Affordable Housing Institute

The astonishing thing about rent control is that economic empirical analysis — in other words, real experience — demonstrates that there is no policy case for it. 

 

“Who are you going to believe, me or your lying eyes?” — Duck Soup

 

Not only is rent control heroin for urban neighborhoods, it benefits some by covertly overcharging others, as this Journal of Housing Research study, with the deceptively modest title Rent Regulations’ Pricing Effect in the Uncontrolled Sector: An Empirical Investigation (link in .pdf), demonstrates:

 

Rent controls, designed to lower the cost of housing for renters, may have the perverse effect of increasing rents for tenants in the unregulated sector. 

 

How much of a surcharge?  Up to $18,000 per apartment on every non-rent-control renter in the same community.   

 

Below I’ll show you how this extraordinary figure is derived.

Methodology.  The authors, Dirk W. Early and Jon T. Phelps,  reach this conclusion not through any armchair exercise, nor through a priori assumptions, but simply by shaking the data and seeing what falls out.   Identifying 49 large metropolitan markets, they obtained data for three clusters of years centered on 1985, 1989, and 1993.  They then identified about 14 major variables expected to have an impact – things like median income, number of households, tax rates, interest rates, and construction costs – then conducted classic statistical regression analysis to find which elements correlated positively with uncontrolled rental rates. 

 

What drives normal market rents?  Only three things.  They then shook the data with classical regression analysis and concluded that in general, rent rates are a function of only three variables:

 

The results suggest that the price of rental housing in the uncontrolled sector is positively and statistically significantly related to [1] mean income, [2] the presence of geography boundary, and [3] construction costs.  Surprisingly, the coefficients measuring the effects of other measures on the cost of supplying housing, namely tax and interest rates, were insignificant under all specifications.  (277)

 

Said more colloquially, rents relate to only three things:

 

1.       How much money people have with which to pay rent.

2.       Whether there is a geographic barrier to developing new housing (e.g. lack of land or adverse zoning) that constrains supply growth.

3.       The cost of building new stock. 

 

Market ‘non-controlled’ rents in rent-control jurisdictions.  Having thus found three principal drivers, they then used this model to predict rents for their sample 49 markets, and then did a paired comparison of cities similar in many respects but differ by the presence or absence of rent control (say, Boston and Anaheim). 

Boston repeals rent control; ten years later, Red Sox win World Series

Coincidence?  I think not!

 

Shaking the data again, they found that Uncontrolled rents are higher in rent control jurisdictions. 

 

The [statistical analytical] estimates imply that, holding all other factors constant [in other words, normalizing out for growth rates, economy, and so on], the existence of rent control increases rents in the uncontrolled sector by more than 13 percent.  (274)  [O]n average, the monthly rent of a typical uncontrolled unit is roughly $85 higher [1996 dollars] because of the existence of rent controls (277).

 

While rent control may hold down the price of controlled apartments, uncontrolled apartments in the same city will have rents 13-15% higher – that is, about $105 per apartment per month (2005 dollars; link in .pdf) – than they would have been if rent control were absent. 

 

In communities with rent control, every renter who does not live in controlled housing pays a $105 monthly surcharge. 

 

Boston repealed rent control; will San Francisco?

 

The fatal problem with price controls, however, is that when an artificially reduced price is imposed, the market will naturally move to adjust the actual amount of supply to reflect the reduced price. In other words, over the long run, setting an artificially low price on a product (in this case, apartments) guarantees that the supply of that product will diminish.  Among other things, when people are unable to move — due to excessively high rents — they tend to stay in one place, that is, to hoard their apartments, effectively removing these units from the market.  (From The Case for Ending Rent Control, Peter Byrne, SF Weekly, August, 2000)

 

Even if this were a straight wealth transfer, it would be dubious, but it’s a highly inefficient wealth transfer: rent control’s presence chokes off new construction and reduces supply:

 

Although new construction is exempt from current rent control laws, a reduction in the supply of rental housing will occur if investors are wary of future controls affecting their units.  Also, if controls reduce landlord maintenance, total housing supply in a market will fall.  (Abstract)

 

Rob from the rich — well, not the rich, just the unlucky — and give it to almost nobody.  Terrific.

 

Damage lingers over time.  But wait, it gets better.  Suppose a community comes to its senses and phases out or repeals rent control.  Surely then the effects swiftly go away?

 

“But, nooooooooo.”

 

Rent control’s harm lasts 20 to 30 years after it stops growing.  Even if rent control applies only to properties constructed before a given year, it will take 20 to 30 years of no further encroachment of rent control before uncontrolled rents will lose the risk premium.  Perhaps not coincidentally, that is long enough for a new generation of developers to come onstage who have no first-hand experience with prior rent control.

 

[T]his effect has diminished through time.…  [The authors estimate 20 to 30 years; their data is incomplete because not enough time has passed.] 

 

If prospective investors in rental housing were hesitant to invest in areas where rent controls existed, they may be equally hesitant to invest shortly after their removal, anticipating the possibility of future ordinances.  It may take many years for investors to believe that future controls are unlikely and stop demanding a risk premium to invest in certain areas.  (277)

 

What does it cost communities after rent control expires?  Taking the authors’ two statistical findings at face value – an $85 per month (1996 dollars) hidden surcharge on uncontrolled residents and a 20-30 year duration of the hidden surcharge – we can thus calculate the aggregate increase in rent burden paid by the uncontrolled market renter residents in rent-controlled jurisdictions.  Adjusting for inflation, $85 in 1996 dollars is about $105 a month in 2005 dollars, or about $1,250 per year in current-cost surcharge for every uncontrolled resident. 

 

Applying that to the midpoint of the authors’ time range – that is, a 25-year duration –yields the following:

 

The total hidden surcharge to all uncontrolled renters in rent-controlled jurisdictions is about $18,000 per apartment in real-dollar terms.  (Calculated using a 5% discount rate, 25 year term, $105 per month today.  It’s probably a bit less in reality, since the premium should diminish over time.)

 

After a smoker stops, it takes his lungs fifteen years to recover.  Rent control takes longer.  It’s more toxic.

 

Do the San Francisco Giants want to win a World Series?

We have a modest proposal …