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Rent Control

Affordable Housing’s Dubious Solution
 

brian j. asquith is an economist at the W.E. Upjohn Institute, a nonprofit, nonpartisan research organization in Michigan.

Published April 26, 2019

 

Rent control has long been dismissed by economists as an inefficient, sometimes counterproductive means of ensuring access to housing for middle- and lower-income urban dwellers. But after a long period of dormancy, a new generation of policymakers and activists are returning to rent control as a solution to the housing affordability crisis plaguing America’s booming metro areas. Campaigns to impose rent control, notably in Seattle and Chicago, are picking up steam.

Urban residents burdened by the highest rents mostly live in booming coastal cities — among them San Francisco (median free-market rent for a one-bedroom apartment: $3,500), New York City ($2,860), San Jose ($2,480), Los Angeles ($2,360), Oakland ($2,100) and Washington, D.C. ($2,160). And by no coincidence, all six of them have rent control laws on the books, as do a host of smaller cities in California, Maryland and New Jersey.

Econ 101 probably left you with the impression that rent control is synonymous with “rent freeze.” But the rules of contemporary rent control cannot be summed up in a phrase. In attempting to thread the political needle, rent control regimes are both varied and complex.

These regimes can generally be analyzed by four key criteria. First, rather than dictating rents like central planners in the Soviet Union, cities cap subsequent increases on a base rent negotiated between tenants and landlords. In systems that adopt “vacancy decontrol,” landlords have wiggle room to set the starting rent for the next tenant closer to the figure determined by supply and demand. This wiggle room can mean anything from modest maximum increases in the starting rent in New York City and Washington, D.C., to complete deregulation of newly vacant apartments in all California cities. Rents are thus tightly regulated for as long as the tenant remains, but vacancies grant landlords some opportunity to reset rents higher.

Second, the control regimes generally require landlords to renew tenants’ leases when they expire and tightly restrict evictions. Usually landlords may evict only for “just cause,” which in practice means they must convince regulators or a housing court that the tenants have committed one of a narrow list of offenses. The goal is to prevent landlords from churning tenants in order to raise rents in response to market demand.

Third, the laws generally do not extend rent control to new buildings unless the owners consent to coverage in return for subsidies — tax breaks and the like. Policymakers do this because they fear controls will discourage new construction and add to housing shortages in already-tight markets.

Lastly, rent control regimes generally include an escape valve for landlords, giving them the right to petition regulators to pass through rising operating expenses. The idea is to ensure that rent-controlled housing does not become synonymous with substandard housing as landlords minimize losses from rising costs for everything from fuel oil to maintenance.

The goals of rent control have always been straightforward: to ensure that residents have access to decent housing at rents they can afford. Then (for New York City, 1942; for the other cities, the late 1970s), as now, lawmakers feared that soaring rents would impoverish tenants on fixed incomes, displace vulnerable families and allow landlords to enjoy windfalls at the expense of renters. Today, affordability, displacement and gentrification concerns remain quite real.

 
Brian L. Frank/The New York Times/Redux
 

According to ApartmentList.com, a rental listing website, the percentage of renting households that report being rent-burdened — defined as shelling out more than 30 percent of their income — has reached 57 percent in Los Angeles and 53 percent in New York City. The only reason San Francisco, Seattle, Portland and Washington D.C. are not as high or higher on this list is that gentrification has reached such an advanced state that renters’ incomes there are significantly higher than elsewhere. Indeed, the median income of renters in San Francisco exceeds $73,000, almost twice the comparable figure for the nation as a whole.

Activists see rent control as a powerful tool not just in stabilizing rents for incumbent residents, but as a means of stabilizing the character of neighborhoods. A recent study by Rebecca Diamond, Tim McQuade and Franklin Qian of Stanford examined the aftermath of a 1994 rent control expansion initiative in San Francisco. They found that tenants in newly covered buildings were 10-20 percent more likely to still be at their 1994 addresses than tenants in uncontrolled apartments. Note, too, that the stabilizing effect of controls was more pronounced for racial minorities, an issue that only exacerbates the tensions created by gentrification.

Nonetheless, the study’s authors are notably reluctant to characterize rent control as a magic bullet. With cause: rent control is not intended to simply prevent displacement, but to make cities more affordable. And by that measure, it’s hard to call rent control a success anywhere. Not one of the six cities with longstanding control programs is anybody’s idea of affordable. Thus, while rent control is celebrated by incumbent tenants, it was — and remains — a problematic solution to affordability woes.

First Postwar Attempts

Modern rent controls arose in response to the perceived failures of earlier attempts. The first large wave of U.S. controls occurred during World War II, when, as part of a broader effort to contain war-induced inflation, the federal government moved aggressively into local rental markets to prevent steep rent increases when migrants flooded into cities for war work.

Congress passed the enabling legislation for rent controls, the Emergency Price Control Act, in 1942. A rent freeze was imposed by establishing a “maximum-rent date,” which was to serve as a benchmark for individual localities. At the peak in 1946, wartime controls reached 1,232 counties.

 
Rent control is not intended to just prevent displacement, but to make cities more affordable. And by that measure, it’s hard to call rent control a success anywhere.
 

The Emergency Price Control Act was allowed to expire two years after the war ended. Congress did renew authority to impose rent controls with the Federal Housing and Rent Act of 1947, but the new law exempted all post-February 1, 1947, construction from the constraints. By the early 1950s, New York City was left as the only major city with any apartments still subject to these controls.

Controlling rents at below-market levels inevitably led to bitter fights between landlords and tenants. And the longer the controls remained in place, the greater the potential for inefficient allocation of housing and rising implicit subsidies for tenants at owners’ expense. A 1988 article in The Washington Post offered a bracing overview of how distorted the controlled market had become in New York City, describing relations between tenants and landlords as having devolved into a “form of guerrilla warfare.”

A dubious honor roll of the rich and the famous who enjoyed rent-controlled apartments at the time included Mayor Ed Koch and film actors Mia Farrow and Darren McGavin. Landlords would hire private investigators to find reasons to evict tenants for just cause (like having a permanent residence in Boca Raton). And some would cook up ingenious, though illegal, schemes for persuading tenants to leave. A certain Donald J. Trump is cited as inviting homeless people to camp out in a luxury apartment building on Central Park South that he owned in order to induce the rent-controlled tenants to exit.

 
Mauritius Images GMBH/Alamy
 

It is important to note here that the lack of means tests for rent control eligibility laws was then, and is now, a way to bulletproof the statutes from opponents. The public policy goal may be to save low-income renters from displacement. But, as advocates sometimes acknowledge, defending the laws in legislatures and courts may depend on the money and political juice of beneficiaries who could afford to pay much higher rents set by the market. From this perspective, allowing the occasional movie star — or, more likely, plastic surgeon to the stars — to pay $1,000/month for a four-bedroom with a view is worth it.

 
Mark Lennihan/Associated Press
 
Rent Control Revised

Mainstream economists are generally skeptical about price controls of any sort, supporting exceptions only as a last resort for managing temporary shortages. The problems created by rent freezes in New York and several European cities bolstered a strong anti-rent control consensus among economists, perhaps best captured by the Swedish economist Assar Lindbeck, who concluded that “rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.”

But most people aren’t economists and, it is safe to say, don’t think like economists. Understandably, then, the stagflation crisis of the 1970s, when America simultaneously suffered from high unemployment and high inflation, renewed interest in rent control. But this time around, advocates tried to improve on New York City’s postwar experience. The new rent controls that emerged are often referred to as “rent stabilization,” “tenancy rent control,” or “second-generation rent control” to distinguish them from their blunt-force predecessors.

In 1969, New York became the first major U.S. city to enact a second-generation rent control system, this time for buildings completed between 1947 and 1969. The New York State Emergency Tenant Protection Act of 1974 extended the initiative, covering some buildings built as late as January 1974.

The system was intended to improve upon “hard” rent controls in several ways. To prevent controls from leading to housing quality deterioration and even abandonment, landlords were allowed more avenues to earn profits on their properties. Rent levels were no longer frozen or subject to a rigid limit; they merely had annual increases capped. Landlords were, moreover, given permission to pass on maintenance and upgrade costs.

The “vacancy decontrol” provisions meant that landlords had incentives to maintain their controlled units, at a minimum bringing them up to snuff whenever a tenant moved out. Explicitly exempting new construction was intended to encourage new supply, while rents paid on newly decontrolled units gave developers a sense of what rents they could charge on new construction.

The cities that followed in New York’s wake largely adopted the same strictures for their own programs. While the new controls were explicitly designed to improve upon the negative experiences in New York City (and Europe), these measures were not designed to remain on the books indefinitely. But, like many temporary policy initiatives, rent control is a response to an emergency that never seems to end.

In part, this is because once rent controls are in place, tenants have powerful incentives to lobby for their renewal. Moreover, the caps on annual rent increases mean that, in most cases, the benefits to renting a controlled apartment grow with time — and make it ever more important to tenants that controls remain. Automatic lease renewal and rules against eviction mean that tenants can stay as long as they like, provided they don’t break the lease.

Tenants And Landlords Under Rent Control

Since so much of the research on rent control has focused on the hard controls of postwar New York City, economists are conducting new studies to take the full measure of the effects of second-generation controls. However, the pattern emerging from the new research seems to be that these second-generation regimes undermine economic efficiency like the first, albeit in subtler ways.

One consistent finding: the implicit subsidy the controls give to renters has powerful downstream effects on tenants’ labor mobility. Among other findings, tenants seem willing to bear the cost of longer commutes in order to stay put. A 2005 paper by Michael Svarer (Arrhus University), Michael Rosholm (Arrhus) and Jakob Roland Munch (University of Copenhagen) investigated this hypothesis with Danish data, finding that the stronger the local rent control ordinance, the more likely a person was to search for a local job. This means that rent control may well allow lucky workers to stay close to high-wage jobs in dense urban areas. But until a study can quantify whether this translates to greater earnings in the long run or causes workers to stay in poorly matched jobs, it will remain unclear whether rent control’s impacts are net negative or positive for affected workers.

The economic distortions created by rent control also extend to the housing supply. While second-generation controls do include landlord hardship provisions, they still reduce profits compared to the potential for earnings in the uncontrolled market. In some cases, like San Francisco, landlords actually stand to lose money in real terms since increases are capped at 60 percent of the general rate of inflation. And since the gap between what a controlled landlord receives versus the prevailing rent for the apartment grows with time in rising markets, landlords have powerful incentives to avoid renting to people they suspect will be “long-stayers.”

Rising market rents make this problem worse in other ways, because tenants will want to stay longer and enjoy their controlled rents while market rents continue to increase. With tenant and landlord incentives so misaligned, it’s no surprise that a 2014 study examining the consequences of the end of rent control in 1994 in the relatively small city of Cambridge, Massachusetts (population about 100,000), found that property prices in both decontrolled and never-controlled buildings combined had appreciated by a whopping $7.8 billion by 2005.

 
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My own research examines how landlords of controlled buildings change the amount of housing they supply when market rents rise. Do controlled landlords act like uncontrolled landlords, being more willing to make vacant units available? Or do they decrease housing supply?

This could happen if owners decide to convert their apartments to condominiums, or if landlords fear that new tenants will stay in their apartments so long that the gap with the market rent will become a gulf.

The Ellis Act is a California state law overriding local statutes, which allows landlords to evict all the tenants and withdraw an entire building from the rental market. Ostensibly, this occurs when landlords no longer want to operate their buildings. So one might expect Ellis Act evictions to rise when the economy slumps and profits fall, and vice versa. Instead, Ellis Act evictions spike during booms and fall during recessions. If landlords are withdrawing rent-controlled apartments in response to market rent increases, then rent control as a response to perceived housing shortages is counterproductive.

If rent control functioned as supporters claim, those living in controlled units would have considerably lower incomes than those paying market rents. In fact, as the figure on page 70 shows, the difference is negligible. Households in controlled units in D.C. actually made a bit more ($784 more a year in 2018 dollars) than those paying market rents. The comparison year (1999) was the latest for which census data were available. But at that point, all of the included cities had had rent control for at least 15 years.

Is There a Better Way?

If second-generation rent controls don’t work as intended, what could mayors and city councils do to help? The orthodox economics answer would be to abolish rent control and cut regulatory hurdles — notably, NIMBY land use restrictions — for developers seeking to build multifamily housing. Right or not, conversations with legislators, activists and other stakeholders make it all too apparent that this approach is a nonstarter. Rent control is too popular where it exists to be repealed, and opposition to construction is too well organized to expect a robust supply response in the medium term, anyway.

The question, then, is whether it is possible to reform the current iteration of rent control regimes, maintaining tenant protection while reducing the incentives for landlords to pare back the total supply of housing. In California coastal cities, where the housing crisis is most severe, this means finding ways to flat-out eliminate or at least to reduce the incentives for landlords to convert their rental units to owner-occupied condos that only the affluent can afford. One simple reform would be to increase the annual allowable rent hikes in controlled housing.

Right now, these caps are set below the rate of inflation in several housing markets. For example, between October 2015 and October 2017 in New York City, rents in “stabilized” apartments were not allowed to increase at all. A compromise approach might be to cap rent increases at the rate of inflation or more so that landlords do not see their earnings fall in real terms.

Another possible reform: allow for rolling inclusion or exclusion of properties. The Terner Center for Housing Innovation at UC Berkeley has proposed that controls be added to housing 40 years after it is built. This would prevent the rent-controlled stock of housing from aging indefinitely as cities block redevelopment for fear of losing rent-controlled units. On the other side of the ledger, a 40-year respite from rent controls is long enough to hardly figure in developers’ calculation of the profitability of new construction.

I would add another wrinkle to that proposal, mandating that controls imposed on 40-year-old buildings be lifted again after another 40 years or so. That would undercut landlords’ incentives to convert their buildings to condos in order to get out from under rent restrictions. This process need not happen all at once, but would be similar to the New York City system, where units are removed from control as each tenant chooses to move out voluntarily or dies.

One area for reform that has been neglected is how to prevent landlords from discriminating against applicants they believe will have long tenancies — which generally translates to the elderly, the disabled and households with children. A simple incentive could be offered, reducing the years until a building is decontrolled in proportion to the number of such tenants accepted.

• • •

Whatever one thinks of rent regulation, there’s little doubt that controls are here to stay. Indeed, we may well see controls spreading as rising rents threaten tenants in more cities that are enjoying the mixed blessings of rapid growth. Probably the best one can hope for are the sorts of compromises discussed above — compromises that limit rent controls’ perverse impact on the supply and quality of rental housing and the mobility of labor. Meanwhile, barring strong supply-side interventions, the dynamics of the housing market are likely to only exacerbate social tensions and inequality in living standards.

main topic: Housing
related topics: Regulation