As one of his last policy initiatives before officially dropping out of the 2024 presidential race, President Joe Biden unveiled a housing plan that included a legislative proposal for a national rent control mandate. The administration will likely continue pushing this policy, as Vice President Kamala Harris herself has long endorsed rent control. In 2019, she praised a rent cap in Oregon, tweeting “Earlier this week, [Oregon Governor Kate Brown] made it easier for families to stay in their neighborhoods by enacting statewide rent control.”
The Biden-Harris administration’s proposal would seek to condition tax credits received by so-called corporate landlords – defined as those renting out 50 units or more – on a restricted rent increase to 5 percent. Yet what the administration seems to ignore is that rent control has been met by criticism across the spectrum, including by progressives.
Despite support for the policy within the administration, most economists find rent control laws to hold negative externalities in the long run. Rent control is the act of placing a price ceiling on rent so that it is “affordable,” as defined by politicians and bureaucrats. However, if these laws place the value of rent below the actual market rate, it disincentivizes further investment and makes maintenance unaffordable. As Competitive Enterprise Institute Senior Fellow Joel Zinberg writes, “Owners will not spend on maintenance and improvements if they cannot recoup the costs through higher rents… can also lead to a mismatch between tenants’ needs and rental units.”
Decades of research have shown that rent control does not achieve its central goal of making housing more affordable. In fact, such proposals make rent in the aggregate more expensive because they create a simple supply-demand imbalance. Consumer demand for non-rent-controlled municipalities and ownable condominiums would be far too high for the supply to accommodate, thus pushing prices further up. The center-left Brookings Institution explains that rent control creates a supply pressure that makes landlords prefer to convert their rental units into ownable condos. Therefore, the supply of ownable homes will decrease, leading to an overall shortage for both rentable and ownable properties.
As Brookings notes,
DMQ [a property management company] find[s] that rent-controlled buildings were 8 percentage points more likely to convert to a condo than buildings in the control group. Consistent with these findings, they find that rent control led to a 15-percentage point decline in the number of renters living in treated buildings and a 25-percentage point reduction in the number of renters living in rent-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by converting existing structures to owner-occupied condominium housing and by replacing existing structures with new construction
Brookings also made the point that rent control laws incentivize hoarding and over-inhabited apartments. For instance, a family of four that can’t afford a three-bedroom apartment in San Francisco may stay in a studio or a one-bedroom instead. Further research from the Cato Institute found similar results, with graphs showing that rent control lowers tenant mobility and drives good-quality property prices to levels far above the actual valuation of apartments.
Besides the aforementioned externalities, rent control advocates must also face the fact that it could crash the housing market altogether. Landlords, any rational landlord at least, do not want to have to deal with expenses that could have been paid for with a market-based rent. If total revenue is below the costs of maintenance and utilities, corporate landlords, who represent a 3.8 percent market share, will suffer losses. With this in mind, landlords will dump or convert rental properties, turning them into condos or corporate rentals instead of rentals for individual tenants.
Criticism on all sides of the economic spectrum is mounting. In fact, Democratic donor Jeff Greene, a real estate entrepreneur, voiced strong opposition to the rent control measure, calling it a “completely ridiculous idea.” Greene would proceed to discuss how his own experience with rent control forced him to mal-maintain his properties. Former Obama economic advisor Jason Furman has, in line with a strong majority of economists, acknowledged that “Rent control has been about as disgraced as any economic policy in the tool kit.”
Ultimately the traditional route of rent control is a toxic mess that most economists across the political spectrum have unequivocally disavowed. Instead, policymakers should focus on increasing the supply of housing to drive down prices. To this end, deregulation of costly housing and labor rules must be implemented.
Originally published by the Competitive Enterprise Institute. Republished with
permission.
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