Rent Control: A Bad Idea Has Spread Again

Oregon, California, and New York recently passed rent control measures. Some Washington politicians want to make it national policy. Here’s why that is wrong.
September 18, 2019

Rent control is back in style. Despite real-world failed examples and bipartisan criticism from economists, it’s being revived in places and by people who thrive on emotion-based politics. New York, California and Oregon have all passed recent bills imposing some variation of rent control on housing statewide. Even some national politicians have called for it, including Alexandria Ocasio-Cortez, who said it should be universal.

Rent control has appeal because it seems like an easy fix – just forcefully suppress rents and watch as housing stays affordable! But while it keeps housing affordable for some, it makes it less so for everyone else. Below are some reasons why, as outlined in the economic literature.

Prevents turnover: Rent-controlled units have abnormally low vacancy rates, because tenants know they’re receiving a bargain and don’t move. This prevents the turnover that occurs in healthy real estate markets. Instead, rent-controlled cities get a big stock of permanently-occupied rental housing, largely filled by older tenants. Newcomers—or existing tenants not lucky enough to have such a unit—must compete for the limited remaining stock of market-rate housing. This means rent-controlled units raise rents for everyone not living in one.

Misallocates resources: This above factor also means rent control becomes a misallocation. In normal markets, households often move to smaller units as their needs change. Maybe a couple’s kids left for college, or someone becomes a widow. With rent control, people stay and over-consume larger units that would be more useful to—and thus attract higher payment from—someone else. Other times, rent controlled units are given to people who don’t actually need them, but might have political or business connections, or know how to flout poorly-enforced laws. That’s why we hear stories of rich people living in rent-controlled units, or even subletting them as pieds-a-terre. In any of these cases, the lack of pricing and market feedback prevents consumers from matching with the appropriate housing.

Causes under-maintenance: In organic markets, the clearing price landlords set for apartments will be high enough to cover expenses; otherwise they’ll go out of business. But in rent-controlled markets, there’s a revenues-expenses mismatch. While the costs of land, labor, taxes, and maintenance rise based on market factors, revenues are set by the government, and often aren’t enough to cover costs. Various papers have found that this causes deferred maintenance, leading to shoddy housing, and preventing the vast sums generated by repair investment from flowing through the economy.

Raises government compliance costs: Even though governments are notoriously ineffective at getting rent-controlled units to benefit the right people, they spend lots of money trying. A 1980 study in Cambridge found that rent control board administration and enforcement cost the city $700,000 annually. As Blair Jenkins wrote for the American Institute for Economic Research, “measurements of administrative costs remind us that bureaucracies are a player and an interest group.” Vast additional costs arise from the lawsuits that governments and landlords file against each other due to rent control, usually about the maintenance landlords are required to provide. This is money that doesn’t get to be spent on actual housing repairs or subsidies.

Spurs condo conversions: It should be obvious to readers by now how much of a bind rent control puts landlords in. They’re expected to provide housing of a certain quality, without the ability to recoup the needed rents to cover expenses. If they don’t provide that quality, they face possible fines and lawsuits. Seeking an escape, many landlords convert their rental units to condos, thus making the units unavailable to lower income levels who can afford to rent, but not buy. A 2018 Stanford University study found that rent control laws made this behavior common in San Francisco, causing a 15% reduction in rental supply and a 5.1% citywide rent increase.

Cools new construction: In markets where rent control laws are applied to new housing, it prevents construction. For example from 1970-1975, New York City, then enforcing its strongest rent control laws, saw a net housing unit decline of about 200,000. Today’s rent control laws are not generally applied to new housing, but that’s changing. Last year, a failed California ballot measure would’ve given localities the right to pass rent control. This year’s law will put annual price caps on buildings older than 15 years. Both initiatives have scared the investment community, and permits are down 17% in California. Oregon’s recent rent control law was also designed not to cool construction, as it exempts new housing for 15 years. But investment activity was still down 38% in the months following the bill.

Violates property rights: This speaks to the biggest problem with rent control: it violates property rights. As a classical liberal, I value property rights in principle. But even pragmatists who aren’t classical liberals should recognize that having stable, predictable property rights spurs investor confidence and economic growth; and that these recent rent control laws violate that concept. State governments are placing retroactive, arbitrary price controls on housing that was built years ago. This would be like if the government decided current restaurant owners – who spent enormous time and capital building their business – must suddenly charge far less for entrees. Many restaurants would close, and probably all of them would serve worse food.

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For these reasons, rent control is widely denounced by economists (95% did in one survey). Fortunately, there are ways to provide affordable housing without all the unintended consequences and moral hazards. The main one is to build more housing, so that supply can keep pace with population growth. If that still doesn’t suppress home prices for the lower end of the market, governments could issue vouchers to make up the difference. But the idea of putting price controls on housing is an emotion-based policy that worsens the problem.