How “inclusionary” are market-rate rentals?

In metropolitan Baltimore, a family of four making $73,000 in 2024 qualifies for 60% AMI affordable housing, where it would pay $1,825 per month for rent, utilities included. A third of new market-rate three-bedroom units in Baltimore are rented at around that level.
Baltimore is typical, as it turns out. In most U.S. metro areas, a substantial share of rentals constructed since 2010 were, in 2021 and 2022, affordable at 60% of AMI… You can also check out maps showing rentals affordable at 80% and 120% of AMI.

The ACS data don’t let me distinguish market-rate from subsidized rentals, so these include LIHTC and other subsidized rentals. Those, however, can’t explain away the core result, and the data don’t show the bifurcated market that some people imagine, with a huge gap between market and deed-restricted rents.

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But it seems to me that there’s an assumption hidden behind this idea: that the neediest people are the ones who are ordinarily most stable, and thus do not suffer from rising housing costs as long as they are protected by rent control or similar measures. For example, law professor Richard Schragger complains that pro-housing zoning reform will “redound to the benefits of investors and developers and not to those residents with limited resources who seek to afford to remain in place.” (emphasis added) In the next sentence, he adds that “those in the market for housing- including middle-class families, recent college graduates, and young families– are often priced out of high-cost urban markets. But reforms should be careful not to equate their interests with those of the working class and especially minority poor…” (emphasis added)* In other words, the “working class” and “minority poor” and people “in the market for housing” are somehow two separate groups.

This assumption might be persuasive if poor people moved less often than other people. But neither common sense nor data support this idea. If you are poor, you might be less likely to have steady employment, which means that your income is likely to be unstable. Thus, you are more likely than other Americans to be evicted or to move voluntarily even if rents are stable. Even if you rely on government transfer payments, you are at risk for bureaucrats questioning your eligibility.

What do the data show? Census Table S0701 shows that over the five year period between 2017 and 2022, 10.6 percent of persons with incomes below the poverty level moved recently within the same county, as opposed to only 6.1 percent of persons with incomes at or above 150 percent of the poverty level. 7 percent of poor Americans switched counties or states, as opposed to 4.7 percent of persons with incomes over 150 percent of the poverty level. Thus, a total of 13.1 percent of the poor moved, as opposed to 10.8 percent of the nonpoor. This is not a new development: between 2011 and 2016, 14.6 percent of the poor moved within a county and 7.2 percent switched counties or states, as opposed to 6.9 percent and 4.4 percent for persons with incomes over 150 percent of the poverty level.

What about in cities with extensive rent control? In New York City, everyone moved less, but poor people still move more. 10 percent of the poor moved within a county or switched counties or states, as opposed to 8.5 percent of persons with incomes over 150 percent of the poverty level. In San Francisco, 15.9 percent of the poor moved, and 13.6 percent of the nonpoor. (These statistics only include people who move into these cities, not people forced out by rising rents).

*My quotes are from page 129 of this article.

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Adam Pagnucco responded with a series of posts at Montgomery Perspective about the prospect of rent control. His series begins with a great rundown of the economics literature on rent control, and continues by examining the effects of rent control in DC and Takoma Park respectively, with reflections from his personal experience living in a rent-controlled apartment in DC. In his conclusion, he cites the anemic pace of new housing construction to argue for a real way forward: instead of rent control, give the county’s recent liberalizing reforms time to work.

I contributed a post to the series demonstrating the effects of rent control on condo conversions within Takoma Park, which has had strict “rent stabilization” since 1981. I was able to exploit a natural experiment by examining one of the city’s boundaries, Flower Avenue, to be able to claim the rare causal effect: rent control caused condo conversions of 15 percent of multifamily buildings.

In a follow-up post, Adam links to a Takoma Park city report from 2017 which noted that Takoma Park’s young adult population declined from 2000 to 2015, and that no new multifamily rental units have been constructed in the city since the 1970s – before rent control was adopted.

Mercatus research assistant Eli Kahn helped draft this post.

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How to you allocate housing?

But these regulations have one fatal flaw. San Francisco is a very attractive city. Even if the economy is worse than it used to be, the culture, geographical location and climate make it a place where thousands of people would love to live, and are currently blocked only by the high rental prices. If you artificially lower these prices (through legislation), you end up with way more demand that the supply can handle. Even if you think this is morally the right thing to do, you have to address the mismatch between the demand and supply you’re creating. 

In other words: how will you allocate housing in the absence of the market mechanism? 

When confronted with this question, American leftists usually do not have an answer, or provide some muddy explanation that still focuses on existing residents, as if their living situation was never changing: they never got married, divorced, their kids never grow up, they never leave for a reason other than being priced out etc., and as if there were no new potential residents who would like to move to San Francisco for whatever reason. 

History provides a warning

In the absence of their answer, we can look at history. In the Eastern Bloc (where the state actually built housing – just never fast enough to house its growing populations), the price mechanism was also removed from the housing equation. How did those states allocate housing, then? 

Let’s look at my home country, Poland. In the socialist Poland, the housing shortage was acute. But it was especially acute in the most-attractive big cities, similarly to how it is in America today. Warsaw in particular was the place where everyone wanted to live (socialist states are typically very centralized, with all the good jobs and services focused in the capital city), but there was never enough housing.

Since rents could not be raised to depress demand, the state had to resort to other tactics. They introduced meldunek, which can be translated as geographical registration. Every Pole was assigned to a specific address, and could not live anywhere else.  There was just no such a thing as geographical mobility – unless you could secure meldunek in a different location, you could never move. Even if you had all the money in the world, or were a world-renowned scientist, or needed to escape your abusive family, you just could not move to a different part of the country. 

Besides the personal implications to the lives of millions of Poles, this policy also had a disastrous economic impact. Warsaw did not reach its pre-war population levels until the 1970s (similarly destroyed Rotterdam managed to get back to its pre-war population by the early 1950s) because the state could not build enough housing and was artificially suppressing demand.

Some towns around Warsaw were more lenient and grew tremendously (in fact, many of the most densely populated towns in Poland are just outside Warsaw to this day), putting pressure on railway lines and forcing long commute times on people who could have lived in Warsaw proper if it wasn’t for the meldunek system. Officials in charge of the meldunek system would also get bribed by people who desperately wanted to live in the capital.

Those who couldn’t afford bribes and could not secure meldunek in satellite towns of Warsaw had to live elsewhere – often in small, provincial towns, where their talents were wasted, they grew angry (often at those who managed to get to Warsaw), and now their children (who moved to Warsaw and other big cities since Poland is a capitalist economy now) dealing with parents left behind while they struggle to organize childcare. 

There is no denying that market forces are not always pleasant, and that sometimes the misalignment between supply and demand puts pressure on people. But the opposite is arguably even worse, trapping people in places they don’t want to live, destroying economic growth, and driving resentment. 

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Takoma Park is a great place to live. It’s also the only jurisdiction in the region that has rent control.

As a result, one building here sold cheap: a 12-unit multifamily building at went under contract in late July for $1,280,000. That’s just $130 per square foot, less than a third as much as the dilapidated (although heroically marketed) house next door.

Outside the City of Takoma Park, inferior multifamily real estate commands higher prices. On the unincorporated side of Flower Ave – where commutes are longer, perceived crime risk is higher, and students are assigned to less desirable schools – two small, unrenovated multifamily buildings sold this year for $258 and $191 per square foot, respectively.

Now, it’s of course possible that the cheap 12-unit building is so cheap due to major maintenance issues or higher taxes. But it’s no surprise to find that decades of strict rent control would massively depress multifamily building values.

The upshot is that there’s an investment opportunity here. For just $1.3 million, you can buy this 25,000 square foot lot, scrape it, split it into three lots, and build a McMansion on each. If the Big Macs cost half a million to build and sell for $1.25 million each – we’re being conservative here – you’re looking at a clean million dollars in profit.

As far as I know, no-one has done that with a Takoma Park rental building. But plenty have been converted to condos (“very cool, hip, and chic”, fellow kids). And no one has built new multifamily within the city limits since rent control was instituted in 1980. Rent control is how affluent people outbid their working class neighbors for valuable urban land.

The post Rent Control is How the Rich Outbid Less-Affluent People for Valuable Land appeared first on Market Urbanism.

In Generation Priced Out, housing activist Randy Shaw writes a book about the rent crisis for non-experts.  Shaw’s point of view is that of a left-wing YIMBY: that is, he favors allowing lots of new market-rate housing, but also favors a variety of less market-oriented policies to prevent displacement of low-income renters (such as rent control, and more generally policies that make it difficult to evict tenants).

What I liked most about this breezy, easy-to-read book is that it rebuts a wide variety of anti-housing arguments. For example, NIMBYs sometimes argue that new housing displaces affordable older housing. But Shaw shows that NIMBY homeowners oppose apartment buildings even when this is not the case; apartments built on parking lots and vacant lots are often controversial. For example, in Venice, California, NIMBYs opposed “building 136 supportive housing units for low-income people on an unsightly city-owned parking lot.”

NIMBYs may argue that new housing will always be for the rich. But Shaw cites numerous examples of NIMBYs opposing public housing for the poor as well as market-rate housing for the middle and upper classes.

NIMBYs also claim that they seek to protect their communities should be protected against skyscrapers or other unusually large buildings. But Shaw shows that NIMBYs have fought even the smallest apartment buildings. For example, in Berkeley, NIMBYs persuaded the city to reject a developer’s plan to add only three houses to a lot.

On the other hand, market urbanists may disagree with Shaw’s advocacy of a wide variety of policies that he refers to as “tenant protections” such as rent control, inclusionary zoning, increased code enforcement, and generally making it difficult to evict tenants.   All of these policies make it more difficult and/or expensive to be a landlord, thus creating costs that may either be passed on to tenants or discourage entry into the housing market.

In addition, I wish Shaw had included a little more data.  He does cite a useful statistic here and there,* but I wish he had included some sort of table comparing high-cost cities’ levels of housing construction to those of cheaper cities.

*My favorite: the San Francisco area added over 500,000 new jobs during the 2010s but only 76,000 housing units.

The post New and Noteworthy: Randy Shaw’s Generation Priced Out appeared first on Market Urbanism.

One advantage of a federal system is enabling people ill-treated by one government body to “vote with their feet” toward less abusive jurisdictions. That escape valve is one rationale for reserving some political policy determination for state rather than national government, or to local rather than state government. However, devolving political power to lower level governments does not serve citizens’ rights when it comes to rent control, because rent control paralyzes owners’ ability to escape imposed burdens by voting with their feet.

Virtually every rent control story focuses on local government policies. Less well known, however, is that a majority of states actually ban or restrict local governments’ power to impose rent control. And currently, in at least four states (California, Oregon, Washington, and Illinois), those restrictions are under attack. Municipalities want power they are currently denied so they can impose rent control, supposedly to give local citizens “what they want.” That raises the question of whether rent control policy should be vested at the state level or the local level.

The Good, the Bad, and the Ugly of Local Governance

In many circumstances, the option to vote with your feet favors local governance. It is generally less costly to leave a small local government jurisdiction whose benefits are not worth the cost, than it is to leave a similarly bad state government jurisdiction. By the same token, it is less costly to leave a state than it is to leave the country. The enhanced exit options provided at a more local level may better protect citizens’ rights.

Citizens’ ability to cheaply leave smaller jurisdictions more tightly limits government’s ability to use them as cash cows rather than serve them better. This is true of sales and income taxes, for example. Dissatisfied residents can avoid those burdens by going somewhere with lower tax rates. However, the same is not true of rent control.

Rent control is immune from owners’ escaping by voting with their feet, which is the usual basis for preferring local political determination. Owners can move away, but if they maintain ownership of their property, they are still forced to bear the reduced earnings caused by government interference. If they sell their property, they bear the burden of a lower sales price. Consequently, even selling your property and leaving the jurisdiction provides no escape from its burdens.

Why would we expect to see rent control in majority-renter cities? Renters greatly outnumber rental property owners, so they have the votes to determine majority outcomes. Many of the far-outnumbered rental property owners cannot even vote on the issue. By stripping owners of much of their properties’ value, local majority power can provide renters with the greatest wealth transfer possible – often involving several hundred or even thousands of dollars in rent each month as compared to free-market prices. And given that rent controls give residents virtual tenure for as long as they choose to stay, that wealth transfer can reach well into six digits for a renter.

So, imposing rent controls in majority-renter municipalities targets the property rights of owners who cannot protect themselves by voting with their feet, and transfers very large monetary gains to the only group that benefits – people who are renting when price controls are adopted. Current renters get to vote, but prospective future tenants, who will be harmed by the reduced supply of available rental housing that results, obviously cannot vote. This is also true of renters in neighboring jurisdictions whose costs rise due to the reduced regional supply of rental units.

In other words, rent control guarantees that current renters in a municipality can vote themselves huge amounts of money out of outnumbered owners’ pockets, while the far larger number of those harmed – renters in nearby areas and those who will search for housing there in the future but find no vacancies – cannot even vote on the issue. It is piracy by local plebiscite.

State Governance Is the Right Governance

Those who would be harmed get to vote at the state level.

That is why, unlike many other areas of governance, state-level determination of rent control policy may protect citizens’ rights and well-being better than local determination. Those who would be harmed get to vote at the state level. State-level determination allows owners who face robbery to more effectively unite against it. Even government officials outside the local municipality who face falling tax revenue from the reduced construction and income that results from rent control’s disincentives get a voice, rather than being ignored under local determination. The result is that citizens may be better served by making it harder for local renters to form a political juggernaut that can steamroll others’ rights and well-being at the state level.

It is important to note that state determination is no guarantee of appropriate rental housing policy. After all, a state could impose rent controls on every municipal area in the state. However, a statewide ban on rent control is perfectly consistent with the essential job of government – to protect individuals and their property against force and fraud. State prohibition of grand theft auto, regardless of the municipality, better protects residents. So would state prohibition of the grand theft, housing, which rent control represents.

Gary M. Galles

Gary M. Galles is a professor of economics at Pepperdine University. His recent books include Faulty Premises, Faulty Policies (2014) and Apostle of Peace (2013). He is a member of the FEE Faculty Network.

This article was originally published on FEE.org. Read the original article.

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A blog post in Pacific Standard seeks to defend rent control- an idea that, as the author admits, is generally detested by economists.

The author writes that “rent regulations give tenants a greater stake in their community and incentivize them to put time, energy, and even money into their homes.” But that’s not necessarily a good thing- in a heavily regulated market, a “stake in the community” means that tenants, like homeowners, have an incentive to engage in NIMBYism. So in a prosperous area rent control hits housing supply with a double whammy- more recruits for the NIMBY army AND less incentive for landlords to invest in housing.

He also endorses the “Unlimited Demand” theory, acknowledging the argument that building more market rate housing creates more affordable housing eventually, but responds: “not in tight markets like Silicon Valley and New York City. ” This claim is of course a self-fulfilling prophecy: people use it to justify opposing new housing, which in turn ensures that supply can never meet demand.  (I critique the argument in more detail here).

However, the article does contain one non-silly argument: that rent-controlled cities do occasionally experience building booms (most notably New York in the 1950s).  Rent control is a factor relating to housing supply, but not the only one.

So here’s my modest proposal for pro-regulation politicians: a city can adopt rent control to protect existing tenants, as long as they deregulate in other ways in order to promote new construction.   So for example, a state law could provide that municipalities could adopt rent control under one condition: no more exclusion of new housing.  So if San Mateo County wants to adopt rent control, they can do it as long as all new housing is exempt from all of the city’s use and density restrictions. The absence of zoning makes up for the supply-reducing effects of housing.

This wouldn’t need to be on a citywide basis; a city could create “rent control zones” that had rent limits but were zoning-free.   This policy might be workable in gentrifying areas where people are especially worried about displacement.

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