Santa Monica Shows Us How Government Ruins the Economy

The government ruins the economy when it forbids people from using their resources to make one another better off.

To understand how stupid and short-sighted Santa Monica is being, let’s think about three groups of people. First, there are people who need temporary residences and are willing to pay for those residences. These people could be vacationers or they could be people who have a temporary job relocation. But they need housing.

The other group of people would be investors and entrepreneurs who see an opportunity to serve the needs of these other people and provide them with temporary residences.

Finally, there are others who need private residences on a more permanent basis: potential homebuyers, not renters or people thinking of houses as rentable properties.

All three of these groups have needs and in a free market they cooperate in the distribution of limited resources. Not everyone gets what they want because they would all prefer to get free housing or free money. But in the process of buying and selling or renting the best possible prices are established and the best possible arrangement is created.

With that background in mind, let’s see how Santa Monica decreased the value of homes and made changes that will make the next housing crisis more severe. Consider what Andrew Bender writes at Forbes under the headline, “New Regulations to Wipe Out 80% Of Airbnb Rentals in California’s Santa Monica.”

The Los Angeles suburb of Santa Monica has instituted the nation’s toughest regulations on short-term rentals like Airbnb. Starting today, hosts will have to live on the property during the renter’s stay, register for a business license and collect the city’s 14 percent occupancy tax.

The city estimates that this will shut down about 1,400 of the 1,700 short-term rental listings – about 80 percent – in this upscale beach town and major tourist destination, population about 92,500.

The city government decided that they wanted the prices of houses to be lower, to encourage homeownership, and discourage renting.

[See also, “New York Gov Gangsters Want to Destroy Thriving Black Market in Rental Property.”]

First of all, who are they to determine where people should live or on what terms? Why can’t property owners make their own decisions about what it best for them?

More than just driving up rents, [Assistant Director of Planning and Community Development, Salvador] Valles says, the decrease in owner- and long term renter-occupancy has the potential to change the character of the city. “It becomes more of a transient community than a neighborhood where people are invested in the community.”

“Our city council thought that it was important to intervene and return rentals to the housing market,” he says.

A second problem with this is that the remaining homeowners have probably made financial decisions and commitments based on the current value of their homes. If suddenly a bunch of rentals are liquidated into the home market, then housing prices could go down a great deal more than anyone expected. This change in housing values could actually start a crash.

If there was a housing crash, whether started by these new regulations or by some other means, it would be even harder for homeowners to keep their homes. When a housing crash occurs we have some people who lose their homes right away and need a less expensive place to stay. Others struggle to remain in their homes. So the optimum situation is that those who are still in their homes rent part of the house, if only one or two rooms, to others who need a place to stay.

The business license requirement and the occupancy tax will make such arrangements harder to work. So more people will lose their homes and more will be homeless, unable to find a cheaper place to rent.

Effectively, the city government has simply reduced the value of all Santa Monica’s houses by limiting what owners can do with them. Everyone is now poorer because of this government interference.

Finally, what about businesses that have literally “invested in the community,” by starting businesses catering to Santa Monica’s current demographic with all its renters and vacationers? It seems more than likely that many of them will have to move elsewhere. How does that help the city’s tax revenues?

Nothing about this decision is going to make Santa Monica prosper. It was already prospering and the city government is trying to stop it. This is how a government ruins the economy, whether a local economy or the world economy.