By Adam Pagnucco.
On July 3, the mayor and city council of Gaithersburg decided to write a letter to the county council opposing the rent control bill that was recently approved by the council’s Planning, Housing and Parks Committee. Mayor Jud Ashman proposed the letter of opposition. Four members of the city council – Lisa Henderson, Neil Harris, Jim McNulty and Ryan Spiegel – voted to send the letter while Council Member Robert Wu opposed it. Following is the text of Ashman’s statement to the city council. I will post the city’s letter when I get it.
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The County is considering a rent control bill, as you know. What has come out of committee and will be going to the full County Council would limit rent increases in Montgomery County to the Consumer Price Index inflation rate (or CPI) plus 3 percentage points and with a cap of 6 percentage points. They are probably going to consider the bill in the next couple weeks.
In theory, I can understand why rent control sounds like a good thing. During COVID, rent increases were constrained County-wide and in the municipalities. Once the state of emergency was lifted, rents went up all over the place – both to catch up to what they would have been during COVID, and to catch up with inflation.
This has caused hardship for people whose incomes aren’t enough to sustain (or easily sustain) these increases, while at the same time, they’re dealing with the inflation we’ve seen across the economy. I know that my colleagues here and I are equally pained and concerned about situations where this is the case. This Mayor and Council, as you know, is a group that voluntarily dedicates a large amount of our budget to support people in need – and we’re proud of it. We care deeply about the well being of our residents and all of our neighbors in Montgomery County.
I believe that the best, most efficient way to help people in need is through safety net programs and even individual subsidies, such as the County’s Rental Assistance program and other types of emergency assistance that our Community Services Division connects people with every day. If a family needs some help, let’s get them that help. That’s what we’ve done here in Gaithersburg.
Likewise, the best way to combat the increase in housing costs is to continue to foster new investment, approve new housing units to be built, and ensure that at least 15% of those new units are affordable as MPDUs. That’s also what we’ve done here in Gaithersburg.
But rent control is not the right solution – and I’m going to walk through some reasons why.
Let’s say the bill passes. Johnny is a renter and let’s say he’s paying $2000 a month for a unit and let’s say that the market rate for that unit is $2500, but under rent control, the property owner could only raise Johnny’s rent by 6% to $2120/month. So the end of Johnny’s lease comes up and he wants to renew, but the property owner refuses because once Johnny leaves, the property owner can then lease it out to the next person for the full $2,500/month.
Under rent control, whenever the market rate for rentals goes up beyond that 6% allowable rent increase, the property owner has an incentive not to renew leases and, thus, we will see an increase in turnover and people who are out of luck.
Rent control will impact County tax revenue and force cuts in County services (which will impact the City of Gaithersburg, by the way). How will it do that? Well, when rent control is implemented, property owners are likely to re-run their cash flow projections to determine the impact of the law on the value of their properties. If they find that their property values have decreased, which is likely, they will appeal their state tax assessments. And if those appeals are successful, which they reasonably should be, it will cut into the County’s tax revenue. Property taxes represent more than 26% of County revenue – and we could be talking about many millions of dollars in reduction. That money is used to provide services, so if our renter Johnny needs help, he’s gonna have less of it.
Under rent control, the services that the County (and, by extension, the City) provides for people in need are likely to be reduced because County tax revenues are likely to be reduced.
So our renter Johnny did not get his lease renewed and needs to find a new place to rent, but it’s not easy. Because rent control creates additional risk and constrains the potential return on investment for building new rental units in a way that other investments are not. Rational investors are likely to reconsider an investment in new housing units in Montgomery County.
For example, under rent control, if a property owner keeps all of the same tenants and there’s no turnover and inflation doesn’t get out of control and there’s no unforeseen expenses, the maximum year of year growth in return they can expect is 6%. By contrast, today you can invest in U.S. Treasuries and get a 5.3% return, but without ANY of the risk or uncertainty associated with owning and managing a property. If the investor prefers the stock market, even with the risks that come with such investments, historically, the annual growth of an investment in the S&P 500 index is around 10%.
This is to say that, with rent control, we are likely to see a dramatic reduction in the construction of new rental units, because investors have better, safer investment options.
Rental prices in Montgomery County, as everywhere, are driven by supply and demand. The demand for housing is outpacing the supply, therefore the prices go up. What the County needs is more housing. If people stop building new housing, ultimately, rents will go up.
Furthermore, we’re likely to see conversions from apartments to condos because simply selling off the properties will make more sense to some property owners than taking on this additional risk and uncertainty. These conversions will reduce the rental inventory even further for people like Johnny, who’s still out there looking for a new place to live.
Under rent control, we are likely to see a reduction in rental unit inventory, higher market prices, and fewer affordable options for people who want to live in Montgomery County.
There’s also the consideration of the overall quality of rental properties. If existing property owners are constrained in their return on investment, they will have less financial incentive to renovate their properties and to keep them nice. Have you ever visited someone in a rent controlled building in New York City? It is not great, to say the least. Residents, like our hypothetical Johnny, deserve a better quality of life.
Under rent control, we are likely to see a diminished condition of rental properties in Montgomery County.
To sum up, rent control will bring us:
- Higher turnover as property owners have an incentive not to renew leases
- A reduction in property tax revenue that will likely lead to reductions in services
- A dramatic reduction in new rental units which will drive market prices higher. Also an increase in condo conversions, reducing the overall rental inventory
- And less upkeep, maintenance, and condition of existing rental properties
These impacts will not help the people that I believe the County Council is trying to help. I am asking our Council for support for a letter that I would submit on behalf of the City, expressing all of those concerns about the bill and the policy.
As always, it is our goal to help our residents and our community in the most efficient ways possible. There are many, many better ways to do this and that’s where our focus should be.