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. 

Update: Governor Signs H201, Bill That Eliminates Protest Petitions

Update 7/22/15, 12:20 p.m.: We just received word that the Governor has signed the protest petition repeal, so it is now law.

In an 82-28 vote the North Carolina House today (7/15/15) voted to concur with the Senate’s final version of H201, a bill that eliminates protest petitions in North Carolina. It will now go to the Governor who has already indicated he will sign it. The bill takes effect August 1, 2015 and affects rezonings initiated on or after that date.

To get an idea why this was good for our members, and why it was a key issue we worked with the Apartment Association of North Carolina to address, just read some of our talking points from our discussions with state legislators:

Protest Petitions in North Carolina city and town re-zoning cases raise the bar to a Super-Majority 3/4 vote requirement by City Councils to overcome.  This seems unreasonable given how easy it is for a Protest Petition to be triggered. Think about how common it is for neighbors to disfavor a proposed land use change (Not in My Back Yard). This currently results in an inordinate empowerment on local land use decisions placed in the hands of a few.

Zoning Protest Petitions are favored by a number of groups in North Carolina cities who stand to gain by the higher-level of negotiations/concessions/exactions that the Super-Majority vote requires of the land developer: neighborhood groups, planning staff, commercial property owners, and re-zoning consultants. All have vested interests in the filing of a protest petition and delaying, adding cost to, or killing a development proposal. The approval rate for projects subject to a protest petition is 52 percent, compared to a 76 percent approval rate for rezoning petitions overall – according to the UNC School of Government.

In H201, A simple majority City Council vote would instead be needed to defeat a re-zoning proposal; meaning that all proposals would be fully vetted before the elected officials take a vote, with a majority deciding. We know of no other Super-Majority vote requirement in municipal administration; even a City Council’s vote on their Fiscal Year Budget only requires a simple majority vote.


Supreme Court Upholds Disparate Impact Liability

You’ve likely heard about the Supreme Court’s ruling in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., but in case you haven’t here’s the info we’ve received from the National Apartment Association‘s Greg Brown:

The U.S. Supreme Court today decided to uphold disparate impact liability under the Fair Housing Act, a legal theory that prohibits neutrally-applied practices with a disproportionate impact on minority groups protected by the law, even without proving an intent to discriminate. The 5-4 decision in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. also emphasized limitations on the policy, stating that neutrally-applied practices should not fail on disparate impact grounds unless they are “artificial, arbitrary and unnecessary.”

Importantly, the majority opinion highlighted limitations on disparate impact liability to allow “practical business choices and profit-related decisions that sustain the free-enterprise system.” Leeway must be given to housing providers to explain the validity of their policies. Further, a disparate impact claim is not demonstrated by statistical disparity alone. A claim must show that a challenged practice actually caused a disparate impact on a protected group, and the availability of an “alternative practice that has less disparate impact” to serve legitimate business needs.

We are currently conducting a detailed analysis of the Supreme Court’s decision and will continue to seek further clarification on disparate impact liability.

We will keep you updated as we learn more.

Update 6/30/15:

NAA has just added some excellent reference links on this issue:

Commentary: Supreme Court Affirms, Narrows Disparate Impact Liability Under Fair Housing Act

Holland & Knight: Fair Housing Act Prohibits Policies and Practices Causing a Disparate Impact

Ballard Spahr: In 5-4 Decision, U.S. Supreme Court Recognizes Disparate Impact Liability



NC DOT May Hit Developers With New Fees

Staffers at the North Carolina Department of Transportation are working on a recommendation to the Board of Transportation to add or increase fees for developers to help counteract the reduction in revenue from gas taxes:

DOT officials are recommending new fees that would scale back this taxpayer subsidy and shift the burden to businesses. They may face resistance from the 19-member Board of Transportation, which includes developers and real estate executives whose businesses make use of these services.

In some cases, DOT now collects modest fees to recover a fraction of what it spends on office reviews and field inspections to regulate billboards, issue business and subdivision driveway permits, and oversee the movement of oversize and overweight trucks…

A few board members were wide-eyed at an Oct. 1 meeting when Mike Holder, DOT’s chief engineer, recommended the new fees.

Among them was Jeff Sheehan of Raleigh, senior vice president for Duke Realty, whose properties include the 3-million-square-foot Perimeter Park office and industrial development near Research Triangle Park. Every time Duke Realty puts up more buildings and develops more acres at Perimeter Park, DOT engineers inspect new streets and review new traffic impact studies to make sure the existing roads can handle the expected addition to daily traffic loads.

Sheehan was surprised to learn that the agency does this work for free.

“I assumed we were already paying a fee,” Sheehan said in an interview. “When you submit these plans to the town of Morrisville, you pay a review fee. It’s what you do. It costs DOT time and resources to review these things.”

North Carolina’s motor fuels tax, 36.75 cents per gallon, is the highest in the Southeast and higher than the gas taxes in all but nine other states. But gas tax collections are waning here and across the country as drivers switch to more fuel-efficient cars.

Duke Energy’s Connect Fees

We’ve been contacted by several members with concerns about Duke Energy’s connect fees. Below is the text from communication sent by Duke Energy representatives to AANC’s Ken Szymanski and also communication between AANC and the North Carolina Utilities Commission:

Communication from Duke to AANC:

Connect Fees

Duke Energy Carolinas will charge a $15 non-refundable connect fee for all metered residential and non-residential customers each time a new account is established beginning September 30. This fee will include temporary and permanent service applications, as well as Revert to Owner customers.

There is a cost to Duke Energy to establish an electric service account; this cost covers field activity to install, connect or read the meter, and the administrative work for creating a new account. Currently, this cost is passed on to all customers. By charging a connection fee only to those customers who establish a new account, Duke Energy is working to keep the overall cost lower for all customers.

For more information, customers can log in their My Duke Energy Portal to learn more. Duke Energy also continues to offer turnkey lighting service and equipment, rebates and incentives, and other tools and resources at builders’ and property managers’ fingertips at

Communication from AANC to NCUC:

Our members were startled this week to learn of a new, unannounced Duke Energy Connect Fee of $15 per electricity service account. Duke Energy’s staff related that this was part of the Settlement with NCUC to hold the line on rate hikes by shifting these connection costs to the users as a user fee. I just want to make sure that you and the Public Staff knew about this; our members obviously did not. See the note below from Duke Energy’s Customer Experience Leader, John Lincoln.

We would argue that this Connect Fee is at least somewhat regressive, because of the socio-economic characteristics and relative residential mobility of the population asked to pay it.

Communication from NCUC back to AANC:

Yes, the Public Staff knew about this.  It was part of the Company’s prefiled testimony, available to the public well before the hearing.  Our witness felt the original change proposed by Duke could have been applied in an unduly broad manner.  We recommended narrower wording to more closely limit the charge to instances where it reflected a cost initiated by the customer.  Duke accepted our recommendation as part of the settlement.

 The Public Staff did not contest the amount of the proposed charge (as opposed to its applicability) because it appeared to be based on actual costs incurred by the Company.  Without Duke’s new charge, the cost of new service connections would be paid by all customers.  This would be less noticeable on a per customer basis, but result in customers who are not causing the cost to be paying for it.  In the Public Staff’s view, it is reasonable to have the customers responsible for new service connection costs to pay those costs rather than for other customers to subsidize them.  To the extent that people who change their electric service more often are lower income, this would impact them.  Personally speaking, I am concerned about any additional financial burden on low income people.  At the same time, our ratemaking process is largely oriented toward charging utility costs to the customers responsible for those costs.  With narrow exceptions the Public Staff does not recommend ratemaking for purposes of reallocating cost responsibility away from low income customers.  However, in this regard, I would note that the Public Staff was able to achieve a very unusual $10 million donation from Duke shareholders toward low income energy assistance as part of the settlement in this case. 

We would be glad to discuss this further if you wish.

We will continue to update you as we continue to learn more about this issue.

Gov. McCrory Signs Bill That Shortens Eviction Time

From the Apartment Association of North Carolina‘s announcement that Gov. Pat McCrory today signed House Bill 802:

Many North Carolina housing providers have struggled for many years with the length of the process for evicting a non-paying tenant. Each day that the tenant remains in the rental unit is another day of unpaid rent and another day that the unit cannot be prepared and marketed for a new tenant. In some urban areas of the state it takes 45 days or more to complete the eviction (12% of the income producing capability for that property). This legislation addresses some of the areas in the system that can assist in speeding up the eviction process as follows:

  • would require magistrates to make their decisions the same day of the conclusion of the evidence, except magistrates may take 5 days for more complex summary ejectment cases which are spelled out in the bill
  • would only allow a magistrate to continue a case for not more than five days or until the next session of court, whichever is longer, unless the parties have both consented
  • would reduce the time frame from 20 days to 10 days to pay the costs of court to appeal a case
  • would require the tenant in an appeal to state a defense orally or in writing and make any necessary bond payments or the landlord can file a motion to dismiss the appeal
  • would reduce from 10 days to 7 days the time required to hold a tenant’s property once a summary ejectment is won and a writ to obtain the rental property is executed

The new law goes into effect September 1, 2013. If you’d like to read the full text of the bill you can find it here.

NCUC Advice Letter for Residential Apartment Owners

Today the Apartment Association of North Carolina (AANC) shared a newly revised Advice Letter for Residential Apartment Owners that “reflects legislative change that occurred this session (amendment to G.S. 143-151.42 in the form of SB545/HB522 “Utility-Inclusive Leases”).”

The letter was prepared by David Drooz, staff attorney for the North Carolina Utilities Commission Public Staff, and is must reading for any apartment owner/manager who uses all-inclusive leases.

Here’s a link to a PDF version of the letter.

Economic Impact of the Apartment Industry

NAA and NMHC commissioned a report by George Mason University economist Stephen Fuller on the contribution the apartment industry makes to the US economy. From Multifamily Executive’s article about the report:

The study found that apartment industry spending contributes $1.1 trillion to the national economy and supports 25.4 million jobs.

“People underestimate the economic impact that flows from apartment buildings,” says Stephen S. Fuller, an academic researcher at George Mason University’s Center for Regional Analysis who conducted the study.

 “It’s always that first splash of new construction that gets the attention,” Fuller notes. “No one pays attention to ongoing maintenance or to the people who live in these properties. By not paying attention to them and the long-term effect they have, people underestimate the importance to the overall economy.”

Multifamily construction contributed $42.5 billion to the national economy, and construction spending spurred $12.7 billion in personal earnings, while supporting roughly 324,000 jobs, in 2011. That’s nothing to sneeze at. But it’s worth noting that resident spending on goods and services produces an economic impact nearly four times greater than construction.

Apartment resident spending drove nearly 80 percent of the apartment industry’s total contribution to the national economy and sustained nearly 90 percent of total jobs supported by the apartment industry. In 2011 alone, the country’s 35 million apartment residents contributed $885.2 billion to the national economy. Renter spending also generated $222 billion in additional personal earnings and supported 22.8 million jobs during the year.

For more information you can visit the website and download the full report, look at state-by-state data or use the apartment community estimator.

Impact of the 2012 Elections on the Apartment Industry

On Tuesday, November 27,  PTAA welcomed Ken Szymanski, Executive Director of the Apartment Association of North Carolina (AANC), and Colleen Kochanek, AANC’s lobbyist, to update our members about the likely effect this year’s election results will have on the North Carolina legislature, and in particular what it means for the apartment industry in 2013.  Ken was kind enough to share a few slides (see below) showing the makeup of the legislature in 2013 and you’ll notice how many “freshman” legislators the state will have next year. Both Ken and Colleen stressed the importance of reaching out to these new legislators before they head to Raleigh next year, and of the need to start educating them about the apartment industry and the important role it plays in providing housing and jobs to its residents, and tax revenue to its local municipalities. There will also be a steep learning curve for issues of particular concern to the industry like continued work on legislation related to local governments’  rental housing registration/inspection programs to name just one.

If you missed the dinner meeting you’ll have the opportunity to see them again at AANC’s Legislative Days in Raleigh next spring. Stay tuned, and if at all possible, plan on making the trip to Raleigh.
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N.C. Legislature Ratifies 10-Year Lithium Battery Smoke Alarm Bill

From the Apartment Association of North Carolina:

The North Carolina General Assembly this week ratified a bill that modifies state Landlord-Tenant law by calling for tamper-resistant,10-year Lithium Battery Smoke Alarms to be installed in certain, limited circumstances. The duty to install such an alarm is limited to when new alarms are installed or when replacing existing alarms (not merely when replacing batteries in existing alarms). The Apartment Association of North Carolina did not oppose this bill. The key new language:

The Landlord shall, after December 31, 2012, when installing a new smoke alarm or replacing an existing smoke alarm, install a tamper-resistant, 10-year lithium battery smoke alarm. However, the landlord shall not be required to install a tamper-resistant, 10-year lithium battery smoke alarm as required by this subdivision in either of the following circumstances:

a. The dwelling unit is equipped with a hardwired smoke alarm with a battery backup.

b. The dwelling unit is equipped with a smoke alarm combined with a carbon monoxide alarm.

Link to the complete Ratified Bill: