Rent Control: Good Intentions Gone Wild?

Rent control is a government-enforced price control measure that uses taxpayer dollars to create laws limiting the amount of rent that owners may charge in market rental housing.Also known by the more politically correct terms as ‘rent regulation’ or ‘rent stabilization’, rent control fell out of favor in the 1970s and 1980s. Over the last few years rent control initiatives and laws have been resurfacing from coast to coast as housing costs and rents throughout the country are skyrocketing.

Why rent control, why now?

A recent report by the Harvard Joint Center for Housing Studies found that nearly 50% of renters spend at least 30% of their income on housing, fitting the federal definition of “cost burdened”.

According to Harvard’s research, the percentage of renters earning between $30,000 and $45,000 who are cost burdened reached about 50% in 2016. For those earning between $45,000 and $75,000, the share of cost burdened renters increased to 23%. According to the most recent 2016 figures from the Census Bureau, the median household income in the U.S. is $59,039.

How rent control policies work

Rent control policies vary by state, and sometimes even by city within the same state. Not all areas in the U.S. have rent control. For those that do, laws can be very different.

In general, rent control laws seek to do some or all of the following:

  • Set a cap on rent increases: how much rent can be increased when a lease is renewed, usually based on the local cost of living or inflation.
  • Set a cap on rent: in buildings in New York City where rent is controlled, rent for a one-bedroom apartment is capped at $700 per month.
  • Regulates frequency of rent increase: laws dictate how often rent can be increased.
  • Limit reasons for eviction: non-payment of rent or significant damage to the property.

States that prohibit rent control

The map below is from the National Multifamily Housing Council (NMHC) and illustrates how rent control regulation varies from state to state:

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Oregon: a posterchild for mandatory statewide rent control

In May of this year, Oregon became the first state to implement a statewide mandatory rent control policy. The new law limits landlords to once-per-year rent increases that cannot exceed 7%, plus the change in the consumer price index.

The law also prohibits landlords from serving a no-cause eviction after the tenant’s first year of occupancy. If they want to evict a tenant without cause prior to that, landlords are required to give a three month notice and pay the tenant one month of rent.

The Oregon law went into effect immediately, with the Legislature saying the state’s housing crisis justified passing the bill as an emergency measure. New York has statewide rent control, but cities are allowed to opt-out. California has rent control laws but restricts the ability of cities to impose them.

Unintended consequences of rent control

Earlier this year, a study by the Stanford Graduate School of Business found that rent control laws benefit longtime renters who stay put. However, new renters end up paying higher rents when the supply of available housing units is constricted.

The Stanford study also found that rental real estate investors respond predictably to rent control. Owners are more likely to convert units into condos, or significantly redevelop buildings to circumvent regulations. (Rent control laws often regulate rents in older buildings, while allowing new property to rent at market.)

The unintended consequences? Rent control drives up rental housing costs while at the same time reducing the amount of rental housing stock. That’s exactly the opposite result of what well intentioned rent controls regulations seek to create.

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