THOUGHTS ON RENT CONTROL

THOUGHTS ON RENT CONTROL

Rent control has historically never worked. Landlords are discouraged from investing in properties. Tenants are discouraged from moving. Thus both quantity and quality of housing stock is reduced.

In NY City not only did the tenants, even though they ceased to live in the city, not give up their apartments to people who needed them to live in, but they held on to their rent controlled properties as incredibly cheap places (mostly rents were less than a nights hotel room!!!) for them and their friends to use for occasional visits to the big city.

The result was of course a deterioration in the quality of both housing stock and tenants: good tenants would not want to live in the available poorly maintained housing stock; poorer quality tenants could not relocate to take advantage of better jobs or just to live the city because they could not afford to, or did not want to, pay market rents elsewhere.

In most systems, Landlords were allowed retroactive rent increases to cover increases in costs. Unfortunately the allowance of these increases was almost never fair to the landlord, the rent control administrators being essentially pro tenant, and in any event the expense reimbursements were a year late. In a period of high inflation this puts enormous financial pressure on landlords.

In periods of low inflation in landlord expenses, especially long term declining interest rates, on the other hand, demand for housing in urban areas tends to sky rocket. Employers also do well in low inflation environments and need to hire more people and pay them more. Since people are pretty much willing to pay a given percentage of their income for housing, rent increases are inevitable, resulting in a double win for landlords whose interest expense goes down and rental income goes up.

The corollary is that lower income people simply cannot afford to pay market rents in long term low inflationary environments where there is high housing demand, a situation very unfortunate especially for the elderly and for the service type workers who are frequently working two jobs just to stay afloat.

The elderly and low income have been virtually driven out of Manhattan and San Francisco because of the enormous rents.

Obviously, new building construction and SUBSTANTIAL rehab of existing housing should exempt property form rent control for a sufficient period of time to allow land lords to recover their expenditures and a fair rate of return thereon. (This would be similar to the economic theory supporting Opportunity Zones. https://www.dhirubhai.net/pulse/qualified-opportunity-funds-philip-goduti/).

Another logical exemption would be housing units which are very well maintained and managed, perhaps those in a given community where the fair market value of rental per square foot is the highest. Owners of these buildings are running them efficiently and in the best interests of everyone. Leave them alone. RENT CONTROL ONLY POOR RUN UNITS THAT ARE ADVERSELY IMPACTING NEIGHBORHOOD VALUES.

Hawaii tried an interesting experiment, at least with condo's: allowing tenants of condo's the option to purchase their units from landlords on a formula price. This generally worked equitably since it shifted some of the enormous "unearned" economic gain from the landlord to the tenant, and yet infused a pride in ownership on the tenants, Management of the properties and reinvestment therein was unaffected since it was done by the HOA. This seems to be a possible solution, at least for large number of unit condo's.

An obvious next step would be to automatically convert all large unit tenanted apartment buildings to condos, apportioning percentages of ownership according to rent structure on a given pre rent control, pre improvement date. This would allow the Hawaii type solution to play out.

Lastly, "rent equity" a term that is often bandied about in rent control discussions has never bee properly thought out. The concept essentially is that rents that exceed expenses by an excessive (as however determined) amount create some sort of equity in the tenant. That said no one has ever attempted, at least to my knowledge to quantify this amount.

I remember one tenant in Brookline who with her then deceased husband, and occupied a unit for 50 years. Obviously she had essentially paid the landlord enough money to buy the unit quite a few times over. Yet the then existing rent control system gave her no more rights than a roommate tenant who had only lived in the apartment for six months. In this age of computer modeling it would not be difficult to calculate a precise amount of a credit to be allowed toward a fair market purchase of the unit.

In short, some sort of a "rent with option to buy, coupled with an exemption for new substantial investment, scenario is probably the best solution for all concerned and would in fact incentivize the formation of more and better housing stock.