Rent control disproportionately hurts small landlords
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.…
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 percent per year. The rent control ordinance would cover all rental properties in St. Paul –– including new construction –– and also include vacancy control. This essentially means that in between tenants, landlords cannot raise rents by more than three percent.
The new proposal is certainly different from the widely known rent control policy that was popularized by New York City and Washington, D.C. during the Interwar period. By allowing landlords to raise rents every year, the proposal is more similar to policies that have been in place in most cities since the 1970s –– commonly referred to as rent stabilization.
Rent stabilization has, however, also proven disastrous, much like the strict first-generation proposals of New York City. In San Francisco, for example, after an ordinance was enacted to cap rent rises at seven percent per year, “many buildings were converted to new construction or condos that are exempt from rent control.” This caused the number of renters living in rent-controlled units to decline by 25 percent.
Furthermore, the total rental housing supply was reduced by 15 percent and rent went up by 5.1 percent citywide as excess demand flowed into the uncontrolled sector. And since the high-end housing built in San Francisco attracted residents with higher incomes, rent control contributed to the gentrification of San Francisco, the exact opposite impact the rent control policy had intended.
Similar effects have been observed in cities like Boston, Cambridge, Brookline and Los Angeles, as well as Santa Monica and Berkeley, with landlords taking rental units off the market and converting them to condos or new construction. These cities also experienced a decline in the growth of new housing supply, while their counterparts saw housing supply grow.
While it is similar to most rent stabilization proposals by allowing rent increases, the St. Paul proposal is stricter since applies to new constructions. Lawmakers generally exempt new construction to ensure that they do not discourage new development. This proposal does not take that into account, which could make a disastrous policy even more harmful.
Furthermore, an analysis of the rental market by the Center for Urban and Regional Affairs (CURA) indicates that higher-end units in the Twin Cities face lower rates of rent increase, which would make the three percent cap largely non-binding. Units that serve low-income residents, on the other hand, face higher rates of rent increase, which makes the three percent cap more binding.
So, in addition to restricting new construction, it is more likely that landlords will gravitate toward catering to the higher end of the rental market –– luxury apartments, or expensive condos –– whereby rent increases will not be significantly impacted by rent control, than on the lower end. This would greatly reduce the supply of housing for low-income renters.
Another provision that would make St. Paul’s rent control proposal even stricter –– and therefore more disastrous, especially for low-income renters –– is vacancy control. The ability for landlords to raise rents in between tenants –– vacancy decontrol –– to some extent mitigates the losses that landlords incur when they cannot raise rents to market rates.
By taking away the mechanism through which landlords can recoup their costs, vacancy control makes an investment in real estate even less attractive.
Indeed, vacancy controls kept rents low in cities like Santa Monica, Berkeley, East Pal Alto, Santa Monica, and West Hollywood. However, vacancy control also magnified the negative effects of rent control in these cities.
Berkeley and Santa Monica, for example, faced a higher than ten percent decline in rental housing stock between 1980 and 1990, while other cities –– even those with rent control, but no vacancy control –– faced an increase in their housing supply or a smaller decline.
The harmful effects of vacancy control are especially demonstrated by a study that compared four California cities with vacancy control –– Berkeley, Santa Monica, West Hollywood, and East Palo Alto –– to surrounding cities, two of which had vacancy decontrol. The study found that cities with vacancy control had fewer housing units than border areas –– even those with rent control policies.
It is possible that to some extent, vacancy control may offer stability and predictability by inducing current tenants to overstay. But stability and predictability are of no use to thousands of new and future low-income tenants who are deprived of housing due to a decline in housing supply, or disadvantaged renters that are displaced when landlords convert rental units to condos or higher-end apartments.
The best way to solve the housing crisis is –– as it has always been –– to focus on increasing the housing supply, which would put a downward pressure on prices.