Rent Control Is Fashionable Again. It’s Still a Bad Idea.

“Another housing development in St. Paul, Minnesota, is on hold after losing its financing partner this week.

On Monday, the St. Paul Pioneer Press reported that developer Alatus had a previously-committed equity partner renege on its commitment to invest $23 million in a proposed 304-unit project in the city’s Frogtown neighborhood. Two other investors who had proposed preliminary financing terms for the project—in which half the units would be rented out at below-market rates—have also walked away.

The reason? St. Paul’s newly-passed rent control ordinance, which Alatus’ principals say is making their once-eager investors skittish about doing business in the city.”

“It’s a near-universal consensus—held in common by progressive policy wonks, radical free marketeers, and the three most recent presidential administrations—that America’s highest-cost cities are so unaffordable because government zoning regulations prevent enough new housing from being built.

So why are a growing number of politicians, wonks, and pundits suddenly embracing a policy that’s been long maligned for further reducing the supply of housing?

The argument from rent control proponents boils down to the need to create short-term stability for renters. That will then, hopefully, give cities some breathing room to get to work on fixing their pressing supply issues.”

“That study looked at a 1994 San Francisco ballot initiative that expanded preexisting rent controls to cover four-unit apartment buildings constructed prior to 1980, but which exempts four-unit apartments built after 1980.

That created something of a natural experiment on the effects of rent control.

The Stanford study concluded that tenants living in the older, rent-controlled buildings were 10–20 percent more likely to stay at their same address than people living in newer, unregulated buildings. The study also concluded that the expansion of rent control caused a 15 percent decline in the availability of rental housing among affected units.

In short, there’s a clear tradeoff in rent control policies between creating stability for existing tenants and preserving and expanding rental housing supply for new tenants. The goal of politicians, according to some, should be to strike the right balance between the two.”

“We actually have a good, real example of what this balance striking in the real world looks like: San Francisco.

The rent stabilization ordinance that’s been in place in San Francisco since 1979, and which the Stanford study examined, has all the features Demsas would want in a well-designed rent control policy: post-1979 construction is exempt from price controls, landlords can raise rents by the lesser of 60 percent of yearly inflation or 7 percent, and there’s vacancy decontrol.

Some 40 percent of San Francisco’s housing stock is covered by these rules. Another 9 percent is deed-restricted affordable housing, meaning that rents can’t generally consume more than 30 percent of tenants’ pretax earnings.

That leaves only 16 percent of housing stock in the city where rents follow the ebb and flow of market forces. (That was at least the case prior to January 2020, when California’s statewide rent control law went into effect.)

The result is, again, San Francisco; a synonym for housing dysfunction and unaffordability. That obviously makes it a place that’s antagonistically expensive to newcomers. Copious amounts of rent control also haven’t stopped it from ranking first among American cities in some measurements for gentrification and displacement, either.”

“Rent control is always going to disincentivize housing construction, regardless of how tight or loose the zoning code is. Repealing zoning restrictions will allow for more housing. It will also make the supply-killing effects of rent control all the more apparent and relevant.”

“Rent control also could disincentivize renters—who should be natural proponents of new housing construction—from supporting zoning reforms.

If government price controls are keeping your rent stable, you have much less of an incentive to support new market-rate construction. At best, it would just be doing more of the same. At worst, it would be adding more construction noise, more traffic, and, God forbid, more shadows.

Indeed, rent-controlled tenants have an incentive to oppose any rezoning on the grounds that it might make their own rental unit a candidate for redevelopment. They’re at risk of losing the below-market rents they’re currently being charged.”

“if rent control isn’t the answer to short-term housing affordability issues and displacement, what is? I’d argue it’s zoning reform, and, failing that, federalism.

New housing units, even if they’re really expensive housing units, act almost immediately to lower the costs of rent for everyone. That addresses both affordability and displacement in the short-term thanks to the magic of the “moving chain.”

When a new “luxury” apartment comes online (and basically all new construction is high-cost “luxury” housing), it’s often filled by a high-income person who moves from his previous, older apartment building in the city. His now-vacant home is then snapped up by a middle-income person who leaves behind an even older unit that a third, lower-income person can now move into.

Follow this “moving chain” back far enough, and soon enough you see that each new unit of luxury housing is freeing up lots of housing in the lowest-cost, lowest-income neighborhoods in the city. That presumably puts downward pressure on prices and displacement.”

“An August 2021 paper from Finnish researchers looking at moving chains in Helsinki found that for every 100 new market-rate apartments built in the city center, “29 units get created through vacancy in bottom-quintile income zip codes and 60 units in bottom-half income zip codes” within two years.”

“Research by economist Evan Mast on the effects of luxury apartment construction in 12 American cities has also found that new, pricey units open up more housing options for middle- and lower-income neighborhoods.”

“relying on rent control to keep that renter in the same home comes at the expense of new housing supply, which in turn raises rents for everyone else in the city and prevents others from moving there entirely.”

I changed my mind on rent control

“all of these policies share a problem if enacted as the exclusive solution to rising rents. As economists often stress, rent control fails to address the core issue of why housing is so expensive to begin with: lack of supply. In particular, states and cities have a bevy of rules and regulations regarding what kind and size of new homes can be built that overwhelmingly make it illegal or unprofitable to build small single-family homes, multi-family homes, and dense neighborhoods.”

“Rent control should be understood as a remedy for displacement, rather than a solution to the spiraling cost of housing. It’s best as a measure that can help keep current tenants from being displaced from their neighborhoods”

“It’s become abundantly clear that even if states do begin to build more homes, it will take years if not decades to rebalance supply and make housing more affordable, and in the meantime millions of families will continue to suffer. Economists are right to be worried about the ways rent control could worsen the housing crisis, but rent control can work.”

“A well-designed rent control policy exists in tandem with eliminating exclusionary zoning laws, reducing the cost of housing construction, and providing universal vouchers to help low-income tenants afford their rent.”

“To encourage people to still build more homes, it is important to exempt future construction from rent control and to allow landlords to increase rents annually by a moderate sum tied to inflation. Policymakers also want to make sure there are incentives to keep existing rental stock well-maintained; one way to do so is by allowing for vacancy decontrol so that when a tenant moves out, a landlord can upgrade the unit and charge a higher rent to the next tenant.”

“When it comes to worries that rent control policies might increase evictions (both formal and informal) as landlords are motivated by profit to convert to condos or force their tenants to vacate so they can renovate, the answer is that, similarly to all types of abuses of power in the market, there needs to be more oversight. A few policies that cities and states should enact are:

Just cause eviction statutes, which would require the landlord to justify kicking a tenant out of the property. The government can define what a reasonable justification is, including but not limited to failure to pay rent, desire to add another tenant to the renter’s lease, violation of lease terms, illegal activity, etc.

Right to counsel to ensure that tenants are not just getting steamrolled in these types of hearings. Numerous studies have pointed to the fact that the vast majority of tenants are going unrepresented by counsel.

A rental registry to keep track of tenants and landlords. One of the biggest factors leading to informal evictions is that the power imbalance between very low-income tenants and landlords leads the former to simply comply when told to leave their home, even if they have the right to stay. By creating a rental registry, landlords will know that their lease terms are being monitored by local officials and that they will be easily caught if they informally or illegally evict tenants in order to get around rent control laws.”

“Skeptics will correctly note that implementing all these ideas would increase the costs of renting out properties, which might push some landlords toward condo conversions or away from developing new units. That’s why it’s important to simultaneously make it cheaper and easier to build and renovate housing. As almost all urban economists have noted, the primary constraint on housing supply in America’s cities and suburbs is the regulatory morass that drives up the cost of developing and producing new homes and makes it nearly impossible for a landlord to extract multiple rents from a single lot by building multi-family housing.”

Developers Halt Projects, Mayor Demands Reform After St. Paul Voters Approve Radical Rent Control Ballot Initiative

“52 percent of voters approved Question 1, an ordinance that puts a hard annual 3 percent cap on rent increases. It makes no allowances for inflation or exemptions for vacant apartments and new construction that are typical in other rent control policies.

The new ordinance doesn’t go into effect until May 2022. Nevertheless, several real estate companies with large projects in the works have already announced that they’re pulling their permit applications.”

“In response to the developer freakout, freshly reelected Mayor Melvin Carter’s administration sent an email to the St. Paul City Council on Monday saying that while he supported “rent stabilization” as one necessary tool to make housing affordable, the new ordinance passed by voters could use some work.

“Allowing a reasonable return on investment is why virtually every other rent control ordinance in effect today exempts new construction,” reads the email. “The Mayor requests you consider an amendment to exempt new housing construction, which he will sign once it reaches his desk.”
That would make St. Paul’s new rent control policy more similar to those that exist in other states around the country.

Both California and Oregon, which passed statewide rent control ordinances in 2019, exempt buildings that are less than 15 years old from their price caps. New York’s long-standing rent stabilization law mostly applies to apartments built before 1974 or to newer units that received certain tax benefits.”

“Some economists have argued that even with exemptions for new construction, rent control policies still suppress the value of new buildings and thus deter some amount of new construction.”

“The 3 percent cap on annual rent increases is itself pretty strict. California and Oregon permit annual rent increases of 5 and 7 percent respectively. Allowable increases at rent-stabilized apartments in New York are typically much lower, and are often in the 1 to 2 percent range.
Both California and Oregon also allow landlords to factor inflation into rent increases. St. Paul’s ordinance makes no allowance for inflation, meaning that if prices rise more than 3 percent, landlords will effectively be required to lower the real rents that they charge. St. Paul’s ordinance also does not allow landlords to raise rents beyond that 3 percent cap for vacant units.

All of this could well encourage landlords to just get out of the rental market altogether and sell their properties to owner-occupiers. Rising home values in St. Paul, where prices have increased 12 percent in the last year, only make this option more attractive for landlords.

This is what happened in San Francisco where an expansion of preexisting rent controls led to a 15 percent reduction in the supply of rental housing, according to one 2018 study. That study found that incumbent tenants benefited handsomely from the limits on rent increases but that their windfall came “at the great expense of welfare losses from future inhabitants.”

Even if the city’s new ordinance is amended to exempt new construction, St. Paul renters, current and future, can expect a similar result.”

Seattle City Council Passes Rent Control by Another Name. Is It Legal?

“The Seattle City Council might have found a clever way around Washington state’s ban on local rent control policies. On Monday, it passed two bills that respectively require landlords to give generous notice to their tenants of any rent increases and to provide relocation expenses to low-income renters who do move in response to large rent hikes.
Current city and state law require landlords to give their tenants 60 days’ notice of any rent increase. One bill passed by the council would increase that notification period to 180 days, likely the longest notification period in the country.

And if a low-income tenant decides to move in response to a rent increase of 10 percent or more, landlords will be obligated to provide them with “economic dislocation relocation assistance” equal to three months’ rent, thanks to another bill passed by the council on Monday.

Both are the handiwork of Councilmember Kshama Sawant, a member of the Socialist Alternative party, who argues the twin bills are needed to protect tenants from a post-pandemic upswing in rents—and from capitalism more generally.

“Today’s victories will benefit tens of thousands of renters in Seattle, who are facing skyrocketing rent increases from profit-hungry corporate landlords and the venture capitalists and big banks who are [fueling] a speculative bubble,” said Sawant after the bills passed.

Landlords were less pleased with the bills’ passage, arguing during public comment that they’d raise their costs of doing business and are, per the Seattle Times, tantamount to rent control.

That latter charge could open up the new bills to legal challenges.

Washington state law preempts municipal governments from enacting laws “which regulate the amount of rent to be charged” and instead reserves that power under the state government.”