Unintended Consequences

Have you ever tried solving a complex problem and had unintended consequences after it is all said and done? What did you do? How did you go about resolving it?

Legislators passing complex laws and ordinances encounter these issues all the time. Take for example Proposition 19 that was passed in 2020. There were two parts to this measure. What was emphasized was that this new law gives homeowners who are over 55, severely disabled, or whose homes were destroyed by wildfire or disaster, the ability to transfer their principal residence’s property tax basis over to a replacement residence of any value anywhere in the state. The part that was not promoted was that in order to make this measure more revenue neutral, the county gets to reassess inherited properties up to market value except for a few exemptions.

This measure passed but people have been trying to get signatures to repeal the second part as soon as it was passed arguing that they were misled and did not understand the full measure or that ballot measures cannot tie two significant and separate issues together.

Another example is our San Francisco rent control ordinance. It was created in 1979 when rents were increasing. One of the key components was that annual rent increases are limited to 60% of the Consumer Price Index (CPI). The intent of the law was to keep housing more affordable for tenants. But keeping rents below the rate of inflation has unintended consequences in the long term that we are dealing with today and contributes to the housing crisis.

From the landlord’s perspective, because rents are held artificially low, there is not enough return on investment to do renovations or maintenance. With our aging housing stock, many properties are being neglected to the detriment of neighbors and tenants. And in recent years, even the largest landlords in the business could not make it given the restrictions put on them and their properties got foreclosed upon and they were forced to give up their properties.

Another consequence of rent control is that tenants who have been in a unit might never move because the rent is so far below market rent. This limits the rental supply on the market, thus resulting in high rents like we are experiencing. There are even tenants who have purchased properties but decide to stay in their existing unit while renting out the purchased property because it made more economic sense.

The tenants who have been renting their units for a long time are enjoying the benefits of low rents, the younger tenants who are just starting out are paying high rents while having to deal with very low rental inventory.

The questions that begged to be asked are: Is rent control supposed to help all tenants or only those who have been in a rental unit for a long time? And should there be a mechanism whereby tenants who are in a high-income bracket not qualify for rent control benefits? The answers to these questions can provide the basis for better rent control legislation.

Unintended consequences not only occur on the local level but on the state and national level also.

Take for example the taxation on the sale of a principal residence. Prior to 1997, a homeowner could sell his or her home and take up to two years to purchase a home of equal or higher value without paying any capital gains taxes. In 1997, this law was eliminated, and a new law was passed whereby the first $250,000 of gain, if the taxpayer is single, and $500,000 if married, are excluded from taxes. Any amount over this would be taxed at the capital gains tax rate.

At the time, the amounts seemed generous. However today, many home sellers have gains over that amount on their home and would have a large tax liability if they were to sell. So, the decision often is to hold instead of selling. This once again limits housing inventory, and thus with demand results in higher and higher prices.

Our current housing crisis did not happen overnight, but it is a result of a growing economy, a desirable place to live, and laws that had good intentions at the time but fell short on solving a complex problem. And over a long period of time, the unintended consequences just multiply. It will take a lot more brainstorming and tough decisions to correct this situation.

John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email johnlee@isellsf.com.