Rent control is making a comeback. Does it work?
Rent control is making a comeback Does it work

With housing shortages and rising rents plaguing major cities across the United States, housing costs are an election issue for the first time in decades, as eight Democratic candidates for president have released concrete housing plans.

But while the debate over the appropriate federal response to the problem plays out, state and local governments have turned to a policy prescription that’s popular among constituents—rent control.

Whether called rent control or rent stabilization, rent regulations cap a tenant’s rent at a specific dollar amount or limit the percentage increase a landlord can add to a tenant’s rent after their lease is up. While some form of rent control has existed in many cities on the East and West coasts for decades, there’s been an uptick in rent control legislation over the last year as housing costs continue to soar and wages remain stagnant.

The biggest rent-control legislation passed this year happened in Oregon, where a statewide cap on rent increases went into effect in March. Landlords can now only increase rent annually by 7 percent plus any rise in the Consumer Price Index, which measures inflation.

New York also passed a law in June that strengthens existing rent regulations by closing a number of loopholes. California has had less success in strengthening rent regulation. In 2018, voters rejected the state’s Proposition 10, which would have lifted a ban on local rent regulations, although the state will try again in 2020 with a new ballot measure.

But does rent control actually achieve the desired outcome of lowering a city’s rent? While both sides of the debate like to present their positions in black and white terms, the reality is a little more nuanced.

Rent-control laws essentially create a two-tiered housing market in a city—a rent-controlled tier and a not-rent-controlled tier. In the rent-controlled tier, tenants do see lower rents because landlords’ hands are tied by caps on pricing. Opponents of rent control argue that this leads landlords to skimp on maintenance to make up what they’re losing in rent.

But for the tier of the market that isn’t rent controlled, the effect of rent control is murkier. Rent control essentially shrinks the available housing supply for this tier of renter because there’s now a whole subset of the housing market that they do not qualify for, depending on the specifics of the rent control law. When supply goes down, prices go up.

Opponents also argue that landlords of rent-controlled buildings will sometimes convert for-rent units into condominiums and sell them because they’ll make more money that way. This further shrinks the supply of housing and puts upward pressure on rents, and it can also lead to gentrification as renters are pushed out in favor of owners.

And depending on whether the law applies to new units, rent control can also discourage developers from building new for-rent units because the project may not make financial sense at the lower rent. The net effect of this, economists argue, is that rent is lower for those in rent-controlled buildings and higher for everyone else.

The theory of this argument makes intuitive sense, but does it play out in practice? Researchers at Stanford University looked at San Francisco before and after a 1994 change in law to measure the effects of rent control.

Their conclusions: Landlords after the 1994 change in the law reduced the for-rent housing supply by 15 percent by selling units to owner-occupants or simply knocking the building down and starting over with new construction. This also led to a 25 percent reduction in the number of renters in rent-controlled buildings because there were fewer rent-controlled units.

Legislatures have attempted to minimize the negative unintended consequences of rent control by writing more complex laws that provide certain exemptions, allow landlords to pass off the cost of capital improvements or maintenance to renters, or add tenant protections.

But these exemptions can have unintended consequences as well. For example, landlords may respond to added renter protections by being less likely to rent to lower-income tenants. Making a law more complex makes it harder for renters and landlords to know the rules and their rights and makes enforcement more time-consuming and costly for local government.

And given the specific cause of the current housing crisis—a shortage of housing in major cities—a policy that unintentionally reduces the housing supply would seem to exacerbate the underlying problem while only partially treating the symptom: high rents.

That doesn’t mean there aren’t other policy prescriptions that could alleviate the problem without picking winners and losers the way rent control does. Affordable housing advocates have been pushing local governments to reduce barriers to the construction of new housing, such as restrictive zoning measures, which could boost the supply of housing and thus put downward pressure on rents.

Of course, rising rents wouldn’t be a problem if wages were rising at the same rate, but they’re not. Since the financial crisis in 2008, the economic recovery has been uneven among income groups, with worker wages remaining stagnant while the wealthy have continued to see increases.

Federal housing vouchers subsidize a person’s rent by covering the difference between their rent and 30 percent of their income. So if 30 percent of a tenant’s income was $800 and their rent was $1,000, the voucher would cover the $200 difference. This is the most efficient way to subsidize renters, but housing vouchers are chronically underfunded by the federal government, and only about a quarter of the people who qualify for a voucher receive one.

Some affordable housing advocates say that subsidizing a person’s income instead of their rent would also help. The Earned Income Tax Credit does this for low-income families, but would need to be expanded beyond the $70 billion annually it provides.

Either way, there’s no easy fix to the housing affordability crisis, and one single policy is highly unlikely to be the answer. Whether rent control can be part of a policy prescription that provides relief to renters is up for debate, but rent control alone is not the answer.

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