Ending rent control may not lower prices for non-regulated units

That’s one takeaway from a paper sent to me by one of its co-authors, Andy Garin, at MIT, on the effects of the end of rent control in Massachusetts in 1995 on property values in Cambridge. Fascinating topic, and much thanks to Andy for sending it to me – it’s always nice when other people write my blog posts for me!

Andy assures me that they “went through great pains to make sure our results do, in fact, have a causal interpretation, and meaningful,” but as always, I don’t have the statistical background to fisk its methods, so feel free to go at it in the comments.

Here’s the abstract of the working paper, available on NBER, called “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts”:

Understanding potential spillovers from the attributes and actions of neighborhood residents onto the value of surrounding properties and neighborhoods is central to both the theory of urban economics and the development of efficient housing policy. This paper measures the capitalization of housing market spillovers by studying the sudden and largely unanticipated 1995 elimination of stringent rent controls in Cambridge, Massachusetts that had previously muted landlords’ investment incentives and altered the assignment of residents to locations. Pooling administrative data on the assessed values of each residential property and the prices and characteristics of all residential transactions between 1988 and 2005, we find that rent control’s removal produced large, positive, and robust spillovers onto the price of never-controlled housing from nearby decontrolled units. Elimination of rent control added about $1.8 billion to the value of Cambridge’s housing stock between 1994 and 2004, equal to nearly a quarter of total Cambridge residential price appreciation in this period. Positive spillovers to never-controlled properties account for more half of the induced price appreciation. Residential investments can explain only a small fraction of the total.

Here’s an earlier (?) version of the paper. If you’re sufficiently motivated, you can find one of their email addresses online and ask for a copy of the latest version, and I’m sure they’d be happy to oblige.

  • http://johnmcdonnell.tumblr.com John McDonnell

    It seems to me that it’s a little myopic to focus on Cambridge, which is essentially a neighborhood of Boston (apologies to any Cambridgites reading this comment, also note I am a New Yorker and 100,000 people makes your community roughly the population of the East Village). It looks like Cambridge upgraded as a neighborhood post rent control, and the end of rent control may have facilitated that, but rents in the Boston metro in general could easily have declined (relative to baseline) as a result of decontrol. For example, if it’s true that wealthier people moved to the neighborhood, that should have reduced their demand on other areas causing rent decreases in those areas relative to baseline.

    A related issue is that I’m willing to bet Cambridge has fairly draconian development restrictions that probably make it more attractive to developers in general to invest in the quality of units than in building more units. Thus, rather than incentivizing developers to increase the quantity of housing (which would have reduced rents), they invested in quality, sparking a chain reaction whereby Cambridge as a whole became a more upscale neighborhood.

    It’s unambiguously good news that decontrol creates so much value, but the precise results observed might be tied to restrictions on new construction and Cambridge capturing the luxury rental market within its metro area.

  • aka_Scoop

    “It’s unambiguously good news that decontrol creates so much value”

    Why on earth does anyone believe that any value has been created here or that rising home prices are ever a good thing for society as a whole? Would the world be better off if housing prices rose 100 times or if houses were magically free?

    In general, the only time rising prices for any consumer products are good (or at least a valuable evil) is when they provide useful signals, either A) demand for this product has risen and it’s time to devote more resources to supply or B) we’re running short on this limited resource so prices must rise to prevent shortages. But rising housing prices in this case do neither. There is no shortage of land, labor or building material that would prevent the sale of high-quality, low-cost housing anywhere but the most valuable parts of the densest cities. But the signal of rising prices does not lead to the creation of said housing in many cases because zoning prevents it. (OK, if prices rise enough, they will stimulate some new development, so they do some good, but far less than they should.)

    What this paper’s synopsis describes is “zoning laws were removed and huge amounts of utility were transferred from renters to property owners”. Some value might also have been transferred from the original group of renters to a later group of renters that could afford the higher prices. No value was created except in cases were the absence of restrictions led to the construction of stuff that wouldn’t have been there otherwise.

    Does one study overturn decades of consensus that rent control is, on the whole, bad? Obviously not, but assuming that this is a high quality study, it would seem to be a serious challenge to the notion that removing rent control, absent any other changes, will lead to much better outcomes for basically everyone except those who had been benefiting directly from the rent control.

  • http://johnmcdonnell.tumblr.com John McDonnell

    “Would the world be better off if housing prices rose 100 times or if houses were magically free?”

    That would depend on why housing prices were rising or falling. If housing got 200x better, a 100x increase in price would indicate a big improvement. If housing became free as a result of a nuclear strike against the city of Boston, that would not indicate an improvement; it would indicate that the housing had become worthless. When I think of free housing, I think of the South Bronx (which had rent control btw).

    In this case, it would have been bad if prices and rents had increased as a result of a decrease in the supply of housing, since in that case those prices would indicate a shortage. But since there was no negative shock to supply, the only source of the increased prices and rents would have to be an increase in demand, which indicates that the quality of the housing stock increased. That means that the increase in rents is the quantification of the value created, and of course land prices increased concomitantly.

    “No value was created except in cases were the absence of restrictions
    led to the construction of stuff that wouldn’t have been there
    otherwise.” … the paper actually talks quite a bit about how deregulation increased investment in housing. But of course, due to Cambridge’s zoning restrictions, I’m sure most of this investment took the form of upgrading the quality of the housing stock rather the the quality. Nevertheless, the rich people that moved into Cambridge must have substituted away from some other neighborhood in the Boston metro, lowering rents there, which is why I’m willing to bet the paper’s conclusions would have been a bit different if they’d looked city-wide.

  • aka_Scoop

    1. Pretending to misunderstand the point isn’t really helpful. The hypothetical is obviously would we be better off if housing prices increased 100x or became free and nothing else about the housing changed?

    2. I happily concede that upgrades to existing housing stock often (though not always) create real value. If much of the value rise came from that rather than supply limitations, then perhaps the paper’s findings are not so glum as the excerpt and Stephen’s synopsis would indicate.

    3. Price increases in one place do not necessarily mean price decreases elsewhere. During the property value increase of the ’00s, people simple began paying more of the income for the same housing they had before. (The price of housing, even entirely unimproved housing, rose dramatically but incomes were dead flat.)

    Counters to my own argument that housing is basically a manufactured consumer good and thus people would massively benefit from increased mfg productivity that pushed prices down and/or quality up:

    1. If you’ve spent a huge sum on the biggest house you’ll ever own and your plan was to either die in that house and leave the money to your heirs or sell it for a less expensive house later, then obviously you will lose out if property values fall.

    2. The size of home expenses and the length of home loans mean that there are huge downside if housing prices fall too fast, as we have seen very vividly in recent years.

    3. Homes are unique in that your quality of life depends heavily not only on the quality of house you can get for any amount of money but also on who can/does make similar purchasing choices. High prices allow the functional to insulate themselves from the dysfunctional. If prices fell really dramatically, that would go away.

    All that said, I think that, on balance, falling housing prices would benefit people hugely. We currently spend huge chunks of our income on housing. Having that money for other things, like an extra two decades of leisure, would be an immeasurable benefit. So the generally held belief that rising housing prices, in and of themselves, are good is batshit nuts.

  • http://johnmcdonnell.tumblr.com John McDonnell

    I understood what you were saying in your first comment (I think) but now I’m very confused. You seem to think I’m arguing that housing prices should increase without an increase in quantity or quality, which I surely was not. But I can’t imagine how rental contract deregulation could cause that to happen.

  • aka_Scoop

    1. I did think you were arguing that it’s good when housing prices increase absent any change in quality, that rising prices of fixed assets somehow indicates value is magically being created. Most Americans believe it devoutly. Most financial reporters believe it devoutly. I’m sorry I lumped you in with them.

    2. “How could rental deregulation cause that to happen?” I don’t really know. As far as I know, it has long been taken as indisputably true that eliminating rent control will (obviously) increase rents in controlled buildings but also decrease rents for those in uncontrolled buildings and spur enough new construction that overall costs fall, meaning overall benefit. (There should also be quality improvements in the mix because rent controls basically destroy any incentive to basic maintenance let alone improvement.) End assumed result to killing rent control: better quality, lower prices, more housing. But this study seems to question this (unless the place was so dumpy that ALL the improvement went into better quality.)

    Here’s a scenario I find quasi-plausible, but I have no idea if it’s the case here: Zoning laws are enacted in a desirable city, restricting construction of new housing supply. Housing prices (both rental and purchase) rise. Renters get angry. Lawmakers enact rent controls on many but not all rental properties. Over the decades, prices diverge substantially. Controlled buildings are cheap enough that reasonably undesirable people can afford them, which limits the value of non-controlled buildings. Rent control is eliminated. Higher prices in the formerly rent controlled buildings for the poor out, making the neighborhood nicer, pushing up prices in never-controlled buildings. All without any improvements other than in the human population. (Eventually, the richer neighbors would demand nicer stuff and start improving, but that would be high prices creating improvements, not improvements creating higher prices.)

  • http://johnmcdonnell.tumblr.com John McDonnell

    I agree with your scenario in general but I disagree that rich people would just move into crappy apartments that poor people used to live in and pay more rent for the same thing and have no problem with that.

    Also the point I was originally trying to make was that this might have been specific to Cambridge. Rich people moving to Cambridge might have eased rent pressure elsewhere in the metro, but to see if that happened the authors would have needed to take a metro-wide perspective.

  • aka_Scoop

    How can you live in Manhattan and say that? People who, by any objective standard, are very rich will move into hovels because they are not quite rich enough to be in places that are both nice and in Manhattan. They live in places that the manager of a Taco Bell in Dallas would laugh at. Much of the LES that used to accomodate winos and squatters now commands $5000 a month (sans too many renovations) because the neighborhood is now rich.

    As for your original point, I agreed with the main thrust, that it’s certainly possible that rising prices in one neighborhood of metro-Boston would lead to lower prices elsewhere. I was only taking issue with the one point, a point that you apparently were not even trying to make. So apparently much of this was for nothing, but I enjoyed thinking through some of the issues a bit. Cheers.

  • http://johnmcdonnell.tumblr.com John McDonnell

    I think it’s important to recognize that there is more value in a Manhattan apartment than its floorspace. The LES has crazy amenities now that never existed when it was full of junkies. Increased rents reflect a huge increase in the value people place on living there, although of course I think that they should also allow massive increases in the quantity of housing available to bring those prices down and allow more people to enjoy that value.

    But yeah sorry if I sounded contentious! Nice talking this stuff through I agree, it definitely made me think about things more.

  • http://twitter.com/stateofthecity Brian F. Kelcey

    I’m sure I’m not the only one thinking:

    “isn’t it a little strange to judge the broad-based impact of eliminating rent control on the market by slicing out the one period in US realty history that virtually everyone agrees was the foundation of a speculative bubble?”
    Just a thought.

  • goodenough

    Either we are talking about housing from a real estate investor’s perspective, or as a resource for its users. When we conflate the two we can not have a meaningful discussion. In Cambridge, deregulation had the desired effect – removing rent control caused real estate values to inflate for all, yielding tremendous gains for speculators and lucky homeowners. These are the investors. Since the negative impact is harder to measure, particularly the impact on those ‘missing’ or excluded by this market shift, we are unlikely to see a assessment from the user’s perspective anytime soon. What happens when housing costs for all rise? How do employers feel about the wage pressure this generates, or the fact that it scares off young talent? How do people who live in (as opposed to absentee landlords) neighborhoods feel about the socioeconomic changes that stem from rising housing costs?

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