Does Rent Control Work?

Main Takeaway: Rent control remains a favored tactic for governments because it doesn’t cost anything to implement and plays well with progressives. And, rent control movements and policies are increasing across the country. Owners and investors should prepare for more rent control proposals, despite the below evidence suggesting it’s ineffective and at times counter-productive.

Story:?Rent control measures are rising due to increasing rents, lower supply, and concerns over affordability. But are these measures effective, and what can we expect from them over the next year??

Let’s begin this week with the status of nationwide rental control measures, and then move over to what the research says about this tactic to ostensibly keep housing affordable.

Local Rent Control Updates

New York: Rent-stabilized apartment landlords in NYC are?preparing ?to mount a legal challenge to a state effort to “close loopholes in a 2019 rent reform law that permitted them to combine vacant rent-controlled apartments and raise rents.” Legal representation for the landlords say that the proposed loophole changes go beyond the original spirit of the 2019 state law. Further, the city of Kingston became?the first ?in upstate NY to enact rent control rules.?

Minnesota: Municipal St. Paul officials recently chose to?allow landlords ?to increase rents on rent-controlled apartments after a tenant leaves. They also passed bylaws that will exempt thousands of units built in the last 20 years from rent control.

Oregon: Recent?reporting ?on rent control measures in that state highlights that the rent control measures passed three years ago at the state level that was tied to inflation will now see rent increase limits jump to 14.6% for 2023.

Florida: In Orange County, FL, a new?ballot measure ?in November will dictate whether or not the 100,000 apartments in the area will have capped rents moving forward. This is the first challenge in the current state-level prohibition on rent control. That said, Tampa and Saint Petersburg city councils?rejected ?similar proposals to put rent control on the ballot.

California: Richmond city council recently?voted ?in favor of putting a rent control referendum on their November ballot, which would cap increases at 3%. Pasadena is also putting a rent control referendum on its November ballot.

And the list goes on. So what is prompting this increased focus on rent control? Rapidly rising rents have made rent control more topical given the affordability strain. But does it work? Let’s take a quick look at some research highlights.

Does Rental Control Work? The Research

Opponents of rental control measures state that this type of enforcement reduces investment, leads to poorer quality rentals, and actually hurt the market by artificially keeping prices low. Here are some of the more recent research findings related to rent control:

• Following the rent control law passing in St. Paul, new building permit applications dropped by over 80%. (WSJ )
• A study found that 29% of rent-controlled housing in the U.S. was in a state of deterioration, but only 8% of the uncontrolled rentals were in a similar state of disrepair. (Econlib )
• St Paul’s rent control ordinance caused property values in the city to fall by 6-7%. (Economist )
• Three Stanford University researchers found that the rent control policy in San Francisco in the 1990s reduced the overall supply of rental housing. In the study, landlords of rent-regulated units were more likely to remove them from the regulated rental market and sell units to owner-occupants or even demolish the apartments to build higher-end properties. (Fed )?
• Various studies have shown that rent control discourages landlords from maintaining the quality of their units. (Urban Institute )
• “Several empirical studies have found that rent control has not been successful at targeting benefits to lower-income residents or families.” (Urban Institute )

One academic look at rent control?concluded ?that: “Economists are virtually unanimous in concluding that rent controls are destructive. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available.”1 Similarly, another study reported that more than 95 percent of the Canadian economists polled agreed with the statement.”

Further, the Economist recently concluded that “[r]ent controls are a textbook example of a well-intentioned policy that does not work.”

Despite the research, there are cautionary tales of rent control gone awry, particularly internationally. For instance, in?Stockholm , which has one of the strongest rent control policies in the world (43% of the rental stock is rent-controlled), the average wait time for rent-controlled apartments is now over 9 years. This has led to little private investment in rental units and has created a black market for uncontrolled and highly expensive sublet units.

Rent Control Expert Take

“Simply put, a developer cannot get a reasonable financial return without being able to adjust rental rates to account for higher construction, supply and labor costs, along with operating expenses such as payroll, maintenance and repairs, insurance and contracted services — which are not artificially suppressed and are increasing at rapid rates.” —?Sam Palmer, EVP at Stoneweg US

Chart: Rent Prices in Florida

According to the?WSJ , rent prices in Florida have increased the most across the nation and far outpace the national averages.

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