Rent Control

January 27, 2021

Rent control has been used in a number of cities by politicians claiming to want to provide affordable housing to those who cannot afford to buy. The question of good or bad policy rests on where you fall — in or out of a rent controlled apartment. Those whose rent is capped experience a lower overall cost to rent over time. This represents the intended consequence. However, rents for those who do not have rents capped tend to increase an excess amount. Those receiving rent controlled housing become subsidized by those not in rent controlled housing.

Politicians can be one of the main beneficiaries by designing a program with parameters capping their own rent. A long time Congressman from New York famously managed to have 4 adjoining rent controlled units. He effectively converted them to one large executive residence. Many New York City politicians live in rent controlled units and love rent control.

Widespread reports and academic studies confirm that many individuals in areas such as New York pass rent controlled apartments from one generation to another. They also pass apartments on to another family member without other renters having any chance to rent. Additionally, many keep rent controlled apartments even when the individual no longer resides there. Instead, they sublet at a higher rent, but lower than market rent, to someone else. The individual controlling the rent-controlled unit pockets the difference.

Swedish socialist economist Assar Lindbeck gained semi-fame his saying. “in many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.”

Recent Rent Increases

Given the recent rent increases, the call for rent control may grow louder. The problem this time around stems from sale price increases. Buyers willing to pay more (including large buy to rent investors) have to charge more rent. SO increasing buy prices create pressure to raise rents.

Second, renters and buyers become even more picky that homes, condos and apartments be updated to provide better interiors and a better living experience. All of the HGTV, DIY and related programs emphasize the updating regime.

Whether buying, building, or updating, the prices of materials, the price and shortage of skilled contractors, and the greater flexibility in living locations have all contributed to higher rents and sale prices.

These factors come together to affect what renters want to rent and the prices they pay. The residences updated may not have been in as bad of disrepair as in years past. But they emphasize the choices renters make. Older, non-updated properties still command less rent than updated and more modernized properties. And updating in stable neighborhoods with better schools still commands large rent premiums.

Choosing Location

Getting better schools for all would be a factor to help give renters more places to rent which meet their needs. Unfortunately, the fact that schools no longer teach basics well enough for needed core knowledge will continue to be problematical for poor school performance. The more esoteric and non-core the teaching in schools, the less desirable the schools become, especially at elementary school level. If your child can’t learn basic math but can agitate for social issues, the schools aren’t doing well and will suffer more over the long term. When financial means allow, parents choose schools and school districts where they can play a bigger role in ensuring their children learn basic fundamentals in reading, writing, and thinking instead of indoctrination.

Rent Control Trade-offs

Inherently, it appears to most that rent control provides help to those who need it. Arguably, it does provide help to those with a rent controlled unit. But that doesn’t assure the rent controlled unit goes to one who needs it. For the most part, the cost of housing in dense urban areas exceeds that for areas outside the urban areas. And many support jobs in urban cores provide only limited wages for those positions. It becomes very difficult, if not impossible, to pay urban rents on low or minimum wage jobs.

What happens over the long term to rent controlled units? Most people are familiar with the old housing projects, many of which have been torn down. Like rent controlled apartments of today, maintenance costs and service suffer. The units tend to fall more into disrepair than non-controlled apartments. Eventually, the rent-controlled property reaches its useful life. Builders tear it down for an alternate use where possible.

Weighing the Effects

Do the bad effects outweigh the good effects? If you have a rent controlled apartment, you probably answered no. But virtually no economist agrees with that position. Again, if it is localized to you, it is one answer. If the effect measured is for the overall renter community in the area, the answer is the opposite. According to many, many studies, more than 80% of economists come down on the bad policy side while only 2% take the good policy side.

One issue to overcome is the US Constitution. Rent control laws walk a fine line. Rent control constitutes a “Taking” under the 5th Amendment. “Nor shall private property be taken for public use, without just compensation.” Effectively, a government must compensate the property owner for lost rent. It is taking from one person to give to another. Decades ago, the Supreme Court affirmed this interpretation of the 5th Amendment. “The Fifth Amendment’s [Takings Clause] . . . was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”

Quantity and Quality of Housing

From an economic standpoint, rent control acts as a price ceiling — i.e., landlords have a limit which their rents cannot exceed. Price ceilings are problematic. By limiting prices they also limit potential profits. Ok, not so bad in many opinions. But, it discourages providing housing and services while increasing demand. This leads to further scarcity, exacerbating the problem. Take a poll concerning low rent or as the extreme example, free. What is the demand for a free apartment? Likely infinite. The news story always present on tv or radio blares a shortage of “affordable” housing. This represents housing priced well below market and with rents subsidized by someone else.

Apart from discouraging investment in new construction, rent control also incentivizes landlords to shift to other types of real estate exempt from rent control. Landlords may convert their apartments into owner-occupied condominiums or luxury units. Landlords may also demolish old building and redevelop them into new, expensive housing. This reduces the housing available in the market for low-income renters. One way through which rent control reduces housing supply is by discouraging investment. Why build to lose money? Let’s look at some evidence and examples from multiple studies.

Studies on Rent Control Effects

Between 2010 and 2018, California cities with rent control measures had a 2 percent decline in growth of supply. Cities without did not.
Between 1980 and 1990, Santa Monica and Berkeley lost an average 10 percent of their rental housing units. Nearby cities with no rent control experienced an increase in supply of rental housing units.
After rent control repeal in 1995, Cambridge, Massachusetts experienced a 20 percent rise in permits. The permits for new construction improvements doubled spending on this housing.
Between 2010 and 2013, Los Angeles experienced decline in the growth of housing supply. Builders didn’t build an expected 79,000 units of housing. Median gross rent jumped 3.8 percent higher than it would have without rent control.

More Evidence

In San Francisco, “many buildings converted to new construction or condos exempt from rent control” according to an in-depth 2019 study. This caused the number of renters living in rent-controlled units to decline by 25 percent. Furthermore, total rental housing supply reduced by 15 percent. And rent went up by 5.1 percent citywide as excess demand flowed into the uncontrolled sector. Since the high-end housing built in San Francisco attracted residents with higher incomes, rent control contributed to the gentrification of San Francisco. This result was the exact opposite impact that the rent control policy intended.
In San Francisco, tenants in rent-controlled apartments saved $2.9 billion between 1995 and 2012. However, current and future residents paid $2.9 billion more for housing. Prices in non-controlled buildings had skyrocketed. This canceled all of the savings by those in rent-controlled apartments.
After implementation of rent control in Cambridge, Massachusetts, about 10 percent of housing converted to condominiums within ten years.
In Cambridge, Brookline, and Boston, the rental housing stock declined by 8, 12 and 2 percent respectively between 1980 and 1990. Landlords converted to condos and other types of housing that were exempt from rent control. Meanwhile, nearby cities experienced an increase in their rental housing stock.

Side Effects

Rent control also encourages tenants in regulated apartments to overstay to maximize savings from cheap rent. This, however, means that fewer apartments are available on the market for new low-income renters. Poorer renters have less options to find housing. Long term residents hold onto the apartments regardless of whether they later become high income earners. Other renters face raised prices as renters compete over fewer available units. In New York in 2011, about 23 percent of house-holds in stabilized units have lived in their respective unit for 20 years or more. This reflects three times the occupancy period in market rate units.

Many rent controlled units become under-utilized. In 1990, after 10 to 20 years of rent control, Brookline and Cambridge had the lowest number of tenants per building compared to other local areas. In Cambridge, rent controlled buildings were generally found to be deprived of essential repairs. They were in worse condition compared to non rent-controlled. And they had maintenance problems like holes in the walls and floors, chipped or peeling paint issues and loose railings.

Who Wins?

Contrary to popular opinion, residents in rent-controlled houses are not always the poorest. Evidence heavily indicates that middle and higher income renters heavily benefit from rent control measures.

In Stockholm between 2011 and 2016, individuals in rent-controlled apartments had incomes 30 percent higher than the metropolitan average.
In San Jose, 62.1 percent of renters in rent-controlled units in 2013 were middle and higher income earners.
Low-income renters only made up just 27.7 percent of all renters in rent-controlled apartments in cities of Los Angeles, San Francisco, and Oakland.

Furthermore, equity may place a role. Rent control prevents landlords from using price to choose whom to rent to. As a result, they may use other characteristics like race, income levels, or status of public assistance. This ends up hurting already disadvantaged individuals. Instead of helping the disadvantaged, other criteria may to used to discriminate against those seeking the help.

Equity Studies – Who Gets The Benefits

In Cambridge, for example;

Landlords preferred to rent their units to higher income tenants, not those receiving public subsidies.
Fewer poor renters found rent controlled housing during rent control than after abolition of rent control.
A 2007 study estimated only 26 percent of renters in the bottom quintile of earners had rent controlled apartments.
Additionally, while Hispanic and Black residents were 25% of the city’s populations, they were only 12% of the residents in rent-controlled units.

Rent control ultimately led to the displacement of large, disadvantaged renter populations by a younger, higher income, better educated, singles population.

In Santa Monica and Berkeley, the proportion of low-income households, college students, elderly persons, families with children, and disabled persons declined. High-income renters, mostly highly educated individuals, displaced low-income renters at a higher rate compared to other cities. So kick out the poor in favor of those with college degrees.

More Housing?

Another study found housing supply grew faster in Berkeley, Oakland, San Francisco, and San Jose after the repeal of strict rent control policies. That repeal came from passing the Costa-Hawkins Rental Housing Act. This 1995 state law repealed vacancy control. It also required all California Cities to exempt new buildings, single family homes and condos from rent control.

Historically, rent control measures show up in areas facing rising housing costs due to shortage of supply. Think dense urban areas where additional construction is very expensive, very difficult, and very lengthy. Research heavily indicates that adding new housing — even at market rates — pushes vacancy rates up. Higher vacancy drives down prices as renters have more units to compete over. This phenomenon witnessed during the pandemic noted high and rising vacancy rates lowered rents in many cities. In San Francisco rents were down by 45 percent for one bedroom apartments by March 2021. San Francisco represents an extreme move, but the effect was similar in New York and many other high costs areas.

So what. I’m going to buy.

Rent control rarely happens in isolation. Almost invariably policies in place in the same area seek to limit new housing. High fees, absurd plan review processes, overly strict ordinances all deter building. Existing owners see the resulting high home prices as a wealth builder as well as a barrier to entry for the “wrong” people to buy in.

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