalled by the horrific, crumbling, Eastern-Bloc appearance of the place. (What a coincidence: Stalin believed in price caps too.). It really will all happen again, should 1506 pass. 

What will happen if 1506 passes?

“Vacancy control” is returning to Santa Monica. It will leave the city in ruins, raise rents and cause homelessness.

(All of what follows is not a criticism of the normal rent control that Santa Monica currently has, but solely of ultra-extreme “vacancy control”.)

Vacancy control was banned throughout California in 1995 for the harm it caused. CA Assembly bill 1506 (sponsored by assembly member Richard Bloom) will allow vacancy control to return, specifically to Santa Monica, Berkeley, West Hollywood and East Palo Alto, as the broken housing politics of those cities previously required it.

I am a long term Santa Monica resident with two young children. I love this city. But I didn't love it in the 1980s. It seemed that all the apartment buildings were decrepit slums with peeling paint and dirt yards, and there were no apartments to rent. I don't want my children to grow up in a city like that. I want Santa Monica to stay the attractive city it has become.

The vacancy control that Santa Monica had from 1979 until 1995, (and that AB1506 will bring back,) restricted landlords to tiny rent increases – even after a voluntary vacancy. Owners were never able to charge market rents, and often the allowed rents were way below market. This is rent control to the n’th power, and it leaves cities in ruins – Santa Monica was such a ruined city.

Back then vacancy control kept rents so low that apartment building owners couldn’t maintain them, and the buildings were virtually abandoned. Santa Monica deserved its nickname of “Skidrow-On-Sea.” Talk to those who lived here then to hear the truth about “vacancy control.”

Should AB1506 bring back vacancy control then the renters may initially be happy; Till they find it impossible to rent a pre-1979 apartment, and the prices of the newer ones have doubled.  That is what price caps do when applied to any commodity. The government of Venezuela doesn’t seem to realize that it’s price caps cause crippling shortages. Neither, it seems, does Mr. Bloom. Or perhaps he knows but doesn’t care – it’s just pure politics.

Back then landlords would often keep low rent apartments empty. And when one of those super cheap, shabby apartments did become available there would be hundreds scrambling to rent it, but the apartments invariably went to someone on the inside, who was in no way deserving of this huge, enforced gift. Thus although rents were low in theory, in practice there were no apartments to rent. That is the inescapable truth of price-caps: Goods are cheap, but they don’t exist. Then the black market takes over and illegal subletting (i.e. fraud) is the only option left.

Under vacancy control landlords couldn’t survive, so they began a “demolition derby” of their buildings to replace them with condos.  Then California banned vacancy control, owners could get a fair return while keeping their low-rent tenants, and the number of demolitions declined dramatically, keeping those tenants safe. Should AB1506 bring back vacancy control, the landlords who have been happy having some low rent tenants, (rather than the entire building of low-rent tenants that it would become under vacancy control) will once again be forced to seek demolition to escape bankruptcy - thus passing AB1506 will greatly imperil the very tenants it is claimed to protect.

Although it currently bans vacancy control, California does allow normal rent control. This lets owners ask for market rents after voluntary tenant vacancies. The new tenants are then again protected by rent control. Acknowledging landlords should have that small, constitutional, right and freedom rescued Santa Monica from being from the gigantic slum it once was.

There is so much unfairness here. Should AB1506 pass then pre-1979 buildings will be rendered worthless, but later ones won’t. But they are the essentially the same thing. Similar businesses should be treated the same way. Of course if they had applied rent control to new-build then only a fool would build apartments. Apparently only fools have been buying pre-1979 apartment buildings in Santa Monica, because if Mr. Bloom succeeds then values will collapse, and lots of mom-and-pops will lose their life savings.

And now, finally, we come to the real reasons they need to bring back vacancy control:

• The slow loss of low rent apartments as tenants move has eroded the number of voters loyal to whoever praises rent control the highest in city hall. Thus to keep their jobs rent control politicians need a fresh influx of super-low rent tenants to refill this reservoir of ultra-loyal voters - which AB1506 would (in theory) supply. 
• The fees. The ever-rising wage and pension bill at the rent control office at city hall is confronting the fixed number of rent control apartments. Should AB1506 pass then rent control can be modified without voter approval. Then Santa Monica will put post-1979 buildings under rent control as well, which will have the side effect of halting all new construction and further crippling housing supply.
• It gives Mr. Bloom a golden status amongst the fringes of housing policy and may give him the boost he needs to jump to the senate when he is term limited out. Never mind the scorched earth wasteland of Santa Monica he will leave in his wake.

Should AB1506 become law then say hello again to Skidrow-On-Sea, rental fraud and the loss of old-build apartment rentals. And that is just the beginning.

You must call and write assembly member Richard Bloom.

Phone: (916) 319-2050

Email:assemblymember.bloom@assembly.ca.gov

Tweet: @RichardBloom

Also, call, email and write to your Santa Monica city council members.

Or how about a march on city hall?