That rent control is an ineffective and often counterproductive housing policy is no longer open to serious question. The profound economic and social consequences of government intervention in the nation’s housing markets have been documented in study after study over the past twenty-five years. In response to this hard-earned experience, states and local jurisdictions from Massachusetts to California have banned or greatly constrained rent control.
Nevertheless, a number of communities around the country continue to impose rent controls, usually with the stated goal of preserving affordable housing for low and middle-income families. Rent control does not advance this important goal. To the contrary, in many communities, rent control has actually reduced both the quality and quantity of available housing.
Role of Rents in a Market Economy
Too often, those who advocate rent regulation have ignored the basic laws of economics that govern the housing markets – treating privately-owned, operated and developed rental housing as if it was a “public utility.” In so doing, they harm only housing providers, but also, in the long-run, the consumers they intend to serve.
Rents serve two functions essential to the efficient operation of the housing markets:
- They compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers and
- They provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock. In this respect, housing is no different from other commodities, such as food and clothing – the amount producers supply is directly related to the prevailing market price.
This second function is particularly important in evaluating the economic implications of rent control. In an unregulated market, a housing shortage – the reason usually cited for imposing rent control – will be addressed in a two-step process. In the short-term, rents on the margin will rise as consumers compete for available units. Over time, these higher rents will encourage new investment in rental housing – through new construction, rehabilitation and conversion of buildings from nonresidential to residential use – until the shortage of housing has been eliminated. Without the increased rents required to attract new investment, new housing construction would be sharply limited and there would be no long-term solution to the housing shortage. Conversely, a fall in rents sends the message to the market that there is no room for new investments.
When a community artificially restrains rents by adopting rent control, it sends the market what may be a false message. It tells builders not to make new investments and it tells current providers to reduce their investments in existing housing. Under such circumstances, rent control has the perverse consequence of reducing, rather than expanding, the supply of housing in time of shortage.
Three additional factors must be considered in the economic implications of rent control. First, the longer rent control remains in place, the more substantial the gap between controlled rents and true market rents is likely to be. Second, the costs of rent controls are not confined to the political boundaries of those communities that adopt them, but often impose significant costs throughout regional housing markets. Third, while the distortions induced by rent control depend on their stringency, any application of rent control leads to inequities and inefficiencies in the housing market.
Harm Caused by Rent Control
Economists are virtually unanimous in their condemnation of rent control. In a survey of economists of the American Economic Association, fully 93 percent agreed that a “ceiling on rents reduces the quality and quantity of housing available.” Economists generally point to six principal objections to rent control:
Inhibition of New Construction
By forcing rents below the market price, rent control reduces the profitability of rental housing, directing investment capital out of the rental market into other more profitable markets. Construction declines and existing rental housing is converted to other uses. Studies have shown, for example, that the total number of rental units in Cambridge and Brookline, Massachusetts, fell by 8 percent and 12 percent respectively in the 1980s, following imposition of stringent rent controls. Rental inventories in most nearby communities rose during that period. Similarly in California, the total supply of rental units dropped 14 percent in Berkeley and eight percent in Santa Monica between 1978 and 1990, even though the rental supply rose in most nearby cities. In the United Kingdom, which has imposed rent control since the Second World War, the share of all housing provided through privately owned rental units dropped from 53 percent in 1950 to less than 8 percent in 1986, reflecting the flight of investment from the regulated market.
Deterioration of Existing Housing
By reducing the return on investments in rental housing, rent control also can lead to a drop in the quality and quantity of existing rental stock. This may take the form of condominium and cooperative conversions or, in some cases, abandonment of unprofitable property. It can also lead to a deterioration of the quality of housing stock as providers faced with declining revenues may be forced to substantially reduce maintenance and repair of exiting housing.
A study by the Rand Corporation of Los Angeles’ rent control law found that 63 percent of the benefit to consumers of lowered rents was offset by a loss in available housing due to deterioration and other forms of disinvestment. Studies of rent control in New York and Boston similarly found market differences between rent-controlled and other units in housing quality and the level of expenditures on maintenance and repair.
Reduced Property Tax Revenues
Rent control also reduces the market value of controlled rental property, both in absolute terms and relative to the increase in property values in unregulated markets. The tax implications of this reduction can be significant, as taxable assessed rental property values decline relative to unregulated property. A study of rent control in New York City calculated the loss in taxable assessed property values attributable to rent control at approximately $4 billion in the late 1980s. These distorted assessments cost the city an estimated $370 million annually in property tax revenues. The city of Berkeley, California, also estimates a significant loss in its tax revenue because of rent control.
Substantial Administrative Costs
The administrative costs of rent control can be substantial, often outweighing any short-term benefits of rent regulation. Rent controls require the creation of elaborate bureaucratic systems. Rental property must be registered; detailed information on the rental property must be collected; and elaborate systems for determining rents and hearing complaints and appeals must be established. The associated costs in dollars and time fall not only on providers, but also on consumers and municipal authorities. For example, in Santa Monica, the Rent Control Board in 1996 had a budget of more than $4 million a year to control rents on only 28,000 apartments.
Reduced Consumer Mobility
The primary beneficiaries of rent control are those consumers lucky enough to find themselves in a rent-controlled unit. But even these consumers pay a price. Consumer “mobility” is substantially reduced by the reluctance of many consumers to part with the rent control subsidy. A recent study in New York City found that rent control tripled the expected duration of residence. Consumers who would otherwise move to smaller or larger homes or closer to their jobs do not do so because they do not want to lose the subsidy. This loss of mobility can be particularly costly to families whose job opportunities are geographically or otherwise limited and who may have to travel long distances to reach those jobs available to them. And for the community at large – including nearby communities that have not themselves imposed rent control – reduced consumer mobility can mean increased traffic congestion and demand for city services, among other costs. Because of these spillover effects, rent control is an issue for state and regional policy as well as for local governments.
Consumer Entry Costs
The short-term benefits of rent control are also limited by often significant entry costs that must be paid by those in search of rental housing. In many rent-controlled communities, prospective consumers must pay substantial finder’s fees to obtain a rental unit, due to the scarcity of available housing. And in some communities, a “gray-market” in rental housing has developed in which units are passed among friends or family members, or new consumers may be required to pay “key money” or to make other payments to current consumers or providers to obtain housing. Poor families, single consumers and young people entering the market are especially hard-hit by these costs.
[Editor’s Note: PLEASE SEND A COPY of this article to the Mayor, City Council members and all politicians you know who are in favor of rent control! Be sure to read Part II – Social Implications of Rent Control in next month’s issue.]
National Multifamily Housing Council (NMHC) is the place where the leaders of the apartment industry come together to guide their future success. NMHC provides a forum for insight, advocacy and action that enable both members and the communities they build to thrive. For more information, visit their website at NMHC.org.