By Adam Pagnucco.
Last week, County Executive Marc Elrich and a majority of county council members announced that they were introducing competing rent control bills. Whether one favors it or opposes it, the adoption of rent control would be a major change for the county. This series looks at the economic literature on rent control, the impacts of rent control in the District of Columbia and Takoma Park and the actual problems in MoCo’s housing market.
Let’s start with the economic literature. There is a LOT of it and the vast majority of it is hostile to rent control. As liberal economist Paul Krugman once said, “Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand.” Krugman’s opinion is not an isolated one. In 2012, the University of Chicago’s Initiative on Global Markets surveyed economists at the nation’s top universities on rent control. Only 2% of its respondents agreed that rent control laws “had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”
Everyone has an opinion, but what does the evidence say? Consider the following reports.
A 2018 literature review from Florida State University summarized 20 rent control studies this way:
In its most basic form rent control is a government-imposed cap on rent and using it as a means of keeping rents below the market rate is an old idea, dating to at least the 16th century. But while rent control may seem like an easy way to control housing prices, the bulk of the evidence shows that it’s an inefficient policy with several negative side effects. Rent control decreases the amount of rental housing, raises prices in the uncontrolled sector, reduces the quality of rental units, leads to a misallocation of units, and decreases tenant mobility. It also transfers wealth from landlords to tenants even though some landlords are poorer than their tenants, and this may foster hostility between the two groups.
A 2017 Stanford University study on rent control in San Francisco found that the law caused landlords to reduce the city’s supply of rental housing. The authors wrote:
We find that landlords actively respond to the imposition of rent control by converting their properties to condos and TICs [Tenancy in Common] or by redeveloping the building in such as a way as to exempt it from the regulations. In sum, we find that impacted landlords reduced the supply the available rental housing by 15%. Consistent with this evidence, we find that there was a 20% decline in the number of renters living in impacted buildings, relative to 1990-1994 levels, and a 30% decline in the number of renters living in units protected by rent control.
Another 2018 Stanford University study on San Francisco rent control by the same authors stated:
Leveraging new data tracking individuals’ migration, we find rent control limits renters’ mobility by 20 percent and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15 percent by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law.
A 1988 study of rent control in Israel stated, “The Israeli rent control system is characterized by far reaching security of tenure; rent ceilings that are a fraction of the free-market rent; legalized ‘key money’ shared between owner and tenant; and decontrol after a tenant dies or the landlord repurchases the unit. Consequently, the construction of privately owned rental housing has ceased. The controlled sector is disappearing, and the remaining stock is badly undermaintained and deteriorating.”
Stockholm’s rent control system has produced nine-year waiting times for tenants to find controlled units. The BBC states that in some neighborhoods the wait is twice as long.
A huge literature review in 2009 noted that rent control in Boston and Cambridge, Massachusetts led to conversions of rental units into condos. In Cambridge, roughly 10% of rental stock was converted to condos between 1970 and 1980.
A 2007 Brigham Young University study of rent control in Boston found that the city’s program was not targeted towards low-income renters. Roughly a quarter of controlled units were occupied by tenants in the bottom quartile of the city’s income distribution while 30% were occupied by tenants in the top half.
Repeal of rent control in Cambridge, Massachusetts in 1995 resulted in a $1.8 billion appreciation of residential property value over the next decade. Furthermore, researchers at MIT reported, “Rent control’s removal produced large, positive, and robust spillovers onto the price of never-controlled housing from nearby decontrolled units.”
A 2000 study of New York City’s rent control system found that the supply side effects of the program were so severe that tenants in both controlled and non-controlled units would be better off without it. Southwestern University professor Dirk Early wrote:
The results suggest that due to the higher price in the unregulated market, on average, tenants in rent stabilized and ‘old style’ rent controlled units would be better off if controls had never been established. If controls had never been put in place in New York City, these tenants would have faced a lower price of housing in the uncontrolled sector and would find units in the free sector that better fit their needs.
The average estimated benefits are -$4 [a loss, in 1995 dollars] per month for households in ‘old style’ rent controlled housing and -$44 per month for households in rent stabilized apartments. This implies that, on average, households in regulated units would have been better off if rent regulations had never been established in New York City.
St. Paul, Minnesota passed a rent control ordinance in November 2021 limiting rent increases to 3% even if tenants turned over. Three months later, multi-family building permits were down by 82% in St. Paul while they were up by 68% in next-door Minneapolis. The city council changed the law in September to allow larger rent increases for vacancies, exempt new construction for 20 years and reduce coverage for buildings less than 20 years old.
A 2022 University of Southern California study found the following about St. Paul’s new rent control law.
We use the price effects caused by the passage of rent control in St. Paul, Minnesota in 2021, to study the transfer of wealth across income groups. First, we find that rent control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. A calibrated model of house prices under rent control attributes a third of these losses to indirect, negative externalities. Second, leveraging administrative parcel-level data, we find 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.
There is a mountain of actual evidence – not opinion, not ideology – that rent control has numerous negative side effects. Where is the evidence that it has ever been an unambiguous success?
Rent control may not do much to help housing markets, but it has produced some colorful quotes over the years. One came from Swedish economist (and social democrat) Assar Lindbeck, who said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
Nodding in agreement with Lindbeck is Vietnamese Communist Foreign Minister Nguyen Co Thach, who told a group of journalists in 1989, “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.”
Enough with the academic studies. In Part Two, we will examine what it’s like to live under rent control in the District of Columbia. I have been waiting to tell these stories for years, so don’t miss it!