A new study by Stanford University professors of rent control in San Francisco concludes that it does more harm than good and can cause housing shortages that reduce the number of low-income people who can live in a city.
Economists Rebecca Diamond, Timothy McQuade and Franklin Qian did the study, “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco.”
“Steadily rising housing rents in many of the U.S.’s large, productive cities has brought the issue of affordable housing to the forefront of the policy debate and reignited the discussion over expanding or enacting rent control provisions,” the report states.
Several States Consider Removing Rent Control Limits
“State lawmakers in Illinois, Oregon, and California are considering repealing laws that limit cities’ ability to pass or expand rent control. Already extremely popular around the San Francisco Bay Area, with seven cities having imposed rent control regulations, five additional Bay Area cities placed rent control measures on the November 2016 ballot, with two passing. Rent control in the Bay Area consists of regulated price increases within the duration of a tenancy, but no price restrictions between tenants. Rent control also places restrictions on evictions,” the researchers write.
“Right now, the government already provides lots of different insurance — unemployment insurance, disability insurance, and insurance to help securitize mortgages,” Diamond notes. “But we don’t provide any formal insurance against rent increases.”
Rent Control Does More Harm Than Good
Diamond, McQuade and Qian examine the effects of rent control in traditionally rent expensive San Francisco in the paper. They find that the effects of rent control are pretty much what economics textbooks would predict.
“Rent control, the Econ 101 student learns, helps a few people, but overall does more harm than good,” writes Noah Smith in Bloomberg View. “According to the basic theory of supply and demand, rent control causes housing shortages that reduce the number of low-income people who can live in a city. Even worse, rent control will tend to raise demand for housing — and therefore, rents — in other areas,” Smith writes.
“It just dramatically limited the supply of rental housing. On top of that, it pushed landlords to supply owner-occupied housing and new housing – both of which are really the types of housing consumed by rich people,” Diamond said. “So we’re creating a policy that tells landlords, ‘It’s much more profitable to cater to high-income housing taste than low-income housing tastes.’”
The report states, “We find that rent control offered large benefits to impacted tenants during the 1995-2012 period averaging between $2,300 and $6,600 per person each year, with aggregate benefits totaling over $214 million annually. Over the entire period, tenants received a discounted value of around $2.9 billion. We find that most of these benefits came from protection against rent increases and transfer payments from landlords. However, we find losses to all renters of $2.9 billion due to rent control’s effect on decreasing the rental housing and raising market rents. Further, 42% of these losses are born by future residents of San Francisco, making them worse off, while incumbent residents benefit on net.
“These results highlight that forcing landlords to provide insurance against rent increases leads to large losses to tenants,” the report states.
In the end, the strongest argument against controlling rents is that there are better ways to protect vulnerable renters. “Diamond and her coauthors suggest an idea that I’ve also endorsed in the past — a citywide system of government social insurance for renters.
“Households that see their rents go up could be eligible for tax credits or welfare payments to offset rent hikes, and vouchers to help pay the cost of moving. The money for the system would come from taxes on landlords, which would effectively spread the cost among all renters and landowners instead of laying the burden on the vulnerable few,” writes Noah Smith in Bloomberg.