Rent control is the name given to a broad class of ordinances or laws that seek to restrain rent increases according to a predetermined formula calculated by a government or non-profit rent control board. The motivation is to help low-income households remain in areas experiencing price increases.
Rent control was outlawed in Massachusetts in a 1994 referendum.
- Related Story: The Economist, “Rent Control: The Morning After”, April 30 1998
- Related Page: Just Cause Eviction
- Related Article: Rent Control Grows in San Francisco
- Related Article: Four cases of rent control abuse
- Related Article: California’s Prop 10 Fails, Rent Control Checked at Cost of $100 Million
What Rent Control Supporters Say
Advocates say that rent control is needed to help low income households remain in their communities. They say that keeping such families in their original communities tends to increase diversity of neighborhoods, stabilize families, and prevent gentrification.
- Related Article: Patricia Cantor, Shelterforce Online, March/April 1995, “The tenants lost the war to save rent control. How did it happen?“
What We Know About Rent Control
One survey of real econometric data was written in 2009 by the Massachusetts-based American Institute for Economic Research.
- Scholarly Article: Rent Control: Do Economists Agree?
This work focused on the effect of rent control in many areas:
- Allocation of units
- Availability of units
- Effect of controls on controlled rents
- Effect of controls on uncontrolled rents
- Administrative costs
Highlights of the survey:
Allocation of Units
Estimates of misallocation (meaning, living in a space too large or too small compared to the ideal one) ranged from 11% to 21% of renters in the case of first generation controls, meaning, absolute price locks. In these cases, tenants stayed on average 18 years longer than identical tenants in market rate apartments (p. 91 – 92). Correlation with age, race, and income level reduced the significance of this difference in one study.
Many researchers found that maintenance declined overall by single digit percentages, but the evidence did not seem to offer incontrovertible proof. In some locations and for some types of maintenance the effects were pronounced, in others not so. Pre-1947 buildings in Manhattan, for instance, were found to be 8.96% more likely to be unsound than their equivalent uncontrolled counterparts. New buildings showed no difference. One study found that an average 3% benefit in rent was offset by an average 2% penalty in reduced maintenance (p 95).
The clearest data here come from Cambridge and Boston during rent control and decontrol in the 70’s and then 90’s. Landlords converted rental housing into condominiums. Whereas 75% of units were renter-occupied in 1970, only 66% were in 1980. In the 90’s, the end of rent control was “associated with a 6 percentage point increase in the probability of a unit being a rental.” Across metro Boston, a 6% effect would equate in today’s terms to 20,000 units (extrapolated from NHMC’s estimate of 350,000 apartment homes in metro Boston).
Effect of Controls on Controlled Rents
In places with absolute price locks, there was a substantial subsidy that came from living in a controlled apartment, in one study, 27% of annual household income.
In places with rent stabilization (maximum increases), controls affected the timing but not the total amount of rent paid. Landlords set the initial rent level under a vacancy allowance and tenants mistakenly chose higher initial rent in exchange for smaller price increases. In fact they ended up paying the same total rent over time (p. 95 – 96).
In addition to this, even without vacancy allowances, the whole effect was “to shift the supply curve back,” meaning to reduce unit availability.
According to one study, “The average estimated benefits are -$4 [a loss, in 1995 dollars] per month for households in ‘old style’ rent controlled housing and -$44 per month for households in rent stabilized apartments. This implies that, on average, households in regulated units would have been better off if rent regulations had never been established in New York City.”
Effects of Controls on Uncontrolled Rents
Here there was mostly agreement that rent control increased the rent of uncontrolled apartments. The lowest data point was 13% immediately, diminishing over time. The highest data point was 46% after two years.
In some specific cases, uncontrolled buildings did experience reduced rents. This occurred when the building was near a rent-controlled building that was not being maintained.
- Related Data: Zumper High-End Apartments Priciest in San Francisco, New York, Cities with Rent Control
Some studies said rent control helps, others said it hurts. There was no clear signal.
These were negative. In the case of New York City rent-stabilized apartments, which approximated what the market was going to do anyway, the effect was pure waste. In the case of Cambridge in the 70’s, the cost was $40 per year for each of the 18,000 apartments under control. In today’s dollars, the taxpayer cost of the same program would be $4.4 billion annually.
Our favorite quote from any economic review: “Measurements of administrative costs remind us that bureaucracies are a player and an interest group.” Or as one cynic put it, “There’s a lot of money in poverty.”
There was strong evidence that targeting was poor. Whereas a Section 8 voucher could be assigned directly to a low-income household, rent controlled apartments were available to all. During Massachusetts’ rent control years, 30% of rent-controlled apartments were occupied by households in the upper half of the income distribution. Landlord preference for less risky tenants played a role in the unfair distribution of benefits.
Rent Control Talking Points
As a public policy, we believe rent control has several flaws:
- It leads to the decline of housing quality.
- It discourages good people from becoming landlords.
- It tends to increase prices in the very neighborhoods it was meant to help.
- It is regressive and causes disparate impact.
- It increases the tax burden of single family owners.
Flaw 1: Rent Control Leads to the Decline of Housing Quality
Owners of private property in a free market must be able to do four things that rent control outlaws or severely restricts:
- Set rent prices
- Deliver up for sale a vacant building
- Conduct major repairs or renovations
- Use the property in ways not expressly envisioned by the laws or ordinances (e.g., create an on-site office or storage space)
These rights are important to the workings of our free economy.
First, price negotiation must take place in the market, where participants are free to agree or not to agree based on the information available to them. Landlords may want higher rent to offset a history of being rough on units. Tenants may want lower rent to compensate for old cabinets. Setting prices or price increases in a Soviet-style central office doesn’t work, and tends to err on the side of rents that are too low to maintain a building.
Second, real estate markets sometimes require buildings to be empty upon sale. This is partly because the new landlord doesn’t trust the old landlord’s screening and tenant selection. Other times it’s because the building will be renovated or reworked somehow.
This brings us to the third right. Sometimes buildings require serious renovations. A collapsing floor, a new elevator, or efficiency upgrades may require units be empty for months. Buildings that are never emptied drift forward through time like little bubbles of the 1950’s, 60’s or whatever decade they were last refinished.
The fourth and final right is the most important, and is most severely abrogated in specific types of rent control called “just cause eviction.” By specifically legislating what one can do with a property, such “just cause” restrictions eliminate all innovations and freedoms that are yet to be discovered. As a matter of principle, laws should be written as restraints, not as permissions.
- On average, older rent controlled buildings may be up to 8% more likely to become unsound.
- For every 3% reduction in rent, there is a 2% penalty for reduced maintenance.
Those four rights are essential to the operation and maintenance of properties. The effect of rent control is to push these properties into decay or obsolescence.
Flaw 2: Rent Control Keeps Good Landlords out of the Business
Tenant advocates want “stability.” Through “just cause eviction” or “rent control,” they want to give moral, obedient tenants an indefinite claim on the property they rent. They aim to create a kind of indefinite lien, a tenancy-ad-infinitum.
This fact is not lost on owners and would-be owners, who realize they have no such assurances. Owners can lose their home if they fail to pay increases to their taxes, or their water bill, or their mortgage. They have no permanent right to remain in their home if these expenses increase. The city will raise taxes, or water and sewer rates, and the owner must pay. The bank may issue an adjustable rate mortgage, and if the rate increases, the owner must pay.
Under rent control, tenants would be insulated from all market forces. They would also be insulated from all legal forces not expressly contemplated in the rental agreement or approved by the rent control board. The smartest people would therefore choose to rent.
Rent control sends a clear message that smart people should not become landlords.
- Notable MassLandlords members have already shifted their portfolios out of Massachusetts just because of current laws, nevermind rent control.
Flaw 3: Rent Control Tends to Increase Rent Levels
Basic supply and demand requires that as supply decreases, prices will increase for a given demand. Take any neighborhood, remove some of the units from the market, and the remaining units will command a higher rent.
Rent controlled apartments are so desirable that few ever leave them. These units are effectively removed from the marketplace, and the remaining uncontrolled units are the only “supply” left to meet housing “demand.”
- Reenacting rent control could be expected to remove 20,000 units of housing from the metro Boston market over the next ten years.
- Studies of rent control in other areas have shown average rent increases of between 13% and 46%.
Flaw 4: Rent Control is Regressive and causes Disparate Impact
Landlords seek to eliminate risk by selecting those tenants with the highest household income, the most stable housing history, and the greatest likelihood of remaining long-time residents. If perfect applicants don’t appear (they rarely do), landlords can offset tenant risk by charging higher rents.
Where rent control prohibits higher rents, landlords tend to hold units vacant until an applicant with the lowest possible risk profile arrives. Socio-economically speaking, that may tend to be upper-income white people, depending on the neighborhood.
In Cambridge, MA “the number of non-white tenants in formerly regulated units has actually doubled” since the repeal of rent control (Economist). This is an astonishing fact, and entirely consistent with the view that landlords will minimize risk in rent controlled units by renting to households with the highest possible socioeconomic backgrounds.
- In the 1970’s, a third of rent controlled tenants were in the top 50% of household income.
So rent control tends to have exactly the opposite effects that tenant advocates would want. It tends to favor upper-income households and tends to select for certain races, depending on neighborhood, despite discrimination laws to the contrary.
Flaw 5: It Increases the Tax Burden of Single Family Owners
Real estate taxes are levied on assessed value. Assessed value is driven by market prices from the last few years. Market prices for income properties are driven, in part, by rent levels. Lower rents therefore contribute to lower real estate tax revenue.
Municipalities that enact rent control and that also seek to balance the budget must eventually raise taxes on businesses and single family owners. This assumes all else remains equal. In communities with high percentages of residential owners, the tax burden would fall squarely on them.
- Related Page: Massachusetts Dual Tax Rates: A Case Study in Worcester
This again is something that few tenant advocates would want. Most would agree that landlords should have to pay according to the density and the people living in their units. But as rent control keeps rents artificially low, it shifts the municipal burden away from landlords. In most Massachusetts communities, this burden would fall heaviest, in terms of percentage increases, on single family owners.
- The Cambridge budget for 1970’s rent control was $700,000 annually. In 2015 dollars that would be over $1 billion annually in additional administrative costs to be carried by the tax base. This would triple city operating expenses.