Welcome to the final post in the series discussing the consequences of rent control. Thank you to the subscribers who have patiently awaited each new post. I hope everyone found it enlightening.
If you haven’t read the entire series, you can catch up with these links:
Rent Control Part One: Microeconomics Lesson and Hording
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict
Rent control is not just a simple price control setting the price at which willing renters and landlords are permitted to do business, it is much worse. It is a coercive act that gives landlords no legal option, but to rent to a tenant against his will, often at a financial loss. Rent control adds a non-voluntary burden to landlords which deepens over time because landlords do not have the option to rent to a tenant at below market rates.
Not only does rent control cause huge distortions in the housing market, but the burdens fall disproportionately on the poor and underprivileged people it was intended to benefit. Although particular people are able to live with the comfort of low rent payments, even those renters will see their living conditions deteriorate as landlords neglect repairs and maintenance. As the situation gets worse, middle class residents are able to move away, leaving behind the poorest residents who have become reliant on the reduced rent.
In effect, rent control grants property rights to renters, that originally belonged to the original property owners. Rent control becomes a redistribution of wealth to rent control tenants away from apartment owners, market apartment renters, and newcomers to the area. Nonetheless, over time the quality of life decreases for all residents of a city where rent control is imposed.
So, it wouldn’t be very productive for me to rant about the problems rent control creates, if I didn’t discuss solutions to the problems. Cities can flat out abolish rent control, like California’s Proposition 98, phase it out through vacancy decontrol, or use other methods to end rent control. However, ending rent control, without ending other burdensome policies, doesn’t solve the problems of limited housing options, particularly for low income people.
Abolishing rent control overnight would bring many market rate units onto the market at once, and would greatly reduce prices for market units. However, it would force many poor residents to move all at once and would cause a shock to the overall rental market. This would correct itself over time if proper action were taken by municipalities to allow additional supply to the market.
Most importantly, developers need to be allow to bring housing supply to market. Many of the places that have the strictest rent controls are also cities that have very restrictive zoning. As new development comes to market, prices will ease on the previously regulated apartments. In fact, I would argue that development restrictions should be eliminated several years before rent control is fully abolished, in order to give developers time to bring sufficient supply to the market in preparation of full decontrol.
Vacancy decontrol is a more moderate method that has been used by many cities to phase out rent control or lessen the scope of rent control. Vacancy decontrol usually means that rent controls are enforced in apartments only until the tenant leaves. At the time a tenant leaves, the landlord is permitted to return the unit to market rates. California’s Proposition 98 is, in effect, vacancy decontrol where current tenants will not be effected as long as they stay in their current apartment.
Vacancy decontrol is typically a compromise between advocates of rent control and apartment owners. While it is preferable over fully-regulated rent control, there are serious drawbacks. The biggest drawback is that it increases the incentive to hoard. When a tenant knows that a unit will be deregulated when he moves out, he will try to stay as long as he can to maintain the benefits. Tenants may have family members stay there or maintain a second residence to ensure he will not loose the benefits of rent control. As a result, controlled units are likely to stay occupied by current residents for a long time, before being let back into the market.
Unfortunately, vacancy decontrol also incentivizes landlords to try to evict tenants in order to deregulate their apartments. There have been many horror stories of landlords harassing tenants, allowing horrible living conditions to prevail, and invading the privacy of tenants as ways of encouraging tenants to move out.
Rent Control and Property Rights
What if we look at rent control as an appropriation of property rights from the landlord to the tenant? A landlord has certain limited rights, while the tenant has extensive rights to the apartment granted through rent control. Since this appropriation typically happened many years ago, one could argue the apartment is more the property of the tenant than the landlord under rent-control policy.
If one accepts this point-of-view, one way to end rent control is to force a sale of the complete property rights either from the owner to the tenant or from the tenant to the owner. The tenant would be forced to offer a price to the landlord to purchase the remaining property rights of the apartment. If the landlord accepts the offer price the unit will be sold to the tenant at that price and become a condominium.
If the landlord rejects the offer price, he will have two choices. Either buy out the renter’s contract at the same price as renter’s offer or sign a contract extending certain rent controls indefinitely for the duration of tenancy. Such a mechanism would ensure the tenant would offer a reasonable amount. In effect, this forced sales will return all apartments to the market immediately, whether they now be owned by the original tenant, original landlord, or controlled only by contractual agreement.
If the tenant could not afford the purchase price, which would likely be below market, he would be permitted to resell the condo unit at any price or forfeit all rights to the property upon failure to execute.
There would be complications if a landlord suddenly lost control of an entire building, creating a fractured ownership of the building. Allowing the landlord the option to extend the lease or buy out the tenant would enable the landlord to maintain ownership of entire buildings at his discretion.
Of course, if one believes rent control was a theft of the original property rights from the landlord, you would be hesitant to reward the tenant for years of hoarding another person’s property. However, if one believes it is theft, should the government be forced to pay reparations to landlords for lost earnings? Perhaps, with a forced sale, the government would be required to remunerate to the landlord, a certain percentage of the transaction as a form of reparations.
For those who believe we need to "do something" for housing affordability, there are solution which are much better than rent control.
Federal housing assistance programs began during the Great Depression. In the ’70s, Congress passed the Housing and Community Development Act of 1974. This act shifted the focus from the quality of housing to the affordability by creating the Section 8 program. Learn more about the Section 8 program here. Many state and local authorities have implemented voucher programs as well.
Low Income Housing Tax Credits
Federal programs offer tax credits to developers of low income housing (LIHTC). These tax credits are more valuable than tax deduction and are often purchased by corporations who pay high tax rates. (learn more here)
Of course, there are consequences to subsidizing housing, (which is another topic altogether) but most would agree that a system of subsidizing housing for lower income people with vouchers or tax credits are certainly less less-bad solutions than forcing the burden on the providers of housing and rental apartment market through rent control.
Zoning and Regulation
The difficulties of phasing out rent control could be lessened by the market more quickly and effectively if zoning and other regulations are loosened at the same time. The private market needs to be allowed to meet the demands of market renters, so that lower quality, and smaller apartments remain affordable to people with lower incomes.
Most importantly, municipalities need to end exclusionary regulations that forbid affordable housing that would be used by low income residents. The most widespread example is that of many suburban communities that regulate the number of housing units per acre. Such regulations prevent developers from creating multi-family housing that is typically more affordable to lower income families. Often times, these regulations are aimed at keeping certain people out in order to maintain an upscale community.
Most cities also have provisions in their zoning codes that prevent development of affordable housing. Chicago, for example, has strict restrictions on dwelling units per acre that in many instances are more restrictive than density restrictions. These restrictions are supposedly implemented to encourage more housing for families, but forces developers to build less units, thus larger units. This discourages development of smaller, more affordable units, such as studios and single room occupancy units; and instead encourages development of larger, luxury units.
Almost all municipalities have restrictions on density, usually through FAR (floor area ratio) and height restrictions that inhibit the amount of development that can happen in a certain area. These restrictions directly burden development of market rentals, which in turn, causes shortages in lower quality housing as middle class renters are forced to choose lower quality units that would otherwise be rented by low income families. Thus, destroying affordability for all demographics.
In order to "protect jobs", many cities have implemented zoning restrictions that prohibit residential development on under-utilized industrial land. These prohibitions are very short-sighted, and in effect, keep land prices low in industrial areas since alternative use of the land is prohibited. These days, industries tend to be location insensitive since transport costs have come down significantly over the last century. Industries typically choose to locate where land is cheap, so in order to attract manufacturing jobs, a municipality must put a huge burden on the housing market. Forcing land prices down in urban areas to attract industries does more harm than good by preventing redevelopment of the land as housing, driving housing costs higher, elsewhere.
All things considered, most currently affordable units will remain relatively affordable if the market is allowed to satisfy the needs of the wealthy and middle class renters, preventing prices from rising across the board and preventing gentrification of lower housing stock by more wealthy persons.
Many municipalities tax rental housing at a much higher rate than they tax home owners. This is mostly due to political pandering to homeowners who tend to be a reliable block. Nonetheless, much of the additional tax burden gets pushed on the renter as the landlord shares the burden by raising rents. Removing this redistribution of wealth would ease the burden on rents, as would lowering real estate taxes by cutting spending.
Tax deductions for home ownership also create a misallocations of housing resources away from affordable rentals.
A Free Market for Housing
In conclusion, supply controls do as much damage to affordability as price controls. Eliminating rent control needs to go hand-in-hand with loosening exclusionary zoning and density restrictions in order to allow the market to perform as it should. A truly free-market incentivizes investment in quality affordable housing for all residents by allowing individual decisions to determine living patterns and location preferences based on quality, availability and affordability.
For more reading, see the section on Rent Control on the Links to Articles and Academic Papers page.