The Delusion of Rent Control
George Santayana’s admonition that “those who cannot remember the past are condemned to repeat it” was apparently lost on progressive Democrats in Congress, led by Sen. Elizabeth Warren (D–Mass.) and Rep. Jamaal Bowman (D–N.Y.), who appealed to President Biden to address what they recklessly described as “corporate price gouging in the real estate sector.” In a January 9 letter to the White House, 50 members of Congress urged the administration to use various agencies to impose a nationwide program of rent control, since, as the letter asserted, “the rent is too high and millions of people across this country are struggling to stay stably housed as a result.”
What the letter writers have conveniently forgotten, of course, is that the rental housing market is still reeling from the rent and eviction moratorium questionably implemented by the Center for Disease Control (CDC) in the midst of the Covid pandemic in the form of the CARES Act Section 4024(b). As a result of that moratorium, property owners—who themselves had to continue paying mortgages, property taxes, utilities and other operating expenses—found themselves with tenants who could decide whether or not they could afford their present rent, resulting in months of losses to property owners as tenants simply refused to pay rent—whether or not they could afford to. So the “corporate price gouging” cited in the Congressional letter may simply reflect the real estate industry’s effort to begin to recoup the significant losses experienced during the moratorium.
Rent control is not a rent moratorium, but it does reward tenants and punish rental property owners by a process euphemistically defined as “rent stabilization,” but which is actually a government attempt to control what rent a private property owner can receive from a tenant, with the assumption that private landlords can, and should, provide affordable housing to needy renters by absorbing losses forced on them in what should be an unencumbered marketplace.
Even if the Biden administration were successful in implementing a nation-wide program of rent control, the likelihood of which is questionably legal at best and well beyond federal authority and reach, rent regulations have historically resulted in the exact opposite effect intended by the municipalities that implemented them.
While policymakers have often looked to regulation in private marketplaces to induce desired social benefits, the lesson of rent control is simple: Not only has it consistently failed to serve those very individuals it was designed to help —namely, the poor and elderly —but it has a number of perverse effects, specifically, of actually creating a scarcity of affordable housing, speeding the deterioration of existing rental stock, polarizing owners and renters, and skewing the marketplace with artificially high and low rent levels.
Long positioned by its advocates as a government-sponsored housing program, rent control is, in fact, paid for exclusively by private owners of rental property. Its policies determine what rents may be charged, when and by how much rents can be raised, what actions an owner may take to evict or replace a tenant, whether and when an owner may occupy his own property and at what price, if at all, a property may be sold or transferred, or even if it can be demolished. Critics of rent control policies contend, in fact, that such regulations amount to an unconstitutional “taking” of private property without just compensation.
The fifty signers of the letter to the White House contend that something must be done about housing affordability. And if that something is a new rent control program, they and the other housing advocates looking at that option would do well to consider how rent control created far more problems than it solved in the housing markets that chose to use it:
- The onerous effects of rent control do not penalize the corporate “gougers” the Democrats fantasize about in their letter as much as they do the small property owner, often of limited means and with less income than some of their tenants. In fact, while housing activists and liberal policymakers like to envision landlords as greedy operators of vast real estate empires, exploiting tenants at their will, the reality is that, as a Brookings Institution study found, “40 percent of residential property units are owned by individual investor landlords.” Moreover, the study found, “among those owning residential investment property, roughly a third are from low- to moderate-income households; property income constitutes up to 20 percent of their total household income,” and that, while the Democrats seek to protect only tenants, rent control will adversely affect their other constituents—property owners— since “unstable rent payments are even more detrimental for individual investors—often referred to as ‘mom and pop’ landlords—who carry greater financial vulnerabilities.”
- Cities with rent-regulated housing have a great disparity in the rent levels between rent-controlled units and market-rate units. The Cato Institute’s William Tucker revealed how price controls, including rent controls, typically create a ‘shadow market’ in which demand exceeds supply, creating a shortage —in this case of affordable rental units. Renters who cannot access controlled units, therefore, are faced with the option of having to choose from units elsewhere in the market with disproportionately high rent levels. “Although rent controls are widely believed to lower rents,” Tucker wrote, “data . . . collected from eighteen North American cities show that the advertised rents of available apartments in rent-regulated cities are dramatically higher than they are in cities without rent control.” Moreover, Tucker observed, “inhabitants in cities without rent control have a far easier time finding moderately priced rental units than do inhabitants in rent-controlled cities.”
- Rent control makes controlled units scarcer by encouraging renters never to give up their units. Without a means test, with a scarcity of other controlled units to move to, and with the minuscule vacancy rates characteristic of cities with rent regulations, tenants have many disincentives to move or even look for alternate housing. Couples renting controlled large units with multiple bedrooms will continue to rent that unit long after their children have moved out, creating an inefficiency of housing use and preventing a new family who needs extra bedrooms from moving into a unit suited for them. Faced with controlled rents, a landlord is also naturally inclined not to want low or moderate-income renters, choosing instead those more affluent and secure tenants who are less likely to default on their rent payments and more likely to enhance and upgrade their unit.
- There is no way—short of the creation of onerous and coercive new local bureaucracies—to efficiently, fairly, or accurately assess tenants who are elderly, disabled, or ‘low or moderate’ income, those individuals generally identified as being most in need of rent protection. Housing activists, and the rent control boards who have historically served as their aggressive advocates, have assiduously resisted any attempt at means testing, positioning it as invasive and in violation of tenant privacy. But while they are happy to let tenants self-assess their right to landlord-subsidized housing without any review of their actual ability to pay, they see no problem in evaluating every financial detail of a landlord’s ownership—up to and including determining the return he or she can enjoy on a property, how the property is maintained or improved, and at what profit it may be operated or even sold.
- Related to the decline in the market value of buildings put under rent control is the trend of owners to defer maintenance and repairs, since in the face of controlled rents, an adequate return on investment is difficult to realize. While tenants benefit from fixed rents, they often have to live in properties that are deteriorating and offering fewer amenities since owners cannot afford any extra expenses or investment in the face of limited rents.
- A decline in the market value of properties, of course, can also significantly impact the tax base of a municipality, meaning that taxpayers in rent-controlled cities may often end up with lower property tax revenues and reduced public services and facilities as a result. A study by the Duke Financial Economics Center found that in Saint Paul, for example, “the introduction of rent control caused an economically and statistically significant decline of 6-7% in the value of real estate . . ,” and that, more importantly to the city’s taxpayers, “rent control [could result in] an aggregated loss of $1.57 billion in property value and a 4% expected shortfall in property tax revenue.”
- Rent regulations serve to discourage homeownership opportunities and the creation of new housing. In regulated housing markets, investment capital also is not likely to flow in the direction of new construction. Investors are unlikely to put capital at risk when government interference limits their return, exposes their projects to uncertain approvals and permits, and offers no long-term guarantees for future rent levels and cash flows. A building permit analysis by HUD of the Saint Paul real estate market “shows an 84 percent decline in building permit activity in the six months since St. Paul passed rent control compared to the same period a year prior,” since, contrary to all rational real estate economics, even builders of new housing units faced the prospect of rent controls—a huge disincentive to build any new housing in the first place.
If policymakers decide they seek to provide more affordable rental housing for the country’s deserving tenants, it is clear that rent control is neither equitable nor efficient in providing that benefit. If property owners are called on to subsidize renters, then they need to be compensated fairly for the losses they experience in a regulated housing market. That compensation takes many forms but has included property tax abatements, building permit variances and tax incentives for creating new affordable housing, or rent vouchers (similar to HUD’s Section 8 program) to bring rents up to market levels when tenants could not otherwise afford to live in those units.
But it is an abuse of government authority to interfere with how landlords and tenants deal with each other in private markets and what rents are offered and accepted, especially since rent control, as has been shown, unfairly places the burden of providing affordable housing to the nation’s neediest tenants solely on the heads of private property owners instead of having all taxpayers provide that benefit through rational, productive, and efficient government actions that do not penalize landlords in inequitable, constitutionally-questionable ways.