In addition to the substantial economic costs associated with rent control, [from Part I] the decision whether to regulate rents raises difficult questions of social policy. Social Implications of Rent Control …The Substantial Costs of Rent Control Fall Most Heavily on the Poor. The costs of rent control fall disproportionately on the poor. As described [last month] these costs include (a) an often substantial drop in the quality of existing rental housing and (b) substantially reduced access to new housing.
Poor families suffer a market decline in existing housing as the quality of housing falls in response to reduced maintenance expenditures. The middle class can move out; for many reasons, poor families lack this option.
Poor families also are at substantial disadvantages when it comes to finding new housing. In a tight market, there may be more people looking for housing than available rental units, thereby giving housing providers substantial discretion in choosing among competing potential consumers. In an unregulated market, this consumer selection process will be governed by the level of rents. However, by restricting rent levels, rent control causes housing providers to turn to other factors, such as income and credit history, to choose among competing consumers. These factors tend to bias the selection process against low-income families, particularly female-headed, single-parent households.
Higher Income Households Benefit Most from Rent Controls
Rent control is most often justified as an anti-poverty strategy. Yet there is strong evidence that higher income households – not the poor – are the principal beneficiaries of most rent control laws. For example, a study of rent control in New York City found that rent-controlled households with income greater than $75,000 received nearly twice the average subsidy of rent-controlled households with incomes below $10,000. Another study concluded that rent control had the greatest effect on rents in Manhattan, the borough with the highest average income. Similarly, a study of rent control in Berkeley and Santa Monica found that the beneficiaries of controls in those communities are “predominately white, well-educated, young professionally employed and affluent,” and that rent control had substantially increased the disposable income of these tenants while “exacerbating” the problems of low-income families. And, in Cambridge, Massachusetts, residents of rent-controlled housing had higher incomes and higher status occupation on average than other residents of the city, including homeowners.
Rent Control Promotes Housing Discrimination
By eliminating rents as the basis of choosing among a pool of potential consumers, rent control opens the door to discrimination based on other factors. As noted [last month] rent control forces housing providers to look to income and credit history in choosing among competing consumers, factors which sharply bias the selection process against poor and young consumers. In some cases, consumer selection decisions also may be based on a potential consumer’s race, sex, family size or other improper or unlawful factors. This may occur notwithstanding the rigorous enforcement of Fair Housing laws.
The reduction in housing caused by rent control also can slow the process of racial and economic integration of many communities, by limiting the opportunities of certain classes of consumers to reside in rent-controlled communities. In fact, in many middle-class communities, rent control has raised a relatively impenetrable barrier to economic and racial integration.
Rent Controls Unfairly Tax Rental Housing Providers and Other Real Estate Providers
Rent controls are designed to supplement consumer income at the expense of rental property providers – by holding below market levels the permissible rate of return on rental property investment. There is substantial evidence that such transfers are highly inefficient. For example, one study concluded that housing consumers gained in benefits only 52 percent of what housing providers lost. This is due, in part to the tendency of consumers in rent-controlled units to “hoard” housing and to be over-housed, a tendency that further exacerbates the underlying housing shortage.
But more importantly, such income transfers pose fundamental questions of fairness. Why should the uniquely public burden of providing subsidized housing to the poor and middle class be borne solely by providers of rental housing? Given both the inefficiency and unfairness of the rent control “tax”, we should rely on broader, more equitable means of subsidizing poor families.
The fairness issue, as well as many of the other arguments against rent control, applies to commercial real estate as well. Controls on rents of retail, office, or industrial space deter construction, diminish the quality of existing structures, and unfairly transfer income from the property owner to the business occupying the rental space.
Effective Alternatives to Rent Control Exist
The answer to the problem of scarce housing and rising rents is increased housing supply – not rent control-induced disinvestment. One way of stimulating the supply of affordable housing is through direct financial assistance to needy renters, whose increased purchasing power will lead to expansion of the quantity and quality of housing in the local market. This “demand-side” strategy is already in place through proved Federal and state programs. In addition, targeted programs to subsidize the construction or rehabilitation of affordable housing can be an effective complement to direct renter assistance. More generally, removal of inappropriate regulatory barriers to housing construction promotes housing affordability for both renters and home owners.
Conclusion
Economists have long considered rent control a failed housing policy. As Dr. Anthony Downs, a leading economist and nationally-recognized expert on housing policy, concluded in a recent report on rent control, other that during wartime, the economic and social costs of rent control “almost always outweigh any perceived short-term benefits they provide.” He also found that rent controls are both “unfair to owners of rental units and damaging to some of the very low-income renters they are supposed to protect.” Given this fact, reliance on rent control as a solution to the problem of housing affordability cannot be justified.
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.