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Rent Control: An Old, Bad Idea That Won't Go Away

05 Nov 2018

Vanessa Brown Calder and Ryan Bourne

The Bradley Cooper-Lady Gaga remake of A Star Is Born
isn’t the only thing from the 1970s making a comeback this year.
After most states passed laws blocking rent control in the 1980s
and ’90s, there’s now a push to reintroduce it from coast to
coast.

Californians will be voting Tuesday on a ballot measure that
would repeal a state law prohibiting cities from
expanding rent control
. In Illinois, the state legislature is
contemplating eliminating a ban on rent control and creating six
boards to manage rents statewide. Meanwhile, the New York city
council is considering a potentially unconstitutional commercial
rent-control proposal that would limit property owners’ ability to
increase rents for office, industrial and retail space.

This resurgence comes in the face of escalating pressure to “do
something” about sharply rising rents in urban areas. Yet
economists of all political persuasions are highly skeptical that
rent controls can be successfully re-imagined. Indeed, it is
difficult to think of another policy where conservative economist
Thomas Sowell, who once observed that “the goals of rent control
and its actual consequences are at opposite poles,” can agree with
liberal economist Paul Krugman. As Krugman, a New York
Times
columnist, explained in 2000, introductory economics
teaches that artificially compressing rents results in a shortage
of rentable properties. The lower fixed price increases the demand
for rental housing while reducing the quantity of it offered for
rent.

That’s because landlords confronted with the regulation are
incentivized to convert properties to other, higher-return uses.
Developers, meanwhile, find new rentable accommodations less
profitable to build, compounding the scarcity-of-supply problem
that often drives high rental prices in the first place.

With urban rents rising
sharply, there’s a push to reintroduce it. But it won’t fix the
affordable-housing shortage.

This is not just theory. Following a 1994 rent-control expansion
in San Francisco, research found that landlords converted rental
properties to owner-occupied apartments and condos better suited to
higher-income families to avoid being subject to the regulation.
The supply of new rentable housing fell too, increasing underlying
market rents by over 5 percent. Rent control both increased the
cost of non-controlled rental accommodations and accelerated
gentrification.

Tenants with rent-controlled apartments benefit financially, but
there are tradeoffs for them as well. Landlords under rent control
have strong incentives to neglect maintenance or upkeep, allowing
properties to fall into disrepair until the market price for the
unit reflects the rent-controlled price. And property owners can
become more discerning about the types of tenants they want to rent
to, making potential tenants jump through administrative hoops to
capture the prize. This can also discourage tenants from moving to
new jobs or more appropriately-sized housing. It’s been estimated,
for example, that 21 percent of rent-controlled tenants in New York
City live in properties with the wrong number of rooms for their
needs.

Faced with this historical evidence, advocates today instead
emphasize the benefits of rent control on tenant security. They
advocate regulations that limit price hikes in fixed tenancy
periods, but with rents free to adjust when a tenancy ends. This is
said to protect tenants against so-called “economic eviction”
— huge unforeseen jumps in rent that force a tenant to move
out.

No doubt tenants value security. But that such contracts are not
widespread in free markets suggests that landlords value the
flexibility to adjust rents to market conditions and their
experience with tenants. Changing the balance of risks in favor of
tenants would require higher rents to compensate.

All of this indicates that tenancy rent controls and security
regulation will — at best — lead landlords to
front-load rent hikes, select tenants likely to stay for short
periods, or provide poor service during tenancies if underlying
market rents are rising rapidly. At worst, tenancy rent controls
would increase overall market rents by raising risks to landlords
and reducing investment in new stock, particularly if the controls
are perceived as a precursor of more-onerous regulation.

The truth about housing affordability is that high rental prices
communicate that the supply of rentable property in the market is
scarce relative to demand. The urgent message emanating from many
desirable U.S. cities is that too few rentable units have been
produced over long periods. But crude rent controls will worsen
this shortage. And more flexible rent regulation amounts to just
suppressing this price message for a lucky few tenants in the short
term, in ways likely to worsen affordability more broadly.

Rent control can’t overcome the structural challenges to
affordability that high-cost cities face, and a rent-control
revival diverts attention from pro-development reforms that matter.
Policymakers who care about housing affordability should leave rent
control where it belongs: in the past.

Vanessa Brown
Calder
is a policy analyst at the Cato Institute. Ryan Bourne occupies
the R. Evan Scharf Chair for the Public Understanding of Economics
at the Cato Institute

Click here to view the full article which appeared in CATO Journal

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