New laws in California and Oregon show that rental regulations are gaining traction as a solution to rising housing costs. But economists aren’t all convinced the rules will work as intended.

First, it was Oregon, which passed an unprecedented state-wide rent control law in February.

Then it was New York, where in June lawmakers approved a bill that strengthened a number of protections for tenants, including limits on rent hikes.

And then California jumped on board, approving its own state-wide rent control bill in October.

As 2019 draws to a close, it’s safe to say it turned out to be a watershed year for rent control. Undoubtedly, that’s good news for millions of renters in the states with new or newly strengthened rent control laws; at a time of stagnating wages, the specter of being priced out of a home has now diminished for many people.

But even as renters themselves have welcomed new rent control regulations, some economists have pumped the brakes. In their view, rent control may offer short-term benefits but also comes with a number of unintended long-term side effects. Ironically, some experts have argued that, thanks to supply and demand dynamics, those side effects actually include less affordable housing and an overall more costly rental landscape. Rent control, in other words, can backfire and make worse the very problems it aims to solve.

The issue is hotly debated and its unlikely the advocates and skeptics of rent control will see eye to eye any time soon. But in the meantime, the debate itself highlights the fact that anyone interested in affordable housing may want to temper their celebrations over 2019’s new rent control laws.

What’s driving the push for more rent control?

Christopher Palmer

Christopher Palmer, an MIT professor of finance, told Inman that the wave of new interest in rent control has been fueled by greater numbers of people being squeezed by their housing costs.

“The appeal of rent control has been driven by years of rent increasing faster than incomes, leading to an affordability crunch,” he said.

A 2019 report from Harvard highlights just how tough the rental landscape has become. The report reveals that in recent years rising housing costs have outpaced income growth, that 37.8 million households are “cost-burdened” (meaning they spend 30 percent or more of their income on housing), and that the number of affordable rentals is actually shrinking.

Credit: Harvard

Harvard also found that rents are rising faster than inflation and that there is unlikely to be a “significant softening of rental markets.”

Renters, the report ultimately found, are “still pinched.”

What are the arguments in favor of rent control?

The recent push for rent control has been driven by coalitions of tenants rights groups, lawmakers and housing advocates who argue that regulation is a fast and effective way to help people in the here and now deal with rising housing costs.

Among them, Stephen Barton, the former director of the housing department in Berkeley, California, has argued in favor of rent control in places where the market simply won’t deliver.

“Rent control can provide tenants with stability and fair rents in cities where the rental housing market is unable to stabilize rents on its own,” Barton wrote in a report earlier this year. “It can protect millions of tenants very quickly and at low cost, with its administration paid for by fees charged to the landlords benefitting from increased rents.”

J. W. Mason, an economics professor at The City University of New York, has also argued that rent control can help foster economically diverse neighborhoods, and that the point and result of the regulation “is to preserve the supply of affordable housing.”

“But it also recognizes the legitimate interest of long-term tenants in remaining in their homes,” Mason added on his website. “A rented house or apartment is still a family’s home, which they have a reasonable expectation of remaining in on terms similar to those they have enjoyed in the past.”

Though several tenants rights organizations did not respond to Inman’s request for comment for this story, one recurring theme in the push for greater regulation is that rent control is about looking beyond housing’s role as a commodity and identifying its various social functions.

Many economists, including Palmer, also see rent control as a kind of “insurance” policy for people in the units where it applies. In other words, for the people who actually get a rent-controlled unit there is a level of certainty regarding future housing costs.

So what’s the problem with rent control?

One of the most common arguments against rent control is that by limiting rents, and thus profits, developers will be less likely to build more units. That means a supply shortage, which in the face of growing demand can actually make affordability issues worse.

The National Association of Realtors made this argument in a statement on the issue to Inman, saying that it is “concerned that the expansion of rent control laws across the country will worsen our nation’s affordable housing crisis by discouraging investment and reducing supply.”

Conversely, NAR advocated for a supply-and-demand solution.

“NAR maintains our belief that America must face its housing shortage head-on by building more affordable homes needed to accommodate the nation’s rising population,” the organization said in a statement.

The California Association of Realtors also argued this summer that its state’s rent control law would “not incentivize production of rental housing or help more people find an affordable place to live.”

“It discourages new rental housing, which is why CAR, representing more than 200,000 real estate agents and brokers across California, strongly opposes it,” the trade group said in a statement.

A related issue, according to Palmer, is that rent control also makes the people who do find a unit “much less likely to leave that apartment,” further limiting the supply of housing for everyone else.

“And because fewer apartments are turning over and fewer landlords want to rent out their apartments at below-market rates, it becomes harder to find even a non-rent-controlled apartment, and that puts upward price pressure on rents,” Palmer told Inman.

He also said that landlords might respond to the prospect of less flexibility when it comes to rent increases, and thus may choose to set initial rents higher in a market that has rent control.

Other economists have similarly raised concerns about the efficacy of rent control. In a report for the Brookings Institute last year, Stanford economist Rebecca Diamond found that rent control can help current tenants in the short-term, but over the long-term, “decreases affordability, fuels gentrification and creates negative spillovers on the surrounding neighborhood.”

Diamond also echoed Palmer’s point that people may be unwilling to move out of rent-controlled units — even when their housing needs change.

Rebecca Diamond

“This misallocation can lead to empty-nest households living in family-sized apartments and young families crammed into small studios, clearly an inefficient allocation,” she wrote.

Diamond also co-authored a 2017 study with two other Stanford professors that came to a similar conclusion and tied rent control policies to higher costs for tenants and a smaller supply of units.

In both the 2017 study and the report for Brookings, Diamond ultimately concluded that a government housing assistance or tax credit could be more effective than regulation on what landlords can charge for rent.

Disagreements will continue — and so will rent control

Not everyone agrees with those economists’ conclusions.

In his report, Barton dismisses analysis from economists who find rent control lacking as “simplistic,” and saying that such arguments ignore “important non-monetary human values.”

Mason has additionally argued that when looking at rent control, the “simple supply-and-demand model is inapplicable.”

“These arguments misunderstand the goal of rent regulation,” Mason wrote, adding later that “Just as we have a legal principle that people cannot be arbitrarily deprived of their property, and just as many local governments put limits on how rapidly property taxes can increase, a goal of rent control is to give people similar protection from being forced out of their homes by rent increases.”

Ultimately, it’s unlikely the two sides will arrive at a consensus any time soon and that makes it difficult to arrive at a simple answer when asking if rental regulations work. Does rent control help some people in some situations? Definitely. Does it also potentially have detrimental long-term consequences? Well, a lot of economists seem to think so.

Credit: Harvard

Either way, though, the conditions that are fueling an interest in rent control don’t appear to be dissipating. Harvard’s report on housing found, for example, that household formation rates have fallen across the country, and especially in high-cost metro areas. The report links that trend to high rents.

The report also found growing income inequality, increased concentration of poverty, and that “low vacancy rates have kept the pressure on rents.” In other words, the conditions that are pinching renters and driving interest in rent control remain in place.

“Going forward,” the report also concludes, “demographic trends should support strong rental demand.”

Email Jim Dalrymple II

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