On Saturday, September 9, I posted about a move by the Monterey City Council to tax providers of rental housing and use the proceeds to run a compulsory rental registry. By the way, I thought the average quality of the comments on my post was high.
Since then, I had time to think through what one of the more articulate city councillors, Alan Hoffa, said. I realized that there was a contradiction between some good reasoning he presented and the position he took. So I wrote this letter to the Monterey Herald and it was published today. I signed it “David R. Henderson, Economist,” but the editor dropped the “Economist” part. The rest of the letter was intact.
At the September 5 Monterey city council meeting on the proposed rental registry, council member Alan Haffa made a good case for exempting both auxiliary dwelling units (ADUs) and home owners who rented rooms. But his case is more general than he thinks.
He argued that he and other members of the council want to encourage more ADUs and more room rentals. That makes sense.
But note his implicit argument: subjecting providers of ADUs and rooms in homes to the rental registry regulations will discourage the provision of such housing. If Haffa understands that, does he not understand, as many members of the public tried to tell him, that subjecting other owners to the regulations will also discourage them?
The fact is that when you raise costs, as the rental registry will do, you discourage the activity being regulated.
David R. Henderson, Economist
Haffa makes his points starting at the 3:05:20 point of this video.
You might wonder why a small annual tax (the staffer’s estimate–at the 2:53:05 point–of between $30 and $80 bracketed my $50 estimate) and an invasion of privacy would discourage people from being landlords. On its own, there probably wouldn’t be much discouragement. But when the mayor and Hoffa say that they’re open to rent control, some landlords will reasonably conclude that this compulsory registry is the first step to rent control. My back-of-the-envelope estimate is that there are about 6,000 rental units in Monterey. If landlords took 5% of them off the market, made them into condos, and sold them, that would be a big loss in a tight market.
The pic above is of Alan Haffa.
READER COMMENTS
Gorgasal
Sep 14 2023 at 8:35am
… also known as “regulatory uncertainty”.
Also, don’t forget the “death by a thousand cuts” argument: sure this one little thing by itself won’t be so painful to drive someone off the rental market. But combine it with all the other small hassles of landlording (both state-driven and others), and there are certain to be some marginal landlords for whom this will be the proverbial straw that broke the camel’s back.
robc
Sep 14 2023 at 9:03am
Also you have to think at the margin. There are some marginal landlords, where the calculation just barely makes sense for them to rent. $30 to $80 pushes the margin back, and you will lose those landlords who were on the margin.
Assuming some sort of normal curve, the new margin will have even more landlords teetering on it, so any other small additional cost would push even more out of the rental business.
robc
Sep 14 2023 at 9:31am
There is one mistake in my post…I was assuming Monterey was on the right side of the bell curve. Its possible they are on the left due to current restrictions, so each new restriction will cause less people to leave the rental market than the previous one.
Of course, that itself would explain the tightness in the rental market.
And if it is in the middle of the curve already, small changes would have a very large effect.
MarkW
Sep 14 2023 at 11:25am
If landlords took 5% of them off the market, made them into condos, and sold them, that would be a big loss in a tight market.
Well, yes, and some might also see writing on the wall and decide to do condo conversions before it was too late and future city council decisions threw up additional roadblocks in the way of such conversions.
David Seltzer
Sep 14 2023 at 5:55pm
Mark said; “Well, yes, and some might also see writing on the wall and decide to do condo conversions before it was too late and future city council decisions threw up additional roadblocks in the way of such conversions.” Right!! In the late 1980’s our private equity group bought several 4 and 8 family apartment buildings in Hoboken and Jersey City. We converted them to condos because of rent control there. By 1987 I estimate 25% of the rent restricted apartments in those cities were converted to condominiums.
Matthias
Sep 14 2023 at 7:37pm
I can believe that even a small tax and extra bureaucracy plus threat of future rent control can have a bad effect on supply.
But how is the conversion to condos supposed to be bad? The overall supply of dwellings stays the same, and each dwelling that’s occupied one way or another takes one household off the market on the demand side. What difference does it make whether that unit is rented out or owner occupied?
Or do people get spontaneously generated when the market ‘needs’ owner occupiers?
As far as I can tell the damage would be when units either stand idle, don’t get maintained or don’t get built?
MarkW
Sep 15 2023 at 10:12am
But how is the conversion to condos supposed to be bad?
Housing activists see this as a bad thing because it tends to price lower-income people (who are more likely to be renters) out of the market. For that reason, some cities do impose various restrictions on condo conversions. First they impose rent-control which creates incentives for conversion, and then they try to throw up barriers to conversion to fix the problem they created in step #1. I think there are limits to how hard they can make the process though before the rules rise to the level of a constitutional ‘taking’.
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