Rent Control Is a Terrible Idea
Few topics elicit a near-unanimous response in economics. One of them is rent control. Across the spectrum and over time, economists repeatedly agree that rent control is bad. In 1990, a poll of American Economic Association members found that 93% of respondents were against rent controls. A 2012 IGM survey from the University of Chicago — Booth has a similar result. The most nuanced take, from the Urban Institute, concluded that rent control benefits those who have it, but no one else.
In a field notorious for disagreeing on nearly every topic under investigation, why is there such a strong consensus on this? First, the body of available research supports it. That work has generally found rent control to be marginally effective for those who occupy controlled units — they do benefit from reduced rents, they are significantly less likely to move out — and of little benefit to anyone else. As the Brookings Institute summarized in 2018, “Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood.”
So, if the experts who look at this issue time and time again conclude that it is a terrible idea, why is it so popular? I think the answer is twofold: people think they will benefit and the negative effects will accrue to landlords, and a sustainable solution feels less likely and less immediate.
It is worth noting that research does support that tenants in a rent-controlled building do benefit. They pay less than the market rate on their living space and, depending on how the rent control laws are structured, they keep their more affordable rent as long as they maintain their tenancy. However, there is no such thing as a free lunch. If the market value for renting an apartment is, say $1500 / month, and rent control sets that to $1000 / month, that missing $500 has to be accounted for somewhere. I think there’s an assumption in a lot of peoples’ minds that landlords are greedy, milking tenants for rents according to what they can get away with, not what they need. So they see the $500 as costing the landlord profit and not doing any real economic damage. I am not going to disagree with the profit motive. Landlords don’t rent property because they think it’s cute. However, while there’s undoubtedly a level of said greedy bastards, a lot more are smaller landlords who own rental properties as an investment. And both groups are likely to charge more for rent because the cost of purchasing the rental property has increased so dramatically in the last couple of years. So that $500 may not be profit, but necessary to cover the property’s underlying mortgage or expenses.
That loss of rental income over time — as supported by research — is likely to lead to reduced investment in rent-controlled properties. In other words, with bare-bones income due to rent controls, those units are likely to be poorly maintained and lose value compared to non-controlled properties. This is a cycle that encourages the lowest common denominator to own and maintain rent-controlled units. Those who can do it with the reduced income will and may not be the ones that anyone wants in charge.
So, if rent control isn’t the answer, what is? The more sustainable answer is an increase in affordable housing. That includes multi-family housing, like apartment buildings. The problems here are manifold. Builders don’t profit as much from building apartments as they do from building houses. Fiancing multi-family is more difficult. I’ve touched on this before when I discussed Fannie Mae and Freddie Mac, but Fannie is the primary lender for multi-family housing and that makes up a small fraction of its portfolio. Zoning laws can also be an issue, as can NIMBYs who don’t want to integrate apartments into residential areas comprised of single-family homes. Even in southern Nevada, it can take months to build new apartment buildings. And yet, building more housing is the more sound solution. If you can rent an affordable apartment for $1000, you’re not going to rent one for $1500 unless you can afford to and you prefer it.
When rents increase by more than 20% in two years and there’s no corresponding change in wages, it’s hard to argue that the system isn’t rigged against renters. The problem is that those who own properties for income are going to do what they can to maximize their profit even in the face of rent controls. So there may be more affordable housing for some, but not for everyone who needs it and not for the long run. The better, more sustainable solution is to build more multi-family housing. It’s a lot less sexy but it’s better policy.
Originally published at http://battlebornecon.wordpress.com on April 25, 2022.