Unintended Consequences

Addressing complex problems often results in unintended consequences. Legislators frequently confront such outcomes when enacting comprehensive laws and ordinances.

For example, the San Francisco rent control ordinance, implemented in 1979 during a period of significant rent increases similar to recent trends, was designed to enhance housing affordability for tenants. While the regulation has evolved, its primary provision – restricting annual rent increases to 60% of the Consumer Price Index (CPI) – has remained unchanged, compounding effects over nearly five decades.

Although the intent was to protect tenants from unaffordable rent hikes, maintaining rents below the rate of inflation has produced several long-term, adverse effects that contribute directly to the current housing crisis. From a landlord’s perspective, artificially low rents reduce the incentive and financial capacity to undertake major renovations. As operational costs, such as insurance, utilities, maintenance and repairs continue to rise, the margin for reinvestment diminishes, leading to neglected properties adversely impacting both neighbors and tenants.

Another consequence is tenant retention: Individuals benefiting from controlled rents are less likely to relocate, further restricting the rental supply and contributing to elevated market rents. Some tenants may even purchase additional properties while opting to remain in their rent-controlled units due to economic advantages, thereby intensifying supply constraints. This dynamic rewards long-term tenants with below-market rents, while newer, often younger renters face higher rates and limited availability.

These developments prompt important policy questions: Should rent control benefit all tenants, or primarily those with longstanding residency? Should there be income-based eligibility criteria for rent control? Addressing these questions is crucial to implementing effective and equitable revisions to rent control legislation.

Unintended consequences also arise at state and national levels. Consider the taxation of principal residence sales. Prior to 1997, homeowners could defer capital gains taxes by purchasing a new residence of equal or greater value within two years. The subsequent law, enacted in 1997, introduced exclusions of $250,000 for single taxpayers and $500,000 for married couples, with gains beyond these thresholds subject to capital gains tax. Over time, property appreciation has rendered these exclusion amounts less generous, resulting in increased tax liabilities upon sale.

Additionally, Proposition 13 limits annual property tax increases to 2%, creating a financial disincentive for homeowners to sell and repurchase homes, as higher property taxes may result from a new purchase. Proposition 19, passed in 2020, permits seniors, persons with severe disabilities and wildfire victims to transfer their property tax basis to a new home up to the value of the previous one. Nevertheless, many homeowners opt to retain their properties, further restricting inventory and exacerbating price increases.

Current debates regarding proposed Family Zoning Legislation in San Francisco highlight similar complexities. Advocates argue that increasing housing density will lower prices and rents by augmenting supply. However, an examination of current rental listings reveals that the challenge lies not in total supply, but in the lack of affordable options. Mandating affordable units within new developments is intended to address this shortfall, yet potential unintended consequences remain to be seen.

The current high housing prices are the culmination of strong economic conditions, high desirability and well-intentioned policies that have not fully addressed the intricate realities of the market. Meaningful progress will require careful analysis, innovative thinking and difficult policy decisions.

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.