Politicians are again calling for rent control to bring down housing costs. It’s easy to see the appeal. Rents are high, and a cap looks like a cheap and direct fix. But economists and housing researchers have studied rent control for decades, and the evidence keeps finding that it backfires. We asked three professors whose research tackles these questions to explain what the data shows.
Michael Manville: Rent control is clear, simple, and wrong.
“For every complex problem,” H.L. Mencken once wrote, “there is a solution that is clear, simple and wrong.” He wasn’t writing about rent control, but he could have been. Rent control’s premise is indeed clear and simple: If rents are high or climbing, cities can pass laws that keep them down. And rent control’s appeal is understandable. There are other ways to address rising rents—allow more housing development, use tax dollars to assist low-income tenants—but these are expensive and often unpopular. Rent control, in contrast, looks cheap and easy. It can occur with the stroke of a pen.
So why is it wrong? The textbook argument is that rent control is a price ceiling, and price ceilings have unintended consequences. They create shortages, reduce quality, misallocate goods, and encourage black markets. Newer rent control laws do try to minimize these problems. They may exempt new construction, allow prices to rise by some set amount each year, and in many cases allow “vacancy decontrol”—when a unit turns over, the price can float to market rate before coming back under control when a new tenant moves in.
These adjustments ameliorate some of rent control’s problems but exacerbate others. Take vacancy decontrol. This provision, by allowing rents to rise when someone moves out, can encourage landlords to maintain their units and stay in the market, thereby reducing rent control’s adverse impacts on supply and quality. But vacancy decontrol also turns some of the housing market’s basic incentives upside down. Under vacancy decontrol, landlords don’t want reliable long-term tenants. They want turnover, because turnover lets them raise the rent. This will lead some of them to behave badly.
Tenants, meanwhile, won’t want to move, because they save more if they stay longer, and the longer they stay, the more painful moving will be. But not all tenants can stay long. Lower-income people move frequently, so in a vacancy decontrol regime, they often benefit less. Low-income people may also be more vulnerable if landlords, in their quest for turnover, resort to illegal tactics to force tenants out.
Of course, some tenants do stay a long time, and they get cheap rent as a result. But those tenants may not be poor. With vacancy decontrol, cheap rent is tied to duration, not deprivation. Staying, moreover, can come with social costs. Controlled rent might lead people to endure lousy roommates or long commutes, or to remain in units that have become too big or too small, and that other people might value more. And a few tenants will move out but illegally sublet the unit—they’ll keep paying the controlled rate, charge others the market rate, and pocket the difference. In these cases rent control, intended to help tenants, has actually created more landlords.
In principle, cities could prevent some of these outcomes by pouring resources into enforcement, rooting out bad behavior, and getting rent control closer to right. But even if this worked—no sure thing—we could no longer say that rent control is cheap and easy.
Rent control’s fundamental problem is that it attacks a symptom and not an illness. Prices are information, and rising prices are a sign that supply isn’t keeping pace with demand. High rents are an alarm telling a city that it has a housing shortage—the illness causing the symptom. Just as shutting off an alarm doesn’t put out a fire, regulating a rent doesn’t end a housing shortage. Rent control lets cities pretend that a cheap and easy solution is available, when in reality the path to affordability is hard. Building new housing is often unpopular, but without enough new housing some tenants will suffer.
Sanford Ikeda: Nine Negative Consequences of Rent Control
Market prices solve a vital social problem: How to successfully coordinate the plans of countless strangers for mutual gain.
When market prices can freely adjust to changes on the demand and supply sides of a market, such as for housing, they tend to reflect the level of scarcity of that good and, at the same time, they provide incentives to adjust plans in the appropriate way.
For instance, if at current prices there are more rental units on the market than renters want—i.e., a surplus—in a free market, competition among suppliers would tend to lower rents. This will encourage more renters into the market and fewer units, thereby shrinking the housing surplus.
The opposite is the case if there are fewer units on the market than renters want at current prices—i.e. a housing shortage. In a free market, competing renters would tend to push rents upward, encouraging fewer renters and more units in the market, thereby shrinking the shortage.
In an imperfect world, even flexible prices will never completely remove surpluses and shortages. But a free-market price system tends to minimize such problems.
Now, rich and poor alike will find some housing “unaffordable,” if there are other things they would like to spend their incomes on, such as education, travel, or health care. In a world of scarcity, everyone faces tradeoffs and must therefore choose among competing ends. Is it possible to eliminate such scarcity through political means, by setting a legal ceiling on housing prices and penalizing any buyer or seller who violates it?
It is not, and, if attempted, serious negative consequences will follow.
First and foremost, because it hampers the price adjustments described above, a mandated price ceiling turns temporary plan discoordination into a chronic shortage. Crucially, rental prices no longer serve as reliable signals of scarcity or incentives for proper adjustment.
Second, while those lucky enough to find housing at the controlled price do benefit, there will be many willing to be a tenant but unable to find housing at that price, and their number will grow along with the gap between the price ceiling and what the actual market rents would have been.
Third, those who manage to get housing will more likely cling to it than move when the opportunity arises, which reduces the chances for others to find desirable housing.
Fourth, long-term solutions to high prices, such as building more units or converting existing spaces to meet demand, are harder to achieve because below-market prices discourage suppliers from doing so.
Fifth, the artificially low rents lower the cost to suppliers of discrimination by increasing the pool of those willing to pay the lower price, while reducing the loss they might suffer from turning away qualified buyers they find personally less desirable.
Sixth, it encourages lawbreaking on the part of buyers and sellers, who will have a stronger incentive to circumvent the price ceiling by illegitimate means, such as bribery.
Seventh, legally restricting supply does nothing to reduce homelessness and may exacerbate it.
Eighth, rent regulation reinforces the belief that political mandates can and should replace voluntary, market-based alternatives for housing which, like food, is a vital part of our lives.
Ninth, where rent ceilings are most prevalent the housing stock tends to deteriorate, along with their neighborhoods, as landlords skimp on maintenance and eschew improvements to keep their costs below the ceiling. As a result, relations between tenant and landlord often turn openly hostile.
These are some of the likely consequences of interfering with price adjustment, which grow as rent regulation grows. Indeed, they are the tip of the iceberg, because those consequences typically provoke further interventions, each generating their own negative consequences.
Vincent Geloso: Rent Control Protects Incumbents and Harms Mobility.
Policies such as rent controls, non-market housing, and tighter zoning restrictions are becoming increasingly popular as solutions to the housing affordability crisis. Popular enough that in major North American and European cities, including Berlin, Montreal, and New York, candidates running on such policies are viable, or have won.
The popularity of such policies is puzzling given that the literature is pretty consistently cool towards them. In an “almost complete” review of the entire literature of rent controls in the Journal of Housing Economics, most studies are found to confirm that rent control reduces rents for controlled units. However, they also uniformly find that rent control reduces mobility, reduces construction of new units, reduces housing quality, increases rents for uncontrolled units, and reduces the supply of rentals. In fact, the most stunning part of that review is how uniform the results are. For example, 14 out of 17 studies find higher uncontrolled rents.
Zoning restrictions follow the same pattern of a quasi-consensus against: they lead to more expensive housing in cities, all else being equal, and they offer few of the benefits proponents tie to them, most notably tied to environmental outcomes . We also know that other policies are far more effective.
On non-market housing—the fancy new term for public housing—the research is thinner, with recurrent mentions of Vienna’s public housing schemes. What research exists gives little room for enthusiasm. The history of subsidized housing in the United States has been a long litany of failed projects that have now been forgotten except by historians, some of whom, like Howard Husock, are serious about not forgetting the past. Second, recent reviews of the literature looking at a wide array of socio-economic outcomes—social interaction, safety, employment, amenities—find highly mixed results that very often cannot be fully attributed to public housing redevelopments. Nothing to warrant enthusiasm.
So why are such policies popular right now? Two answers emerge.
First, they are often the results of earlier government failures. One particularly important point regarding low-cost housing is that, very often, the demand for public housing soared following government efforts to regulate portions of the housing market on the poor side of town. While the “poor side of town” did have lower-quality housing, much of it was the product of a filtering process whereby formerly higher-quality housing gradually depreciated, became less desirable, and thus became affordable to poorer households. By being inexpensive, this housing offered a low-cost entry into urban markets, which generally offered greater opportunities for income mobility than non-urban areas. This allowed families to save more, access better-paying city jobs, and move up the income ladder. Regulations meant to deal with the problems of the “poor side of town” ended up eliminating inexpensive private housing—without replacing its economic functions. From there, the demand for public housing rose.
The second answer is tied to wider economic events. A recent article in Cliometrica finds that rent controls were rarely introduced in response to housing supply shocks, but rather to sudden increases in housing demand, sometimes associated with the concentration of stigmatized populations. But increasing demand for urban housing can also reflect better economic opportunities in cities, including higher wages. In other words, rent controls may simply be a policy designed to protect incumbent urban workers from newcomers and preserve the economic rents they enjoy from living in cities. This makes the pro-rent-control movement into a force for social exclusion, under the guise of blaming the landlords. But just as with the case of the regulations that outlaw housing on the poor side of town, rent control ends up reducing upward mobility.
Image: Via Wikimedia Commons, uploaded by Ser Amantio di Nicolao. Originally posted to Flickr by Seattle City Council at https://flickr.com/photos/47354378@N05/48800400492 (archive). Used with permission under the Creative Commons Attribution 2.0 Generic license.
