Freakonomics: Why Rent Control Doesn’t Work

There’s no doubt that man communities in the United States, including here in the Piedmont Triad, are dealing with housing affordability challenges. There’s also no doubt that elected officials in cities, counties and states are looking for possible solutions to the affordability problem. Unfortunately some of the solutions that, on the surface, seem to make sense can actually make the problem worse.

One of the solutions that many elected leaders consider is rent control. Just this year Oregon became the first state to enact a statewide rent control law. Some cities, like New York, have long had rent control laws and yet their residents still have some of the highest rents in the country. So what gives?

That can be a complex question to answer, but thankfully the folks at Freakonomics have produced a show that does a great job of explaining why rent control actually makes the affordability challenge worse, not better. It’s well worth a listen so here’s a link to either listen to the podcast or read a transcript:

Freakonomics: Why Rent Control Doesn’t Work

And here’s just a small excerpt from the show:

DIAMOND: When you pass rent control, the landlords of the property suddenly getting covered by rent control are losing so much money, they no longer really want to rent their apartments out at the prevailing new prices, so they decrease their supply of rental housing to the market. And if there’s less supply, that’s going to drive up prices. 

DUBNER: Okay, so, let me just make sure I have it pretty straight. You find evidence that rent control increases gentrification, one component of which is the displacement of low-income tenants. On the other hand, you also find evidence that low-income people, including minorities — at least those who are in rent-controlled units already — they’re likely to disproportionately benefit from rent control.

So, if I’m an affordable-housing advocate, I might say, “Oh, fine, fancy Stanford professor — who I’m sure has some kind of great income and/or housing subsidy and/or situation — I don’t care that some landlords are suffering. I don’t care that the policy is having some downstream effects that you don’t like. I need to make sure that low-income people aren’t going to get a rent increase of 50 percent overnight.” So, how do you respond to that argument?

DIAMOND: So, when you think about those initial tenants, that’s the best bet you’re going to get for the benefits of rent control to low-income tenants: the people that are already in the housing. But even though we find that those tenants are much more likely to stay in their apartment, when we look 10, 15 years later, the share of those 1994 residents that are still there is down to 10 percent or so. So 90 percent of them no longer live in that initial apartment.

And it’s that next low-income tenant that wants to live in the city, that low-income tenant is going to have a very hard time finding an affordable option, because now there’s going to be less rental housing, the prices that that low-income tenant are going to face when they want to initially move in are going to be higher than they would have been absent rent control.

DUBNER: I’m curious how generalizable you think your findings from San Francisco are for other cities.

DIAMOND: I would suspect that the actual quantitative loss of rental supply or benefits to the tenant will depend a little bit city to city, but I think the qualitative takeaway that landlords are savvy and are going to work hard to not lose money on their investments, I think is a very general point. 

Freddie Mac’s Plan to Help Cap Rents

Freddie Mac is launching new lower-cost financing to apartment owners who agree to cap rent increases for the life of the loans. From an article in the Wall Street Journal:

The program, announced Tuesday, will begin immediately and be available all over the country. Mr. Brickman said he hopes hundreds of properties will take advantage of it.

The initiative comes at a potentially appealing time for real-estate investors who are facing a slowing rental market. Freddie Mac will provide mezzanine debt—which is more risky but pays a higher interest rate than senior debt—at below market cost.

While rent increases have naturally slowed over the past year or so, the initiative protects tenants from steep hikes when the market accelerates again. Operators who receive the low-cost loans must have at least 50% of the units affordable to households making the local median income or below. Borrowers must then agree to limit rent growth on 80% of units.

Rent Controls Gaining Support in Cities Throughout the U.S.

The Wall Street Journal has an article about the rising popularity of rent controls as a tactic to address affordable housing issues in cities across the country. Of course, this is not popular with landlords, but it’s also important to note that it is a tactic that has been shown to be ineffective:

Economists generally have a dim view of rent control, which they say restricts supply and drives up rents for tenants who don’t live in regulated buildings.

A working paper released in January by Stanford University economists found that from 1995 to 2012 rent control in San Francisco helped residents in rent-controlled apartments, increasing the likelihood that they would stay at their address by nearly 20%.

But the study also found that rent control hurt the city overall by making landlords more likely to convert their apartments to other uses and deplete the housing stock, leading to a permanent citywide rent increase of 5%.

“Tenants benefited dramatically when they were covered by rent control,” said Rebecca Diamond, an assistant professor of economics at Stanford and one of the authors of the paper. “We don’t really share it as a society.”

In other words, rent control only helps those who live in rent-controlled buildings. For everyone else, it actually drives up the cost of housing, so in the end, it results in less affordable housing, not more.

Supply and Demand Issues Lead to Rent Control Proposals

Due to an explosion in new jobs, and not enough new housing being built to meet the increased demand, several municipalities in Silicon Valley have rent control referendums on the ballot next month. That means there’s a battle being waged between apartment industry representatives and advocates for rent control initiatives.

Tenant organizations, unions and church groups are knocking on thousands of doors in an effort to drum up support for measures designed to protect apartment dwellers from runaway rents.

On the other side, landlords and real-state agents are pouring money into mailers and television ads in a vigorous effort to battle the initiatives.

At the root of the issue is that there isn’t nearly enough housing for all the new jobs. Between 2008 and 2015, the four counties that make up the heart of the region added 400,000 jobs, while permits were issued for just 86,000 new housing units…

The measures call for rent increases on some or most rental apartments to be capped, generally to a few percentage points a year, for existing tenants. When tenants leave, rents could reset to market rates…

Economists widely criticize such laws because of inefficiencies they produce: Tenants generally get to keep their rents steady regardless of income, allowing some wealthy residents to get choice apartments for low rent as long as they remain in them for years.

Supreme Court Rejects Rent-Control Challenge

From the LA Times:

The Supreme Court on Monday rejected a constitutional challenge to New York City’s famed rent-control ordinance, a post-World War II housing measure that limits the rents of more than a million apartments.

The court’s action is a setback for property-rights activists, who had hoped a more conservative court would protect landlords and a free market in rentals. For decades, critics have said rent-control laws deny property owners the right to fully profit from their investment…

In his appeal, James Harmon said the rent control law violated the 5th Amendment, which says “private property [shall not] be taken for public use without just compensation…”

For decades, critics have urged the justices to strike down rent-control measures as unconstitutional, but they have refused.