Ah, rent control. I know I’ve debated a lot of things this past month. And none of them make me feel quite as strongly as rent control.
Supply and demand states that when the demand for something is high, but the supply is low, the price for it goes up. This is because when there isn’t enough of that resource to go around, raising the prices is the only way to keep it from running out. Usually, if the price for something like rental property is high enough, and stays high, then it becomes a signal for entrepreneurs to profit by being able to offer that service to others. And since there are now more people offering that service (places to live), the price of them will go down. And rent control disrupts that order, for if the price is already low, then it tells the aforementioned entrepreneurs that they will not make money by making more rental properties.
Here are a few of the demonstrated harms caused by government rent control policies:
St. Paul, Minn., passed a rent control ordinance in 2021. A
University of Southern California study the next year found that “rent control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion.” It further found that “the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities. For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”
A 2018 study of rent control in San Francisco found that the imposition of rent controls reduced the supply of rental housing by 15%, raised rents by 5%, and fueled the conversion of lower-end rental units to higher-end condominiums. The authors found that “landlords of properties impacted by the law change respond over the long term by substituting to other types of real estate, in particular by converting to condos and redeveloping buildings so as to exempt them from rent control. This substitution toward owner occupied and high-end new construction rental housing likely fueled the gentrification of San Francisco, as these types of properties cater to higher income individuals. Indeed, the combination of more gentrification and helping rent controlled tenants remain in San Francisco has led to a higher level of income inequality in the city overall.”
From 1970-1994, Cambridge, Mass., imposed strict rent controls and made it hard for the owners of rent-controlled properties to convert them to other uses. Those ordinances were abolished with the passage of a 1994 referendum banning rent control in Massachusetts. This led to increased apartment construction. “Over the next several years, direct dollar investments in housing units, as measured by building-permit filings, more than doubled on an annual basis,”
a 2012 study found.
A separate
2007 study of the effects in Massachusetts found that rent control did lower rents in covered buildings, but also “led to deterioration in the quality of rental units” and encouraged apartment building owners to “shift units away from rental status.”
A 2000 study of the effects of rent control on tenants found that rent control raised market rents and “the average benefit to tenants in regulated units is negative. This implies that, on average, tenants in rent regulated units would be better off if these controls had never been established.”
A 2019 study of rent control in Berlin, Germany found that rent control “reduces rents in the controlled sector, but also leads to rent increases for uncontrolled units. And it “reduced the propensity to move house within rent controlled areas, but only among high-income households.”
A 1989 University of Pennsylvania study of rent control in New York City found that capping rents discouraged homeownership, helped whites more than minorities, and reduced investment in and upkeep of rent-controlled units. In short, rent control lowered the quality of apartments while simultaneously discouraging renters from becoming homeowners. “The expected rent control benefits had a significantly negative influence on the propensity to own. That is, consumers with large expected rent control benefits had lower demands for homeownership.”
A 2009 review of the economic literature on rent control found that “economic research quite consistently and predominantly frowns on rent control.” It also found that the effect on homelessness was inconclusive. “Several empirical studies find no clear relationship between rent control and homelessness,” according to the review. Some studies found that rent control increased homelessness, others that it had no clear effect or reduced homelessness. Given the mixed results, rent control should not be considered a solution to the problem of homelessness.
But, obviously, I mostly grabbed this for sources. Personally, the best way someone depicted it to me was this.
Imagine there are two people. The first person can afford to spend $1,500 on rent, but the second can only afford to spend $800 on rent. The first person can find a one-bedroom apartment for $1,400, but the second person cannot. Therefore, they begrudgingly move in with three other roommates to split bills.
In a rent controlled city, the first person can afford their one-bedroom apartment. But so can the second person. And all three of their roommates. And the result is that everyone can afford it, but there aren’t enough vacancies, and they don’t have an open apartment to move into. And there won’t be any more, since no one has an incentive to wanna build them.