Rent control refers to the fixing of a ceiling on residential rental rates within a particular legal jurisdiction. The practice is meant to aid those with lower incomes in finding and keeping affordable housing. Like other forms of central planning, such as the minimum wage, rent control has led to numerous unintended consequences including shortages of residential rental properties, the rapid deterioration of residential apartment buildings, and urban blight.
In a free market, prices adjust based on the relationship of supply and demand. When demand for housing increases, the prices for housing also tend to rise, both in buildings for sale, as well as rental units. The increased prices send a signal to entrepreneurs that higher profits can be had in building new housing or converting existing buildings. In turn, prices will trend downward as new units become available.
When prices are fixed and demand increases due to rising birth rates and immigration, as happened in New York City following the Second World War, fewer property owners will decide to invest in housing. The inevitable consequence will be fewer units for rent. Because investors realize a diminishing rate of return they must cut costs in order to remain in business. Building maintenance represents a large fixed cost, so there are incentives in reducing those expenditures. Deterioration soon follows as leaky faucets and torn carpets go unrepaired.
In A Critique of the Legal and Philosophical Case for Rent Control, Austrian economist Walter Block notes that rent control reduces tenant mobility. When an individual moves into an apartment and his rent becomes fixed at the present rate, he stands to have higher rates if or when he chooses to relocate. Because of this, individuals and families often stay in units for extended periods of time. This has the simultaneous effect of restricting labor markets by reducing the flow of labor into areas where demand is high.
Rent control reduces the supply of rental units through two different mechanisms. In the short run, where the physical number of apartment units is fixed, the imposition of rent control will reduce the quantity of units offered on the market. The owners will hold back some of the potential units, using them for storage or keeping them available for (say) out of town guests or kids returning from college for the summer. (If this sounds implausible, consider just how many people in a major city consider renting out spare bedrooms in their homes, as long as the price is right. Airbnb is an example.)
In the long run, a permanent policy of rent control restricts the construction of new apartment buildings, because potential investors realize that their revenues on such projects will be artificially capped. Building a movie theater or shopping center is more attractive on the margin.
There are further, more insidious problems with rent control. With a long line of potential tenants eager to move in at the official ceiling price, landlords do not have much incentive to maintain the building. They don’t need to put on new coats of paint, change the light bulbs in the hallways, keep the elevator in working order, or get out of bed at 5:00 a.m. when a tenant complains that the water heater is busted. If there is a rash of robberies in and around the building, the owner won’t feel a financial motivation to install lights, cameras, buzz-in gates, a guard, or other (costly) measures to protect his customers. Furthermore, if a tenant falls behind on the rent, there is less incentive for the landlord to cut her some slack, because he knows he can replace her right away after eviction. This is the behavior associated with the term "slumlord".
Cities with rent control
Currently four U.S. States, and the District of Columbia, have cities or municipalities which impose rent control measures. Major U.S. cities include: Los Angeles, Oakland, and San Francisco in CA; College Park, MD; and New York City, Albany, and Buffalo in NY.
Note: New Jersey has more than one hundred cities which impose rent control.
Cambridge, Massachusetts maintained a very strict form of rent regulation from 1971 to 1994, when rent controls were removed by statewide initiative. Cambridge is composed of both affluent and modest income neighborhoods, and has a very large older housing stock. According to a 2003 study, investment increased by approximately 20% over what would have been the case if rent control had been maintained. These investment increases occurred across a wide variety of settings; both affluent and modest income neighborhoods experienced an "investment boom". A National Bureau of Economic Research paper concluded that "The end of rent control raised the overall valuation of Cambridge's housing stock by $1.8 billion between 1994 and 2004, more than $1 billion of which was due to spillovers to never-controlled houses.
Another study found that contrary to its stated intent, restrictive rent control in Cambridge and Brookline decreased the supply of available rental housing during the 1980s and spurred gentrification - the process by which a mixed-income diverse set of residents is supplanted by an influx of more advantaged newcomers. The study reveals the following adverse effects of rent control over time:
- rent control fosters the removal of existing apartments from the market;
- rent control discourages the development of more private rental housing;
- rent control induces underutilization (waste) of rental space by tenants;
- the combined effect of declining numbers of apartments and underutilization displaces a significant number of tenants from the local housing market; and
- in the competition to secure increasingly scarce apartments, advantaged households typically prevail over disadvantaged ones, resulting in gentrification.
Rent control produces the opposite of the promised results; it is an initially well-intentioned but ultimately destructive housing policy that actually reduces supply, hurts the poor and displaces the needy.
A 1991 Report to Congress on Rent Control, by the U.S. Department of Housing and Urban Development concluded that under rent control:
- Housing quality usually deteriorates.
- Benefits of rent control are poorly targeted.
- A significant number of well-to-do renters live in rent-controlled apartments and enjoy substantial benefits while many low income renters receive little or no benefits.
- Some landlords of rent-controlled properties have low incomes but nevertheless bear the burden of rent control transfers. Thus it appears that current rent control policies are highly inefficient, inequitable, and ineffective mechanisms for helping lower income tenants.
- Rent control reduces mobility.
A 2013 study of rent control during World War II concluded that rent control played an important role in the increase in home ownership.
An overview of economic research literature by Blair Jenkins points to a conclusion against rent control, yet as of 2001, about 140 jurisdictions in the United States persisted in some form of the intervention.
- ↑ A Critique of the Legal and Philosophical Case for Rent Control (pdf) by Walter Block, Journal of Business Ethics 40: 75–90, 2002
- ↑ Robert P. Murphy. "The Case Against Rent Control", The Freeman. Referenced 2014-11-14.
- ↑ Landlord.com website, last accessed 09-20-2011
- ↑ Henry O. Pollakowski. "Rent Control and Housing Investment: Evidence from Deregulation in Cambridge, Massachusetts" (summary), MIT Center for Real Estate, Journal of Housing Economics, No. 36 May 2003. Referenced 2013-10-06.
- ↑ David H. Autor, Christopher J. Palmer, Parag A. Pathak. "Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts" (detailed summary; actual paper), National Bureau of Economic Research, NBER Working Paper No. 18125, Issued in June 2012. Referenced 2013-10-06.
- ↑ Rolf Goetze. "Rent Control: Affordable Housing For The Privileged, Not The Poor", 'A Study of the Impact of Rent Control In Cambridge, Massachusetts'. GeoData Analytics, August 1994. Referenced 2013-10-06.
- ↑ "Report to Congress on rent control" (pdf), U.S. Department of Housing and Urban Development, 1991. Referenced 2013-10-06.
- ↑ Daniel K. Fetter. "The Home Front: Rent control and the rapid wartime increase in home ownership" (pdf), Wellesley College and NBER, September 25, 2013. Referenced 2013-10-06.
- ↑ Blair Jenkins. "Rent Control: Do Economists Agree?" (summary, pdf), Econ Journal Watch, Volume (Issue): 6(1), Pages: 73-112, Published: January 2009. Referenced 2013-10-06.
- Block, Walter (2002). "A Critique of the Legal and Philosophical Case for Rent Control". Journal of Business Ethics 40 (1): 75-90. doi:10.1023/A:1019952703506. http://mises.org/etexts/rentcontrol.pdf.
- Block, Walter (2007). "Rent Control". In Henderson, David R.. The Concise Encyclopedia of Economics. Indianapolis, Indiana: Liberty Fund. pp. 442-445. ISBN 978-0-86597-665-8. http://www.econlib.org/library/Enc/RentControl.html.
- Block, Walter; Olsen, Edgar, eds (1981). Rent Control: Myths & Realities. Vancouver: The Fraser Institute. ISBN 0-88975-033-5. http://www.walterblock.com/wp-content/uploads/publications/RentControlMythsRealities.pdf.
- Rent control at Wikipedia
- Rent Control by Walter Block at The Concise Encyclopedia of Economics
- Rent My Flat (Black Market Edition) by Andrew Heaton, August 2013
- How Rent Controls Hurt the Poor by Allan Brownfield, March 1975
- Rent Control and the Penultimate Solution by Scott Gardner, June 1993
- The Folly of Rent Control by James A. Maccaro, January 1990
- Three Fallacies of Rent Control by Robert Batemarco, June 1997
- Beware the Comeback of Rent Control by Peter A. Tatian, January 2013
- Landlords create vacancies to beat rent-control laws, San Francisco Examiner, September 2008
- Economic Study of the Rent Stabilization Ordinance and the Los Angeles Housing Market (pdf), City of Los Angeles Housing Department, 2009
- How Rent Control Drives Out Affordable Housing by William Tucker, May 1997
- Rent control from PolicyLink