Understanding Rent Control

Council member Kshama Sawant has decided that 2019 is the year to push for rent control in Seattle — even though there is still a statewide ban on it. She held a rally last week announcing that she would be introducing rent control legislation (to become effective if/when the state lifts its ban), and earlier this week she invited the Seattle Renters Commission to present in her committee (video here) on why they are recommending that the city implement rent control.

I’m not an economist, not a landlord, nor a renter. But since we’re having this debate, I went to the UW Library and pulled the literature on rent control so I could understand the issues, the studies, and what the experts conclude.  Here’s what I found.

Since I recognize that most of you won’t read a lengthy and undoubtedly wonky article on the details and nuances of rent control policy, here’s the tl;dr version:

1. Within the community of economists there is broad consensus that rent control is a bad idea. The consensus is on par with the scientific community on climate change, and the medical community on the safety of vaccinations.
2. There are two documented benefits of rent control: it decreases economic displacement for people living in rent-controlled housing, and it can reduce the volatility of rental pricing in cities where there is sufficient stock of rental housing.
3.  There is a very long list of documented harms that rent control causes. It provides a strong disincentive to build more rental housing. It drives landlords to reduce spending on maintaining their units until the quality of the housing has drawn down to the point where it matches the allowed rent. And thus by reducing property values, it reduces property tax revenues. It reduces mobility for renters, causing them to stay in their rent-controlled housing rather than move when a better job or the needs of their family require it. It misallocates the total housing stock by encouraging people to stay in housing that doesn’t match their needs.  It encourages rental property owners to convert apartments to condominiums, thereby reducing the rental housing stock. It inevitably leads to a “cluster” of regulations piled on top to try to legislate away all of rent control’s problems. And it doesn’t help the people with the greatest need, but rather the people most capable of gaming the system.
4. In many cities with rent control, tenants see annual rent increases at the maximum amount allowed, because landlords understand that if they skip a year they will never catch up.
5.  Rent control’s harms can be mitigated in part through an aggressive public/social housing program that creates a large quantity of  units using public funds. However, in those places it’s unclear that rent control itself is adding much value beyond the significant value that the public housing program alone delivers.
6.  As this paper says, rent control “confers its benefits early, and extracts its costs late.” That’s one of the reasons it’s such an attractive policy idea.
7.  As this article puts so well, among rent control advocates there are no rent control failures; there are only bad implementations.
8. And finally, as this research paper suggests, economists have been thorough at convincing themselves that rent control is a bad idea, and inept at convincing anyone else.

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Rent control is not a new idea, particularly in Europe. It was introduced in some cities in the United States during World War II as a means to prevent wartime abuses while the economy was see-sawing around. That “first generation” of rent control would freeze rents at a specific level; since then there is near-universal agreement that first-generation rent control is a terrible idea. But it led to “second generation” rent control policies, which allowed rents to rise a certain amount each year, often tied to inflation rates.

Not all rent-control policies are created equal; in fact, there are a variety of knobs and dials to be tuned in choosing a particular form to implement. The first, most basic question is whether all rental housing will be subject to controls, or only a subset. Many cities exempt newer housing constructed after a particular date. Others exempt ADUs and rented single-family homes. Many invoke “vacancy de-control,” wherein a rental unit becomes exempt from rent control when a tenant leaves and the landlord can reset the rent back to market prices. Vacancy de-control is popular with landlords but problematic in that it creates perverse incentives for landlords to evict tenants. However, it’s debatable whether it actually causes tenants to pay higher rents over the course of a tenancy. In California, rent control advocates are actively campaigning for the repeal of the Costa-Hawkins Act, which banned vacancy control and exempts certain types of housing from rent controls. Oregon’s new rent control law also includes vacancy de-control.

There are two benefits of rent control that have support in the research. The first is the obvious one: it does, in fact, reduce economic displacement by allowing people to stay in their homes longer. The second is that it reduces the volatility of rental prices in “hot” housing markets; to be clear, it smooths increases into a steady predictable pattern of increases instead of wildly fluctuating increases (and potentially decreases when the market goes soft).

When all rental housing is subject to rent control, studies have shown that new rental housing construction drops off. Some jurisdictions have learned this lesson and have created public housing or “social housing” programs as a government intervention to ensure that additional housing continues to be built, some funded entirely by the government and some through subsidizing private development.

When only a portion of the housing stock is under rent control, then the housing market becomes partitioned, with very different dynamics between the two. The rent-controlled housing becomes a finite world unto itself, with low tenant turnover because of the strong financial incentive for tenants to stay put. The rest of the housing stock becomes a smaller pool of housing than before rent control was enacted, serving the rest of the population plus all the newcomers to the area. That increased competition for a smaller pool drives prices even higher; in fact, the economic models and the empirical studies both show that the savings that the tenants see in rent-controlled housing are offset by the increased prices in the uncontrolled market. People in non-rent-controlled housing are, in effect, subsidizing the rents of the people in rent-controlled housing.

That might be a good thing if the people in rent-controlled housing were the ones who can least afford market-rate housing, but rent control doesn’t work that way. Initially the people in rent-controlled housing are the ones who were in that housing already, but over time it becomes the ones with the best connections, the best ability to hunt for available units, and in some cases a tolerance for working the “grey market” to get a unit.

An effect repeatedly seen in rent-controlled markets is that landlords spend less on upkeep, maintenance, and upgrades. That doesn’t mean that they let the units violate building or health codes, but they do let the quality of the housing degrade until it matches what they are allowed to charge for it in rent. A corollary of this effect is that tenants end up doing — and paying for — more maintenance themselves, a hidden cost of rent control that offsets some of the benefit of lower rents.

Some studies have shown that rent control decreases tenant mobility, in that if a tenant receives a better job offer she/he will refuse to move and instead choose to commute further — or decline the job offer altogether  — rather than give up a rent-controlled unit. The same effect means that families with kids may stay in a rent-controlled unit that doesn’t have enough space for their needs rather than move, or an empty-nester couple may remain in a unit that has much more space than they need. That’s bad for the tenants, but it’s also bad for the community in that it misallocates the housing stock: the people who need particular kinds of housing often don’t end up in units that match those needs. Put another way, there is a risk of “overconsumption” of affordable housing by tenants in rent-controlled units.

As mentioned earlier, in many cities that have implemented rent control, landlords impose rent increases every year at or near the maximum allowed, rather than when their costs require it. This is because they know that if they fall behind the long-term inflation rate, rent controls will prevent them from catching up. And that’s only one tricky part of tying rent control to inflation; another is simply choosing what inflation metric to tie it to. Some cities tie it to broad-based consumer inflation, but in places like Seattle construction and building maintenance costs have far outpaced inflation, so a landlord’s ongoing costs will go up faster than consumer inflation rates.

We also mentioned “vacancy control” earlier, in which landlords aren’t allowed to reset rental rates between tenants. But studies have shown that vacancy control doesn’t change the amount paid by a tenant in the long term; it just shifts it from the beginning to the end of the tenancy.

To address many of these issues, and to prevent landlords from gaming the system, jurisdictions often pile additional housing regulations on top of rent control. That “regulatory cluster” of rules may control when a landlord may evict a tenant; when additional rent increases may be allowed if a landlord wants to do a major upgrade; minimum maintenance standards; rules for offering a rental unit and for evaluating and choosing a new tenant; and other tweaks. Collectively they make it more difficult and more expensive to be a landlord, they create investment uncertainty since landlords don’t know what new regulations will be imposed in the future, and they ultimately create another strong incentive for apartment owners to convert their units to condominiums and simply get out of the rental-housing business.

The heart of the problem with rent control is that it doesn’t address the underlying cause of high rents: housing scarcity. If anything, it makes the scarcity problem worse by creating a fierce disincentive to building more rental housing. In the few cities with rent control where it hasn’t created havoc, it’s because the government intervened with a public housing program — essentially taking the burden upon itself to increase the housing supply after ensuring that private developers won’t.

Take Berlin, for example, the city used by Sawant in her press conference last week. She cited its introduction of rent control in 2015, and a news article showing that it had been successful. She neglected to mention that the article was published later in 2015, only a few months after rent control took effect and before it could have any real effects. Research and press coverage in the ensuing years have painted a gloomier picture of Berlin’s foray into rent control, with a recent article suggesting that in the end it hasn’t had much of an effect at all — largely because Berlin’s version of rent control is so complicated that it’s ineffective. But Berlin also committed to building tens of thousands of new housing units when it introduced rent control.

In the Seattle Renters Commission presentation earlier this week, they cited Montreal, which they consider to be the “gold standard” for rent control in North America. They claimed that Montreal has been booming, and has added 100,000 people in the last ten years — all the while rent control (first imposed in 1979) has kept rents very low and renters happy. But a closer look at Montreal reveals a different, more complicated picture.

Montreal is very different from every other major city in North America. It is a beautiful city of 1.75 million people, where French is the primary language for government, business, and the majority of residents. But that language barrier creates a level of social and commercial isolation in North America that kept the city in the economic doldrums for decades, and equally kept its resident population growth very low for long periods of time.

Population of Montreal (note graph is not zero-based)

 

GDP of Montreal

 

On top of that, Montreal benefitted from a huge amount of residential housing built in the late 19th century and early part of the 20th century, and a long-term consistent investment by the federal and provincial governments in building social housing.  Montreal has 62,000 units of social housing; by contrast, all of King County has 8,000. Until very recently, Montreal has been a city with a stable population, low wages, and low rents.

As the Renters Commission pointed out, Montreal added 100,000 to its population in the last decade — but on a base of 1.65 million people. Seattle added 120,000 people over the same period, but from a base of around 600,000.

Also, much of Montreal’s growth has been since 2017, when it began a much-celebrated economic revival. As recently as 2014, local leaders were complaining that Montreal had been in an economic slump for 15 years, but the last couple of years the economy has picked up (though it still lags other large Canadian cities). But when we look at the construction and housing numbers for Montreal, we see some very interesting things. The value of permits for residential construction was in steady decline up to 2017 when it suddenly skyrocketed.

However, when we look at the housing stock itself, we see that the amount of rental housing available is continuing to decline, and nearly all the growth is in condominiums (with a small amount of growth in single-family homes). In fact, condominiums have bucked the trend in Montreal and grown steadily for years.

This is exactly what you would expect to see in a rent-controlled city: condo conversions and construction shifting from rental housing to owned homes. The provincial and federal governments cut back on their funding for social housing programs in Montreal several years ago, and now that a new housing crisis is emerging, Montreal’s mayor campaigned on a new push for public funding for affordable rental housing.

In the meantime, Montreal’s rental housing has developed a reputation for being a collection of older (though in many cases beautifully antique) units that have not been maintained well. Again, this is exactly what we would expect to see in a rent-controlled city.  Montreal is far from the rent-control paradise that advocates suggest, and it was saved from the worst liabilities of its rent-control policy by a long-term investment in housing. But to the extent that Montreal is now “booming,” the problems with rent control are coming home to roost.

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What are the lessons for Seattle?  First, we need to recognize that Seattle is a worst-case scenario for rent control to be introduced: it already has a critical shortage of housing, there is not nearly enough public and subsidized housing, and the population and economy continue to grow. To the extent that the housing stock is starting to catch up with the population growth, we are already seeing overheated rents start to cool off. But adding rent control — especially without a major government investment in housing — would likely cause new housing construction to dry up quickly. We can demonize “big developers” and others (at Tuesday’s meeting, a presenter from the Renters Commission claimed that of the economists who oppose rent control, “many are venture capitalists”) but at the end of the day if the housing projects don’t make financial sense, they aren’t going to get built.

Second, regardless of whether Seattle enacts rent control (and whether it ever takes effect), the city needs to make a massive investment in public housing. Sawant has made this point many times, and she is 100% correct. We can have a robust debate about the extent to which the private market will deliver enough housing for people earning the median Seattle income or higher, but there is no rational argument to be made that the market will deliver housing for people with incomes below 80% of the median income; it simply won’t. Meeting that need will require government intervention. It will also require a lot of money, and unfortunately today it doesn’t look like either the federal or state government are likely to help much.

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To summarize, the expert consensus is clear: rent control is bad policy, though that is least visible in places where there is ample housing supply and government commitment to build significant additional amounts of public housing. However, rent control is suicide in places where there is already a shortage of housing.

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If you want to learn more about rent control and its effects, here are some resources:

• A great four-part series from Market Urbanism;
•  a survey research paper summarizing the issues, research, and consensus views of the economics community on rent control;
•  A study of the effects of rent control in San Francisco.

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