St. Paul’s rent control proposal would be one of the most stringent in the nation
Exactly a month from today, residents of St. Paul will vote on whether to allow the city council to enact a rent control measure that caps rent raises at three…
Proponents of rent control often claim that greedy corporate landlords hold so much power in the market that they are able to take advantage of renters and raise rents excessively. Therefore, enacting rent control is one way to ensure that corporate landlords subsidize housing for poor tenants –– who would otherwise be displaced due to high and rising housing costs.
Providing access to housing is indeed a noble goal. But as research has shown time and time again, rent control is an ineffective way of solving the affordable housing crisis. Rent control reduces housing supply; leads to the deterioration of housing quality; encourages housing misallocation; and lowers property values and erodes the property tax base.
Going beyond the general effects of rent control, research evidence does not support the idea that rent control enables the distribution of rent subsidies from corporate landlords to tenants.
On the contrary, research evidence shows that rent control mainly disproportionately hurts small landlords since they are less likely to substitute to other types of real estate that are exempt from rent control.
One of the ways through which landlords escape rent control is by substituting to other types of real estate that are not covered by rent control. These include luxury units, owner-occupied condos, or newly developed buildings.
Rates of conversion, however, differ among small and corporate landlords. Because corporate landlords have much easier access to capital, they are able to convert at a higher rate and therefore escape rent control. Small landlords, on the other hand, are mostly unable to cover the high costs associated with conversion –– costs which may include paying current renters to move out, renovation costs for upgrading, or building new units.
Evidence of this phenomenon is provided by researchers from the University of Stanford, who analyzed how the expansion of San Francisco’s rent control law to cover small multi-family housing –– or mom and pop ventures with 4 units or less –– affected conversions.
As the authors find that:
..properties that have a corporate landlord at the time of the rent control expansion decrease their supply of rent controlled housing by 64 percent, while properties owned by individuals only decrease their supply by 14 percent. Corporate landlords replace this lost housing supply by increasing their supply of non-rent-controlled rentals by 20 percent and by selling to owner occupants, increasing their size by 10 percent. Corporate landlords primarily evade rent control by investing in new construction rentals, the most capital-intensive version of rent control evasion. Since corporate landlords likely have much cheaper access to capital than individuals, they can evade rent control at almost four times the rate of individual landlords.
So, while on the surface, rent control may look like a transfer from greedy corporate landlords to tenants, the reality is that small, credit-constrained mom and pop landlords usually end up paying for the full or disproportionate share of the cost of benefits that tenants receive in the form of lower rent when they are in a rent-controlled apartment.
Rent control is, in other words, regressive tax mostly paid by small landlords and not corporate landlords.