Affordable Housing in Santa Cruz Causes and Policy Options
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Affordable Housing in Santa Cruz
Causes and Policy Options
Jesse Cunha, Ph.D.
Graduate School of Business and Public Policy, Naval Postgraduate School
Department of Economics, UC Santa Cruz
June 4, 2018
Introduction
In recent years, rents in Santa Cruz have been rising. According to Zillow’s rental price
index for newly rented multi-family units in the Santa Cruz area, rents were fairly flat from
2010 (the first year data is available) until 2014, and then rents began to rise in the summer
of 2014 at a rate of about 10% per year (Figure 1). While wages have been rising over this
time period as well, some renters are finding that rents are rising faster than their income,
which puts pressure on their household budget. This affects current renters when either they
move to a new rental unit or are asked to pay higher rent at the end of their current lease.
New renters are affected because they may not be able to find a rental unit which they can
afford.
In this short brief, I summarize the extensive empirical and theoretical academic literature
on the issues surrounding housing affordability, and explore the available policy options. In
light of the recently submitted rent control ballot initiative in Santa Cruz, it is important to
stress at the outset that there is little evidence suggesting that Rent Control is an efficient or
equitable way to address housing affordability. In fact, it is likely that Rent Control in Santa
Cruz would protect a small minority of current renters , while exacerbating the problem of
affordable housing for the majority of current and future renters.
1Figure 1: Median rents for newly rented units in Santa Cruz have been rising.
Median monthly rent, multifamily units in Santa Cruz
Data source: Zillow.com
3000 2500
Median monthly rent
2000 1500
July 2010 Jan 2012 July 2013 Jan 2015 July 2016 Jan 2018
Why housing is expensive
Basic economic theory explains that (1) rents are rising because the price of housing units
is rising and (2) increases in housing prices are being driven by an increase in demand for
homes with little change in the supply of housing units. The price of housing will continue to
increase as long as demand is increasing (more people want to live in the Bay Area and Santa
Cruz) and the supply of housing is relatively constant (there are few new units constructed).
These issues are summarized for non-academic audiences in two recent survey articles
by Glaeser & Gyourko (2018) and Metcalf (2018). Metcalf (2018) shows that while housing
prices and rents have been rising in several major metropolitan areas in the country (not just
the Bay Area), other areas have seen very modest price increases over time. For example,
Atlanta and Dallas have seen increases in house prices of 20-40% over the past 20 years, which
is roughly in line with general inflation, while, San Francisco, Los Angeles, and Boston have
seen home price increases of 100-160%.
There is abundant evidence showing that in places like Atlanta and Dallas, supply has
risen in response to increases in demand, and this helps keep prices low. Why then has supply
not risen in response to demand in areas such as the Bay Area? While construction costs do
vary across geographic areas, they do not seem to be the main impediment to building more
housing (See Gyourko & Saiz (2006) and Gyourko & Saiz (2006)). Similarly, geographic
constraints to building in mountainous areas near bodies of water (such as Santa Cruz) do
restrict growth, but this can not fully explain the large observed increases in prices over time
(Saiz, 2010). Rather, the main reason why more houses are not built to meet demand is
government-imposed restrictions on building, through the use of exclusionary zoning laws
that limit where housing can be built and the density on any given parcel of land (Glaeser &
Gyourko, 2002; Glaeser et al. , 2005a,b). Any public policy relating to housing affordability
must address the fact that restricions on growth and density will tend to increase the cost
of housing.
2Policies to address housing affordability
A major impediment to enacting meaningful solutions to create affordable housing is the fact
that zoning laws are created at the local level, while housing markets exist at the level of
metropolitan commuting areas. In the Bay Area, consider how common it is for individuals
to work in one city while living in another. Thus, individual cities and towns have the
incentive to protect “their own backyards” by continuing the status quo of exclusionary
zoning, yet collectively, the supply of housing does not expand to meet rising demand and
prices increase.
Nonetheless, individual cities can take steps to increase the supply of housing. Metcalf
(2018) summarizes the literature on the possibilities and limitations in the use of a host of
possible policy interventions, including: vouchers (subsidies) for low-income tenants, pub-
licly provided housing, affordable housing that is privately owned but price capped, relaxing
exclusionary zoning to allow for greater density or lower minimal standards of housing units,
controls on rental price increases, building transportation infrastructure to connect employ-
ment hubs to areas with affordable housing, and building more cities.
Rent Control is Not the Answer
Rent control as a policy solution has been used since the first and second World Wars,
and has often been enacted because it is an immediate and salient policy that appeals
to current tenants concerned about rental price increases. While rent control has been
enacted in various ways (see Arnott (1995)), all policies that restrict rental price increases
are broad-reaching government interventions into an otherwise free housing market. There
is an extensive academic literature that studies the direct and indirect pathways by which
rent control can impact a city. Here are some of the main conclusions:
1. Rent control discourages the construction of new rental units and encourages existing
units to be removed from the rental market (Sims, 2007). This leads to higher rents in
both non-rent-controlled units and rent-controlled units when those units turn over and
are rented at new market rates (Diamond et al. , 2017; Caudill, 1993; Fallis & Smith,
1984; Early, 2000; Early & Phelps, 1999).
2. Rent control gives benefits to existing tenants who remain in controlled units, but few
tenants stay in these units long term (Diamond et al. , 2017; Sims, 2007)
3. Rent control hurts landlords by reducing the return on their investments (Olsen, 1972)
4. The quality of rent controlled units eventually declines unless there are explicit incen-
tives for landlords to make improvements (Sims, 2007; Kutty, 1996; Moon & Stotsky,
1993)
5. Rental units are not occupied by those who value them the most, which implies a
significant loss of economic welfare (Glaeser & Luttmer, 2003; Gyourko & Linneman,
1989; Sims, 2011; Pollakowski, 2003; Ault et al. , 1994).
6. There are negative effects on the community
(a) Removing rent control has been shown to reduce crime (in particular, property
crime) (Autor et al. , 2017)
3(b) Rent control has been shown to increase homelessness, via higher prices of non-
controlled units and little increase in overall supply (Grimes & Chressanthis, 1997)
(c) Rent control leads to higher commuting times because rent-control “locks” renters
into a particular unit (Krol & Svorny, 2005)
The broad academic consensus is that rent control is not an effective policy solution to
provide affordable housing, and in fact, rent control can lead to worse outcomes than an
unregulated housing market.
Conclusion
All of the citizens of Santa Cruz - tenants and home-owners, both current and future - deserve
a more thoughtful discussion of the various options available to address the issues of rising
rents and housing affordability. Part of this debate must address the fact that if housing was
cheap, far more people would like to live in Santa Cruz than it could ever support; and this
high demand is likely to exist regardless of how much new housing is created.
The discussion should therefore focus on how much of our housing stock we as a community
believe should be accessible to those with lower incomes, and how those housing units should
be allocated if not via a free market. Sadly, while rent control may seem to some an effective
policy solution, the proposed initiative will likely end up benefiting only a few long-term
tenants while imposing greater costs on the rest of the current and future renters in our
community.
4References
Arnott, Richard. 1995. Time for revisionism on rent control? Journal of Economic Perspectives, 9(1),
99–120.
Ault, Richard W., Jackson, John D., & Saba, Richard P. 1994. The Effect of Long-Term Rent Control on
Tenant Mobility. Journal of Urban Economics, 35, 140–158.
Autor, David H., Palmer, Christopher J., & Pathak, Parag A. 2017. Gentrification and the Amenity Value
of Crime Reductions: Evidence from Rent Deregulation. Working Paper.
Caudill, Steven B. 1993. Estimating the Costs of Partial-Coverage Rent Controls: A Stochastic Frontier
Approach. The Review of Economics and Statistics, 75(4), 727–731.
Diamond, Rebecca, McQuade, Tim, & Qian, Franklin. 2017. The Effects of Rent Control Expansion on
Tenants, Landlords, and Inequality: Evidence from San Francisco. Working Paper.
Early, Dirk W. 2000. Rent Control, Rental Housing Supply, and the Distribution of Tenant Benefits. Journal
of Urban Economics, 48, 185–204.
Early, Dirk W., & Phelps, Jon T. 1999. Rent Regulations’ Pricing Effect in the Uncontrolled Sector: An
Empirical Investigation. Journal of Housing Research, 10(2), 267–285.
Fallis, George, & Smith, Lawrence B. 1984. Uncontrolled Prices in a Controlled Market: The Case of Rent
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Economic Perspectives, 32(1), 3–30.
Glaeser, Edward L, & Gyourko, Joseph. 2002. The impact of zoning on housing affordability. Tech. rept.
National Bureau of Economic Research.
Glaeser, Edward L., & Luttmer, Erzo F. P. 2003. The Misallocation of Housing Under Rent Control. The
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Gyourko, Joseph, & Linneman, Peter. 1989. Equity and Efficiency Aspects of Rent Control: An Empirical
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Gyourko, Joseph, & Saiz, Albert. 2006. Construction costs and the supply of housing structure. Journal of
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Krol, Robert, & Svorny, Shirley. 2005. The Effect of Rent Control on Commute Times. Journal of Urban
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Metcalf, Gabriel. 2018. Sand Castles Before the Tide? Affordable Housing in Expensive Cities. Journal of
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Moon, Choon-Geol, & Stotsky, Janet G. 1993. The Effect of Rent Control on Housing Quality Change.
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5Olsen, Edgar O. 1972. An Econometric Analysis of Rent Control. Journal of Political Economy, 80(6),
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Pollakowski, Henry O. 2003 (Mar.). Who Really Benefits from New York City’s Rent Regulation System?
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Saiz, Albert. 2010. The geographic determinants of housing supply. The Quarterly Journal of Economics,
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Sims, David P. 2007. Out of Control: What Can We Learn From the End of Massachusetts Rent Control?
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The B.E. Journal of Economic Analysis & Policy, 11(1). Article 27.
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