San Francisco Faces Rent Control, ‘Housing Crisis’

Home to nearly 850,000 people and rapidly growing, the City of San Francisco is packed into a little less than 47 square miles. Having long been known as one of the primary financial, tech and cultural hubs of the United States, San Francisco is a place where many people want to be. Business is booming, companies are competing for employees, and the city is as culturally vibrant as ever. It seems like every week there is another article about San Francisco topping another a “best of” list.

Supply, Demand, Rent Control

Every city endures growing pains during times of economic expansion – new construction, rising rents and home prices – not to mention added stress to the local public infrastructure. The supply of housing in San Francisco remains relatively static for various reasons, with strict building and zoning regulations, a comparatively fixed supply of buildable land and the added complications surrounding the development of real estate in a densely populated, coastal city. On the flipside, demand for housing, which most consider a necessity, is highly inelastic. This is due to the average per-capita income for San Francisco residents, which is about 80 percent higher than the average per-capita of the United States. The average per- capita income in San Francisco was only 50 percent higher than the United States just 10 years ago.

San Francisco has long been home to residents who also tend to be more socially liberal and in support of a mixed-economy, drawing characteristics from both market and planned economies. For example, the city enacted the San Francisco Rent Control Ordinance in 1979. Buildings constructed before 1979 are subject to rent control, which contains the majority of the local housing stock. Legally, controlled rents can only go up each year by a fraction of the actual inflation rate. Like most public policies, the result creates positive and negative externalities.

The Result

Real estate takes time to build and redevelop. There are various aspects that filter into the decision-making process, including planning, construction, risk allocation, debt and the marketing process, among many others. The result is a fixed supply in the short run and, for San Francisco specifically, a highly inelastic supply in the long run. Rent control further decreases the supply of housing by creating a ceiling on prices for certain individuals who remain in apartments for extended periods of time. Added to this equation is the highly inelastic demand that consistently increases as more people look to move into San Francisco. The end result isThis leads to drastic increases in prices and a significant shortage of available housing. For those at the right place at the right time (or long-term residents), it creates a place where culture and creativity thrive.

Marcus Griffin, Broker Associate, Holyoke Alexander in San Francisco. This article originally appeared in the November 2014 edition of Western Real Estate Business magazine.