The Rent Control Bandwagon Rolls On [Cato]

by Ryan Bourne, Sofia Hamilton / December 09, 2022

Ryan Bourne and Sofia Hamilton

High inflation. Threats of strikes. Volatile commodity prices. It often feels as if we are reliving the 1970s, not least because we see the long-debunked economic ideas of that decade re-rearing their ugly heads. One example is the renaissance of rent stabilization laws—the demands for which have grown louder still as unexpected inflation squeezes real pay.

The National Multifamily Housing Council’s Jim Lapides told NPR that 19 states had considered rent control proposals this year—nearly all to expand it. In recent midterm ballot initiatives, localities in FloridaMaine, and California jumped on the bandwagon, with voters opting to introduce, or tighten, laws governing rent increases.

As a form of price control, economists object to capping rent uplifts. Market prices are signals wrapped in incentives. Their movements are messages about changes to the relative scarcity of accommodation driven by shifts in demand and supply. Putting a binding ceiling on rents muffles that message when demand hugely exceeds supply. It produces rental housing shortages and inefficiency.

A vast academic literature shows that when rent stabilization laws bite, tenants stay in rent-controlled properties for too long relative to their needs, landlords convert properties to non-controlled forms of tenure or let them fall into disrepair, and you get less investment in new rentable accommodation due to the lower profit stream and the additional risks placed on landlords.

Paradoxically, these responses mean rent controls usually increase market rents, exacerbating the underlying affordability problem that often animates their introduction. With apartments in short supply, landlords must then ration accommodation through non-price means, with some becoming more discerning about who they rent to. Much research therefore finds that rent control laws disproportionately benefit middle- or higher-income households. A 2013 study found over 60 percent of San Jose’s rent-controlled units were occupied by middle- and high-income households, for example.

California is a good case study of how we are rapidly unlearning economics here. Several cities, such as Los Angeles and San Francisco, have had rent price laws since the 1970s. But in the more enlightened 1990s, the state passed the Costa-Hawkins Rental Housing Act, which exempted new construction, single family homes, and condos from rent control state-wide, while making it illegal for ordinances to prevent rent increases between tenancies. This substantially de-fanged rent control efforts, albeit leaving localities with wide discretion over rent and eviction policies for within-tenancy non-prohibited properties.

Since then, efforts to revive broader rent controls have been fierce. In 2019, Governor Gavin Newsom signed a new state-wide law for buildings more than 15 years old, while still exempting most single-family homes and condos. Rents can be increased by no more than 5 percent plus the percentage change in the local Consumer Price Index (CPI) (up to a maximum of 10 percent), while landlords can only terminate leases for “just cause” and must renew leases or pay tenants a “relocation fee.”

In some ways, the legislation was quite tokenistic. It set a high ceiling for rent increases, and with the broad exemptions, wouldn’t bite in most places in most years. In fact, economic theory suggests it would only create shortages of rentable accommodation in very hot markets or during wild price swings (such as after pandemics).

The mere act of passing this legislation, however, opened the way for more aggressive local ordinances and sent the message that rent control was back. When it passed, one of us warned that it would please nobody—disappointing struggling tenant groups through its limited impact on affordability, so resulting in an inevitable push for tighter rent control legislation.

And so it has proven. Today’s inflation, coupled with rents rebounding sharply post-pandemic, has left households squeezed. Rent controls are now a legitimized response. In the midterms, two successful ballot initiatives tightened rent laws in Pasadena and Richmond. To reduce the possibility of “economic eviction”—tenants being forced to move because of large rent increases—Pasadena voters opted to cap rent increases each year at 75% of the local CPI. The people of Richmond voted for a tighter law still, whereby rents on controlled units can rise only by the lower of 3 percent or 60 percent of the local CPI annually.

Both controls will reduce the quantity of rentable accommodation supplied. This will clearly be bad news for those young or poorer households who cannot afford deposits and who are unfortunate enough not to secure a controlled apartment. As Figure 1 shows, 5 of the 10 least affordable urban housing markets are in California. Historically, these have been deemed severely unaffordable if the ratio between median house prices and median household incomes is above five. In San Francisco, it was 11.8 last year, while being higher still in San Jose. These pressures spill over to surrounding cities such as Richmond.

FIGURE 1: House Price Affordability for Large U.S. Urban Markets, by Median Multiple (Median House Price/Median Household Income)

My colleague Mike Tanner has explained how dysfunctional California’s housing market is, and how this contributes to poverty. The unaffordability of housing is a huge factor in the acute homelessness problem in many Californian cities. But given what the price signals are screaming, there’s really no alternative than to try to change policy to ensure an adequate, responsive supply of housing for the long-term.

When enough apartments are available where people want them, landlords must compete for tenants, providing more amenities at lower cost. Yet in many parts of California, anti-development restrictions choke off new housing and rental construction. Zoning laws and building mandates all raise the cost of housing.

Rather than turning back the clock to the 1970s, unpicking these supply-side constraints should still be the focus of policymakers. Trying to compensate for years of insufficient housing development by forcing rent prices to lie about the conditions of the market doesn’t solve the underlying affordability problem. It worsens it.

Reprinted with permission