Rent Control Rears Its Ugly Head Once Again

by Rich Vetstein on March 29, 2019 · 0 comments

in Landlord Tenant Law, Leasing, Massachusetts Real Estate Law, Rental Housing

Recent Studies of Cambridge and San Francisco Prove It Not Only Doesn’t Work But Results In Gentrification, Displacement and Higher Rents

Rent control. Like a diseased zombie rising again from the dead after 25 years. Banned statewide by a voter referendum in 1994 and widely proven ineffective and counter-productive by economists, the debate over rental control is back in Massachusetts. As reported in the Boston Globe, a group of liberal urban lawmakers are readying legislation which would effectively override the 1994 voter ballot question, and allow cities and towns to impose rent control as a mechanism to curb rent increases and encourage affordable housing.

I’m all for a robust, healthy debate, so allow me to weigh in. The great thing about the 1994 vote banning rent control is we now have empirical data and a reliable study from prominent economists which has compared the Cambridge housing market during rent control vs. after rent control. We also have data and a similar study out of San Francisco. Both studies (and others from the past) have found that rent control did not work at all, and actually had the exact opposite effect — contributing to gentrification, displacement of tenants and income inequality.

Are rent control advocates and politicians aware of all this economic literature? I don’t know, but I do know that human beings are emotional creatures, and the debate over rent control has become very emotional. In fact, it reminds me of the climate change debate, but this time rent control advocates are behaving like climate change deniers. Faced with overwhelming evidence that rent control doesn’t work, these advocates continue to push the idea in a knee-jerk emotional reaction to the affordable housing crisis and high rent prices.

Study of Effect of Rent Control In Cambridge Market

Economists Autor, Palmer, and Pathak (2014), studied the effect of rent control on the Cambridge market. From December 1970 through 1994, all rental units in Cambridge built prior to 1969 were regulated by a rent control ordinance that placed strict caps on rent increases and tightly restricted the removal of units from the rental stock. The legislative intent of the rent control ordinance was to provide affordable rental housing, and at the eve of rent control’s elimination in 1994, controlled units typically rented at 40-plus percent below the price of nearby non-controlled properties. 

The economists found that newly decontrolled properties’ market values increased by 45%. In addition to these direct effects of rent decontrol, the economists concluded that removing rent control had substantial beneficial indirect effects on neighboring properties, boosting their values too. Post-decontrol price appreciation was significantly greater at properties that had a larger fraction of formerly controlled neighbors: residential properties at the 75th percentile of rent control exposure gained approximately 13% more in property value following decontrol than did properties at the 25th percentile of exposure. This differential appreciation of properties in rent control–intensive locations was equally pronounced among decontrolled and never-controlled units, suggesting that the effect of rent control had been to reduce the whole neighborhood’s desirability.

The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock was large, boosting property values by $2.0 billion between 1994 and 2004. (And of course, that huge increase in property value translated to massive real estate tax revenue for the city). Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly controlled units, while $1.7 billion is due to the indirect effect. These estimates imply that more than half of the capitalized cost of rent control was borne by owners of never-controlled properties. The economists ultimately concluded that rent controlled properties create substantial negative externalities on the nearby housing market, lowering the amenity value of these neighborhoods and making them less desirable places to live. In short, the policy imposed $2.0 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.

To summarize in plain English, the economists concluded that rent control is a really bad idea, both in concept and in actual practice.

San Francisco: Another Failed Experiment

Economists came to the same conclusions when studying rent control in San Francisco. Its rent control law was different than Massachusetts’. It applied to buildings with five or more apartments and regulated rent increases, linked to the CPI, within a tenancy, but no price regulation between tenants. New construction was also exempt.

Economists Diamond, McQuade, and Qian (2018), concluded that San Francisco’s rent control ordinance encouraged condo conversions resulting in more owner occupied units (and less rental units) while encouraging rent controlled owners to defer maintenance and upkeep. As the economists found “it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. Indeed, by simultaneously bringing in higher income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city.”

Rent Control Just Doesn’t Work

In addition to the Cambridge and SF studies, there are many other articles by economists critical of rent control. The Urban Institute concluded that [g]iven the current research, there seems to be little one can say in favor of rent control.” Lisa Sturtevant, Ph.D. recently surveyed 30 different peer reviewed rent control studies, concluding that rent control decreased the supply of available rental housing, does a poor job in targeting benefits and generally leads to higher rents in the uncontrolled market.

As these studies show, rent control in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood. When the government forces landlords to provide insurance to tenants against rent increases, it will ultimately be counterproductive. There are better ideas to address the affordable housing problem than rent control. We can do much better than this outdated, tired idea.

For a good summary of why rent control doesn’t work, check out the page on Rent Control.

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