Kyle Russell argues that San Francisco’s housing prices are so expensive because there’s too little housing: height and other zoning restrictions make it impossible to have high density. This leads to a bidding up of prices by the wealthy, who can outcompete the not-so-wealthy. I agree that this is a large part of the problem (though, oddly enough, few seem to think attacking the wealthy part of the equation might do something). But what all of these arguments don’t explain is why rental prices never decrease except in truly extreme circumstances. The run up during boom times makes sense, but then prices don’t drop during the bust.
Well, some asshole on the internet proposed this explanation (boldface added):
Another issue that I don’t think Yglesias tackles is that rents never drop in nominal terms (though landlords might offer discounts), unless the economy craters Detroit-style. In many urban areas, large real-estate companies own a significant fraction of rental properties (and are also involved in the home purchase and construction markets). These companies use their rental properties as collateral for ongoing and future projects. While they might offer temporary discounts to effectively lower rents (e.g., something broke, so you get a discount for that month or paying a realtor’s finder fee, etc.), if they lower the ‘official’ rent, the value of their properties decreases, raising the interest on their ongoing loans. These companies drive the prices in the non-corporate rental market, making prices sticky.
Leaving aside national effects such as the collapse of Big Shitpile in 2008, most housing markets are local, so I don’t know if this applies to San Francisco, but it would be useful to figure out how much of the rental market, especially at the high end, there and elsewhere is controlled by large companies versus ‘Mom and Pop’ rentiers (who as long as they don’t go bust, can be more flexible, especially post-run up).