Study: San Francisco Rent Control Expansion Led to More Evictions

More moderate supporters of rent control will often argue that while the policy does constrain housing supply, it is nevertheless an effective means of keeping long-time tenants in their homes. The trick for policy makers is to balance these two goods of supply and stability.

But new research suggests that rent control might be a poor means of providing tenant stability as well.

A paper published last month by Northwestern University's Eilidh Geddes and Nicole Holz on SSRN, and summarized in a Cato Institute research brief published yesterday, found that the 1995 expansion of San Francisco's rent control law led to an increase in both evictions and complaints about wrongful evictions being filed with the city's rent board.

"We found that eviction notices filed with the rent board increased by 83 percent and that the number of wrongful eviction claims increased by 125 percent in zip codes with the average level of new exposure to rent control," write the researchers.

San Francisco's original 1979 rent control ordinance limits rent increases at buildings with five or more units occupied that year or before to 60 percent of inflation. In 1994, San Francisco voters passed a referendum that expanded those controls to 1979 buildings of one to four units. The law went into effect the next year.

The city's sudden expansion of rent control has proven a fruitful development for researchers.

A landmark 2019 study from Stanford researchers found that after the expansion, tenants in pre-1980 buildings were less likely to have moved than tenants in non-rent-controlled buildings. The same study also found that the supply of rental housing fell by 15 percent as landlords converted their buildings to condominiums or otherwise withdrew them from the rental market.

That lends credence to the idea that rent control provides a mix of stability for incumbent tenants and less availability and higher prices for new entrants in the rental housing market.

San Francisco's rent control ordinance allows landlords to reset rents to market rates for a new tenant, a policy known as vacancy decontrol. The Stanford study found that this gave landlords an incentive to get rid of rent-controlled tenants when rents started to rise quickly.

"Individuals in areas with quickly rising house prices and with few years at their 1994 address are less likely to remain at their current address, consistent with the idea that landlords try to remove tenants when the reward is high, through either eviction or negotiated payments," said Stanford researchers.

The Geddes and Holz study seems to confirm this result with its finding that evictions and complaints about wrongful evictions stayed relatively flat immediately after the expansion of rent control and then started to rise alongside rising market rents.

"Our results show that evictions do not increase until landlords have a financial reason to attempt to re-let, when market rents across San Francisco exceed the allowed increase in rental prices," they write.

This would also mean that rent control affords tenants the least amount of protection from rising rents when rents are actually rising.

Instead of just raising rents on a current tenant, who might be willing to absorb them, landlords are incentivized to evict them and get a new tenant paying the new market rent.

The study also reinforces the idea that even with price controls in place, market forces will heavily influence outcomes. Rent controls just make the process a lot less efficient, workable, and just for everyone involved.

Tenants are still moving as a result of rising rents. The difference is that landlords have to undertake the cost of filing and pursuing an eviction. If they're successful, a tenant is forced to move and gets an eviction on their record.

Rent control supporters typically argue that these aren't problems with rent control, they're problems with loopholes to rent control. They can therefore be fixed by eliminating vacancy decontrol, restricting condo conversions, and stepping up enforcement activities against illegal evictions.

New York's 2019 changes to its rent stabilization law that covers close to 1 million apartments in New York City were guided by these principles. It eliminated various means by which landlords could remove their units from rent control, reset rents to market rates, and pass on the costs of capital improvements to tenants.

The financial returns from operating rent-stabilized units have fallen dramatically as a result, leading landlords to claim their buildings are being "defunded." There's some evidence that unit quality is falling and vacancies are increasing, as owners have fewer funds and less incentive to maintain occupied units and renovate empty ones.

The fact is market prices tell you something real about the costs of operating buildings and the opportunity costs of capital needed to do it.

If regulations attempt to squeeze market prices out of the system, producers will find less efficient workarounds for charging those market prices anyway. If regulations are successful at shutting down those workarounds, fungible capital will move on to other parts of the economy where market returns can still be made.