Beware the Comeback of Rent Control

The U.S. rental housing market has come under increasing strain recently. As homeowners with unsustainable mortgages have to leave their homes and fewer home buyers are able to qualify for new mortgages, more people are looking for places to rent. As a result, rental vacancy rates have fallen from 11.1 percent in the third quarter of 2009 to 8.6 percent in the third quarter of 2012. With affordable housing already in short supply, there is growing concern that stronger protections are needed to prevent rents from rising too fast, pricing more low-income and vulnerable renters out of the market.

One idea to protect renters that may be getting renewed interest is rent control. Rent control policies have been tried in a number of cities, first during World War II and later again in the 1960s and 1970s. Relatively few places have rent control today though and most states have laws prohibiting the practice. Given the challenges in today’s rental market, does rent control deserve a second look?

 

A scan of the research literature revealed very little evidence that rent control is a good policy. Arguments against rent control go back as far as the 1970s and the RAND housing allowance experiments in New York City. More recently, a MIT study of the 1995 repeal of rent control in Cambridge, Massachusetts, found that investment in housing increased after rent control ended, leading to “major gains in housing quality.” A National Bureau of Economic Research paper also examined the Cambridge experience and concluded that “elimination of rent control added about $1.8 billion to the value of Cambridge’s housing stock between 1994 and 2004, equal to nearly a quarter of total Cambridge residential price appreciation in this period.” These findings have been used to argue for removal of rent control in New York and other places.

In a comprehensive overview of the research literature, Blair Jenkins examined studies of different aspects of first-generation rent control (strict price ceilings) and second-generation (limits on increases, also referred to as rent stabilization). The upshot is that, at best, rent control does little harm but probably not much good and, at worst, it has negative impacts on landlords and tenants. There is near universal agreement that strict price ceilings, such as the kind imposed in New York City in the 1940s, are always bad because they severely inhibit housing production and investment. Even those most sympathetic to rent control seem to agree with this.

 

 

 

 

That leaves the softer, rent stabilization policies, like those currently in place in New York City and Washington, D.C. These regulations place limits on how much landlords can raise rents on sitting tenants, but generally allow much larger rent increases for new tenants. They also often allow exceptions for landlords to pass along certain costs to tenants, such as capital improvement costs or utility charges.

On rent stabilization, the strongest finding in Jenkins’s overview appears to be that tenants in noncontrolled units pay higher rents than they would without the presence of rent control; one reason being that landlords need to make up the difference for lower rents in controlled units. Interestingly, one study found that New York City tenants in controlled units also had higher rents initially, because they were willing to pay more to get into a rent-controlled unit with the understanding that they would have smaller rent increases in the future. The net effect, however, is that tenants don’t save much in the long run—they simply trade higher rents now for lower rents later.

The conclusion seems to be that rent stabilization doesn’t do a good job of protecting its intended beneficiaries—poor or vulnerable renters—because the targeting of the benefits is very haphazard. A study of rent stabilization in Cambridge, for example, concluded that “the poor, the elderly, and families—the three major groups targeted for benefits of rent control—were no more likely to be found in controlled than uncontrolled units.” And, as noted earlier, those in uncontrolled units tend to pay higher rents, so they are actually hurt by rent control.

Given the current research, there seems to be little one can say in favor of rent control. What, then, should be done to help renters obtain affordable, decent housing? A better approach may be adopting policies that encourage the production of more diverse types of housing (different densities, tenure types, unit sizes, etc.), implementing strong regulations and practices to ensure housing quality and to protect tenants from abuses; and providing targeted, direct subsidies to people who need help paying their rents.

 

Source: The Atlantic Cities

When Rent Control Ended in Cambridge, Mass.

 When Rent Control Ended in Cambridge, Mass.

WEDNESDAY, OCTOBER 24, 2012

Every intro class teaches about price ceilings, and I suspect that 99% of them use rent control laws as an example. Of course, the standard lesson from a supply-and-demand diagram is that price ceilings lead to a situation where the quantity demanded exceeds the quantity supplied, and so while the price of rent-controlled apartments is lower, good luck in finding a vacancy!The slightly more sophisticated insight is what I call in my own intro textbook the problem of “many margins for action.” (Of course, if you are teaching an intro econ class, I encourage you to take a look at my Principles of Economics textbook, a high quality and lower-cost alternative to the big publishers, available here.)  Landlords who face rent control legislation can skimp on maintenance, or hunt for ways to force the renter to bear additional fees or costs. If a large number of landlords act in this way, the feeling of the neighborhood and property values for homes that are not rentals may be affected, too.Cambridge, Massachusetts, has a rent control law in place from 1970 to 1994. It was ended by a statewide vote that barely squeaked out a 51%-49% majority–and ended despite the fact that Cambridge residents favored the continuation of the law by a 60%-40% majority. The law placed limits on rents for all rental properties in Cambridge built in 1969 or earlier. In “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts,” David H. Autor, Christopher J. Palmer, and Parag A. Pathak look at what happened. (The paper is published as NBER Working Paper 18125. These working papers are not freely available on-line, but many in academia will have access through institutional memberships. Full disclosure: David Autor is editor of my own Journal of Economic Perspectives, and thus my boss.) Autor, Palmer, and Pathak have data on rents and prices in both controlled rental buildings, uncontrolled rental buildings, and owner-occupied housing. They can also make comparisons to neighboring suburbs that did not have rent controls in place. Here are a few of their more striking findings:

— The rent-controlled buildings in Cambridge, Mass., typically had rents 25%-40% below the level of uncontrolled rental buildings nearby. However, the maintenance of rent-controlled building was often subpar, with a higher incidence of issues like holes in walls or floors, chipped or peeling paint, loose railings, and the like. More broadly, owners of rent-controlled properties had no incentive to do any major fix-ups or renovations, because they would be unable to recoup the costs.

— Rent control laws are still easy to find, if not exactly widespread, in the United States. For example, “New York City’s system of rent regulation affects at least one million apartments, while cities such as San Francisco, Los Angeles, Washington DC, and many towns in California and New Jersey have various forms of rent regulation.”

— Not surprisingly, the end of rent control in 1995 meant that prices of the buildings that had formerly been rent-controlled rose. “Our statistical analysis also indicates that rent controlled properties were valued at a discount of about 50 percent relative to never-controlled properties with comparable characteristics in the same neighborhoods during the rent control era, and that the assessed values of these properties increased by approximately 18 to 25 percent after rent control ended.”

—  More surprising, it turns out that the end of rent control raised the value of all the non-controlled properties in Cambridge, too. Properties that were in a neighborhood with a higher percentage of rent-controlled properties increased in value by more than those in neighborhoods with a lower percentage of rent-controlled properties. Indeed, when rent control ended, the gains to owners of  uncontrolled properties were greater in total than the gains to the owners of rent-controlled properties. “The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock is $1.8 billion. We calculate that positive spillovers from decontrol added $1.0 billion to the value of the never-controlled housing stock in Cambridge, equal to 10 percent of its total value and one-sixth of its appreciation between 1994 and 2004. Notably, direct effects on decontrolled properties are smaller than the spillovers. We estimate that rent control removal raised the value of decontrolled properties by $770 million, which is 25 percent less than the spillover effect.”

Taking all of this together, it seems to me like the way to think about rent control–at least in the form that it was enacted in Cambridge, Mass.– is that it creates a situation of low-quality and poorly-maintained housing stock, which then rents for less than uncontrolled properties. If the goal of public policy is to create lower-quality and more affordable housing, there are other ways to accomplish that goal. For example, zoning laws could require that rental complexes include a mixture of regular and small-sized rental apartments, so that the small-sized (and thus “lower quality”) apartments would rent for less. Or those with lower incomes could just receive housing vouchers.

But when rent control is enacted in a way that leads to degradation of a substantial portion of the housing stock, the costs are not just carried by landlords of those rent-controlled apartments. In fact, a majority of the costs may be as a result of spillover effects to real estate that isn’t rent-controlled. When a substantial proportion of the houses in a neighborhood are not well-maintained, everyone’s housing prices will suffer.

 

Resource: The Conversable Economist blog