If Rent Control is Like Winning the Lottery, Who Buys the Losing Tickets?

October 10, 2018

Speaking in support of a ballot initiative that would allow California cities to expand rent control, Los Angeles Mayor Eric Garcetti recently likened snagging a rent-controlled apartment in L.A. to “winning the lottery.” In a typical lottery, it’s exciting to see someone win big, but we all know that some of the winnings come from plenty of people who wasted money buying lottery tickets that never paid out. Clearly, scoring an apartment or house to rent at a price well below what the owner of the property could charge is a sweet deal. But if that’s the upside, what’s the downside, and who pays for it?

As it turns out, quite a few people are paying for that downside. A December 2017 report from the Legislative Analyst’s Office in California noted, “economic theory suggest [sic] that rent control policies reduce maintenance of rent controlled properties, reduce construction of new rental housing, and increase rents for housing that does not fall under rent control,” though it adds that empirical research on these issues is somewhat mixed. Despite that caveat, the conclusion that rent control policies cause more problems than they solve remains one of the most agreed upon conclusions in the field of economics. See here, here, and here.

When a property becomes subject to rent control, the first losers are the property owners. Stripped of their ability to freely negotiate rental agreements with prospective tenants, property owners usually see a decline in the value of their property, and many simply turn rental properties into condos or other kinds of housing that can be sold rather than rented. Even the property owners who do keep their properties in the rental market are likely to see much lower returns, often hampering their ability to perform regular maintenance.

Ok, you’re probably thinking “boo hoo,” those property owners might get a little less money, but maybe that’s worth it if renters are the ones benefiting. Ah, but this is only true for renters who actually get to rent the apartments that are rent controlled. With declining property values and lower expected returns on rental units, places with rent control laws have far fewer homes to actually rent. With fewer places to rent and the same number of renters, the cost of renting in the area increases dramatically—ironically making housing much more expensive for the majority of renters who didn’t hit the jackpot.

Local governments are another often-overlooked loser. Because most local governments are supported by property taxes, the reduced property values that go along with rent control end up resulting in a decline in property tax revenues. This can severely strain local government budgets. In one particularly dramatic example, the city of Toronto introduced rent control in 1975 and over the next five years, the city saw a decline in property values of 40 percent!

So how can we make renting cheaper without everyone (except our lucky jackpot winners) being worse off? Increase the supply of places to rent! This means different things in different places, but there are a few general policies that can help. First, ensure zoning rules don’t make it impossible to build new or denser housing. Second, reduce the number and burden of building restrictions that make new construction or renovation prohibitively expensive. And finally, consider changing rules that ban new, innovative kinds of housing, such as tiny homes or prefabricated housing.

Housing is too important to run like a lottery, especially when there are clear ways to help renters, property owners, and local governments alike.

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Ben Wilterdink is a Research Fellow and former Editor-in-Chief of Catalyst at the Independent Institute.
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