How Ironic: America’s Rent-Controlled Cities Are Its Least Affordable

By on May 4, 2015

Bad ideas die hard, and rent control is no exception. For several decades, there has been near-consensus among economists that laws which cap or regulate rents are counterproductive, and most cities have ended them. But there are a few that still have rent control, and others have spoken of reviving their policies, including Seattle, which held a town hall meeting about the matter on Thursday. The main supporter of rent control there was Kshama Sawant, the Socialist Party councilor who believes that Seattle must “build a movement around housing justice.” I’m not sure if by that she meant the city should adopt a measure that raises housing prices, but that would likely be the effect.

According to Landlord.com, there are six cities among the nation’s 50 largest with rent control. In New York City, nearly half of units are rent controlled or stabilized, with annual increases determined by the Rent Guidelines Board. Los Angeles has almost the same number of rent-regulated units, at 880,581. In Washington, DC, a majority of units are rent-controlled, and the policy exists in the Bay Area cities of San Francisco, Oakland, and San Jose. In such cities, rent increases are generally tied either to inflation, or some other metric that ensures annual increases of a few percentage points. Most of these laws began in the 1970s, in response to rising housing prices.

The commonality between all these cities—despite differences in geography, demographics, and land use—is their expense. According to a 2012 BLS study that calculated annual household expenditures on housing, the nation’s three costliest metro areas are DC, San Francisco (a metro area that includes Oakland and San Jose), and New York City. Los Angeles was #6.

There are multiple factors for why these cities are expensive, including other regulations that mirror rent control’s arbitrariness. They all have zoning regulations that limit the housing supply, even as demand remains high. And the housing that is built undergoes lengthy approval processes, placing costs on developers that get passed down onto consumers. But a lot of it is because of rent controls that cause market distortions.

For example, back when it was enforced on new housing, rent control discouraged construction by reducing profits. When New York City expanded its rent regulations under Mayor John Lindsay, in response to housing shortages, it just led to further shortages, writes Manhattan Institute scholar Peter Salins.

“Before rent stabilization arrived on the scene in 1969, New York built 35,000 dwellings a year on average. In the early seventies, the rate dropped to 20,000 a year, and a decade later, to 10,000.”

Rent-control does, however, lead to abandonment. In San Francisco, a combination of rent control and strict eviction laws force many landlords to accommodate long-time tenants who pay well below market rate, leaving little revenue available to cover expenses. This has caused landlords to abandon an estimated 31,000 units—or one-twelfth of the city’s stock. Mayor Lindsay’s late-1960s rent-stabilization measure, which came right before an era of high taxes and inflation, caused New York City landlords to abandon 300,000 units from 1974-1984.

But rent control mainly makes housing expensive by taking units off the market via high occupancy rates and low turnover. Tenants who don’t want to lose their good deal stay in their apartments. This means that newcomers—or anyone not lucky enough to have a rent-controlled unit (including prospective homebuyers)—must compete for a more limited stock of market-rate units. If New York City abolished rent regulations today, it would double the number of available market-rate units, meaning housing costs would be shared more equitably across the population. As things stand now, many people pay more, because so many others pay less.

In these respects, rent control causes the same misfortunes as other price controls: it leads to underproduction of the units that are regulated, and price gouging for the units that aren’t. The biggest reason rent control endures is that, rather than looking at the issue economically, those who benefit view it politically (electing leaders who will maintain it), while even those who don’t benefit view it emotionally. The case against ending it often comes alongside anecdotes about how otherwise some grandma would live on the street. But there are numerous programs that could be used to help people in dire situations—from housing vouchers, to government-run senior living—and perhaps minor levels of rent control for them could be in the mix. That doesn’t mean, however, that a fundamentally bad policy should apply to large percentages of a city’s housing stock. Many people benefiting from rent control could compete in the private market, and some are flat rich, since in places like New York City, those making up to $200,000 qualify. Such people are being subsidized by landlords, and forcing higher prices for everyone else.

Read more at forbes.com

Leave a Reply

Your email address will not be published. Required fields are marked *

If you are a current investor, real estate investor, private lender, business owner or a professional who serves these groups, then you will enjoy and benefit from the Reinvestor Newsletter.

Enter Your Name & Email Below. Subscribe today, and get a valuable publication of ours as a free gift.

100% Secure