Why rent control helps no one

An artificial ceiling on rents produces a host of unintended or overlooked consequences that eclipse good intentions or favorable PR.

Rising housing costs in the Twin Cities have resurrected an old idea –– rent control. This fall, voters in both Minneapolis and St. Paul will decide whether to give local bureaucrats the power to cap how much rent landlords can charge their tenants. Advocates claim this will help low-income renters, especially people of color, escape gentrification and hold on to their housing.

Indeed, lack of affordable housing is a real issue facing most big cities, including the Twin Cities. American Experiment described the factors driving high housing costs in the Twin Cities in our paper, “Out of House and Home.” But rent control is the worst way to deal with the issue.

Economics can lack consensus on most topics, but rent control is not among them. When pollsters at the University of Chicago asked economists in 2012 whether three decades of rent control measures had had “a positive impact” on the amount and quality of broadly affordable rental housing, 81 percent disagreed, most of them strongly.

Most economists consider rent control a price ceiling that creates a host of adverse consequences that eclipse good intentions or favorable PR. To illustrate, imagine if the government limited how much your boss can pay you. Chances are you will be less motivated to find a job, and if you had one, you would not dedicate as much effort to doing it. Nobody wants to invest capital or labor into producing a good or service that will not profit them.

Similarly, landlords are likely to respond to the loss of revenue by reducing the quality and quantity of the housing supply. One way they escape rent control is to transform apartments into owner-occupied condominiums or to develop buildings into higher-end luxury properties.

Analysts at Stanford University, for example, found in 2019 that “rent-controlled buildings (in San Francisco) were eight percentage points more likely to convert to a condo or ‘tenancy in common’” than buildings with no rent control. The result? The number of apartment units available for low-income renters decreased as landlords catered to higher-income renters, leading to an increase in the cost of renting by about 5.1 percent city-wide as renters competed over a much smaller available housing stock. In fact, they discovered the number of renters living in rent-controlled units declined by 25 percent, “as many buildings were converted to new construction or condos that are exempt from rent control.”

And since the high-end housing in San Francisco –– that was developed in response to rent control –– attracted residents with higher incomes, rent control contributed to the gentrification of San Francisco, the exact opposite impact the policy intended.

And when capital or legal constraints limit property owners’ ability to upgrade units or convert to higher-end condos they will often limit financial losses by cutting back on maintenance costs. Research in 2003 by the MIT Center for Real Estate found that rent-controlled buildings in Cambridge, Massachusetts were “older, in worse condition, and more in need of very essential repairs.” This lower housing quality, when coupled with lower rent revenues, also eroded the community’s property tax base. In fact, MIT reported that when rent control was repealed in Cambridge, property values increased as much as $2 billion for both controlled and uncontrolled buildings between 1995 and 2004.

Rent control also discourages investment in new housing. The Stanford study estimated that rent control reduced the supply of housing in San Francisco by 20 percent. Similarly, the MIT report found that investments in housing increased only after rent control measures were repealed.

Another side effect of rent control is that it discourages tenants from moving. Former New York City Mayor Ed Koch famously paid only about $475 a month for a Greenwich Village apartment, which he kept vacant for the 12 years he occupied Gracie Mansion, the city’s official mayoral residence. Nat Sherman, a tobacco-industry tycoon, paid only $335 for a six-bedroom apartment on Central Park West, astoundingly lower than the market price of even a studio apartment in the same neighborhood.

Failure all around

An irony of rent control is that it ends up benefiting middle and high-income renters, who do not need any help. A report for the Citizens Budget Commission noted that in 2017, New York’s rich tenants occupied 12 percent of the city’s rent-stabilized units –– a total of 98,780 units. Moreover, of those households, 28,377 earned more than $200,000, thereby saving an average of about $14,000 per household due to rent control. And in Stockholm, Sweden, between 2011 and 2016, individuals in rent-controlled apartments were found to have incomes 30 percent higher than the metropolitan average.

Rent control’s negative impacts are not exclusive to New York, San Francisco, or Cambridge, but extend to places outside the United States. Rent control measures have led to a decline in housing value, the deterioration of housing quality, and reduction in new housing construction in areas like France between 1914 and 1948; Hong Kong after 1921; and Ontario after 1975, just to mention a few.

But even more recently a rent freeze enacted in Berlin in 2020 caused landlords to cut back on maintenance expenses and reduce the number of rental units advertised, lowering the housing supply. Furthermore, rental prices went up in nearby regions, pointing to a potentially increased spillover demand in those areas.

The housing crisis is a supply issue

Historically, rent control measures have mainly been implemented in areas facing rising housing costs due to shortage in the housing supply.

In 1593, for example, when Jews living in Rome –– who at the time were forbidden from owning property and could only rent in the ghetto –– were banished from all but three Papal states, they flocked to the ghettos of Rome and Ancona, causing rents to rise disproportionately in those ghettos compared to other regions. This resulted in Pope Clement freezing rents to protect Jews from their Christian landlords.

Likewise, in 1755 when Lisbon enacted rent control, it was only after a great earthquake had destroyed one-third of the city, slashing the city’s housing stock and leading to high prices.

In the U.S., Washington D.C and New York, the earliest adopters of the modern concept of rent control in the 1920s, also mainly did so because World War I had led to a housing shortage which raised prices.

The Twin Cities are not facing a novel problem. The cost of housing is high and rising because there is not enough supply to satisfy demand, causing prices to go up. Indeed, evidence from the Metropolitan Council shows that while housing supply has grown, it has lagged population growth. Between 2010 and 2017, for instance, the twin cities added 83,100 households and only 63,600 new housing units –– a shortage of 19,500 units.

So, to address the housing crisis, policymakers should focus on increasing housing supply by removing impediments to affordable housing, namely burdensome permitting requirements, land use regulations, zoning rules and environmental building codes, as well as excessive fees which delay construction projects and can add tens of thousands of dollars to the cost of housing development in the twin cities –– costs which are inevitably passed down to consumers.