Rent Control Is Fashionable Again. It’s Still a Bad Idea.

After losing their financing partner, another housing project in St. Paul is now on the sand.

The Monday Special will be held at St. Paul Pioneer Press reportedAlatus was forced to cancel its promise of $23M investment in a 304-unit development in Frogtown by an equity partner. Two other investors who had proposed preliminary financing terms for the project—in which half the units would be rented out at below-market rates—have also walked away.

Why? Alatus principals claim that St. Paul’s recently passed rent control ordinance is making it difficult for investors to do business in the city.

The United States is seeing a revival in rent control. This limits how much landlords can raise rents over a year.

This policy, once a military measure, has been criticized by economists for decades.

The argument was almost universal that landlords were discouraged from maintaining existing properties and developers are deterred from building new ones. This leads to less housing and less maintenance.

Rent ceilings don’t do anything to ease this [housing] shortage,” wrote economists Milton Friedman and George Stigler in a now-famous pamphlet for the Foundation for Economic Education in 1946 in response to San Francisco politicians considering extending wartime rent caps. In fact, they’re more likely to keep it going: The implications of renting ceilings for new construction have dire consequences.

Friedman and Stigler are right to warn St. Paul. Since St. Paul residents approved a rent-control ordinance, which caps rent increases at 3% per annum with very few exceptions, the Alatus Project is the latest project that has been put on hold.

St. Paul is not the only place to have adopted rent control over recent years.

Tendencies are seeing an increase in rents. This brings with it all the problems of displacement and unaffordability. More jurisdictions believe they can abolish or even reform supply-and-demand law.

Oregon’s 2019 first ever statewide rent control legislation was passed. It limits annual rent increases at 7 percent plus inflation. California followed suit a few months later with a 5-percent-plus-inflation rent control cap.

In that same year, New York State legislators expanded coverage of the existing rent control policies in New York City and gave permission to other states to pass their rent control laws.

Why is there a rising tide in rent control?

It’s a near-universal consensus—held in common by progressive policy wonks, radical free marketeers, and the three most recent presidential administrations—that America’s highest-cost cities are so unaffordable because government zoning regulations prevent enough new housing from being built.

Why is it that politicians, pundits, and wonks are suddenly supporting a policy long criticized for further decreasing the housing supply?

Arguments for rent control essentially boil down to creating short-term stability in renters’ lives. The cities will have more time to fix their urgent supply issues.

Vox policy reporter Jerusalem Demsas made a thorough, representative argument along these lines in an article published last week.

Demsas quickly identifies high housing costs due to the “bevy” of regulations that cities and states have regarding how large and what type of homes are allowed to be built. These rules prohibit or make it unprofitable for small, single-family, multi-family, and densely populated areas.

According to her, rent control is not going to fix the shortage of housing or the high prices and rents it creates. It’s impossible to do so.

Demsas suggests that “rent control shouldn’t be understood as a way to prevent displacement.” Rent control should be understood as an effective way to prevent tenants being forced from their homes. As part of America’s long-term housing crisis solution project.”

She argues, in particular, that rent control is essential to protect low income renters of color from being forced into other neighborhoods or, in extreme cases, to the streets.

By limiting the rent that can rise in one year, people are protected from unaffordable and sudden increases in living costs. This prevents them from becoming homeless.

Demsas refers to a groundbreaking 2019 Stanford economics study, Tim McQuade (economist), and Franklin Qian as evidence that rent control can stop displacement.

This study looked at the 1994 San Francisco ballot initiative which extended preexisting rent control to four-unit apartment buildings built prior to 1980 but exempted apartments with four units constructed after 1980.

This created a sort of natural experiment about the effects rent control has on people.

The Stanford study concluded that tenants living in the older, rent-controlled buildings were 10–20 percent more likely to stay at their same address than people living in newer, unregulated buildings. Also, the study concluded that there was a 15 percent drop in availability of rentals among units affected by rent control.

Rent control policies have to make clear choices between stabilizing existing tenants and expanding the rental housing stock for potential tenants. According to some politicians, the goal should be to achieve the best balance between them.

Demsas writes, “The issue is the policy design.” “There, “The devil is always in the details.”

Her advocacy for rent control, which excludes new construction and allows modest increases linked to inflation, is particularly important. It also allows landlords to increase rents on empty units, a policy known as vacancy decontrol.

San Francisco is a great example of how this balance can be achieved in real life.

According to the Stanford study, the rent stabilization ordinance in San Francisco, which has been in effect since 1979 and was examined by Demsas, includes all of the following features: Post-1979 constructions are exempted from price controls; landlords have the right to raise rents at the lower of 60% of the yearly inflation rate or 7 percent. There’s also vacancy control.

This rule covers 40 percent of San Francisco’s housing stock. A further 9 percent are deed restricted affordable housing. This means that rents cannot consume more than 30% of the tenants’ pretax earnings.

This leaves just 16 percent housing stock where rents reflect the fluctuations of the market. That was, at most, the case before January 2020, when California’s new statewide rent control laws took effect.

San Francisco is the result. It’s synonymous with housing instability and affordability. This makes the city very expensive for newcomers. The city ranks first in America for displacement and gentrification, despite the fact that it has a great deal of rent control.

Demsas is an advocate for zoning reform and supply-sider. He argues that San Francisco is unaffordable because they have not yet seriously reformed their zoning codes, or the labyrinthine process of approving new housing.

This is true but conceptually it can be confusing. No matter how strict or loose the zoning code, rent control will always discourage housing construction. Removing zoning restrictions can result in more housing. Rent control will be more relevant and obvious because of its supply-limiting effects.

A marathon runner is running with a sore ankle and is being held to a boulder. You could say the boulder prevents her from running. But even with the boulder gone, her injured ankle still will be an issue.

Similar to the above, single-family-only zoneing does not allow a developer to convert a large home into an apartment complex of four apartments. However, legalizing the construction of four-unit apartments on that parcel, while subjecting them to rent control, may not result in any building. All the zoning reform went sour.

Rent control also could disincentivize renters—who should be natural proponents of new housing construction—from supporting zoning reforms.

You are less likely to back new market-rate construction if rent stabilization is being enforced by government price controls. It would do more of the exact same. It would add more noise to construction, traffic and shadows, at worst.

Rent-controlled tenants are motivated to resist any rezoning because it could make their rental units a potential candidate for redevelopment. These tenants are at high risk of losing their below-market rents.

San Francisco provides another great example. The city has a lot of rent control, but that doesn’t stop it from being anti-development. There is even a tenant rights movement, which is vocally opposed to the construction of new apartment buildings at market rates, even though the only thing they would be replacing are a parking garage or laundromat.

We can still see cases outside the U.S. of rent control that does not result in zoning reforms but more state-controlled housing policy.

Germany’s federal government enforces a moderate form of rent control. It prohibits landlords in Germany from charging rents that exceed 10 percent of their market rents. Berlin adopted rent control laws that required landlords to pay lower nominal rents for some cases, however. The city’s Rent Control Law was invalidated by the Federal Court. Voters responded with a referendum that calls for the expropriation 15 percent of city’s housing stock.

Former Swedish Prime Minister Stefan Lofven’s recent attempts to modestly reform rent control in the country—which is causing a massive housing shortage—by exempting new private construction nearly toppled his government.

Demsas believes that rent-controlled tenants might be more open to zoning reform if their immediate fear of being displaced has been resolved. However, the study that Demsas cites for evidence only surveyed approximately 60 tenants in rent-controlled buildings about their opinions regarding “not within my backyard” policies. According to the authors, it was statistically too noisy for them to make any meaningful conclusions regarding their views as compared with tenants who live in non-rent-controlled properties.

Rent control may not be the solution to housing affordability problems and displacement. It’s zoning reform and federalism if it fails.

The cost of renting a home is almost always lower when new units are built, even though they may be very costly. The “moving chain” magic works to address both affordability and displacement.

A new apartment is often called a “luxury”. This happens because all new construction in high-cost housing has to be high-quality. The middle-income individual who takes over the vacant home leaves behind an older unit which can be rented to a third person with a lower income.

This “moving chain”, if you follow it back enough, will soon reveal that every new luxury unit is releasing lots of housing stock in low-cost and lower-income areas of the city. This presumably causes prices to drop and displacement to decrease.

It might seem a little strange, but it is true. There is increasing empirical evidence that suggests these “moving chain” benefits are quite tangible for people with low incomes.

A paper by Finnish researchers on moving chains in Helsinki was published August 20, 2121. It found that, for every 100 market-rate apartments in Helsinki’s center, there are “29 units created via vacancy in low-income zip codes.” The 60 units were then created in lower-income zip codes.

The researchers concluded that “When market-rate units are occupied by households with high incomes, it also benefits middle- and lower-income households via a moving chain mechanism.”

Evan Mast’s research on luxury apartment construction in 12 American Cities has shown that there are more options available for lower and upper-income areas when they have newer, higher-priced units.

A short-term solution to affordability can be found in new housing stock displacement. These benefits can only be realized if policymakers get rid of their zoning regulations.

Are policy makers willing to do this? It is unlikely that policy makers will do so in many of the most expensive cities.

California and other states are making real gains in removing restrictions from new housing supply. The positive reforms the state is passing are nevertheless relatively marginal ones—a duplex legalization bill here, a streamlining of environmental review there.

To realize the short-term, widespread benefits of increased supply, bolder reforms are needed. This is unfortunately not possible in places where supply is most needed.

We are not dependent entirely on the New York City and San Francisco City policy makers to implement policies that make housing affordable in the immediate future.

The best thing about living in a country such as the U.S. with its federalism, regional policies cultures and symbiotic relationship to the U.S. is the abundance of housing options that are relatively affordable, even for low-income individuals.

Renters being priced out of their homes by restrictive zoning codes in New York City, Los Angeles, and San Francisco do have the option to move to growing, cheap cities like Houston, Phoenix, and Las Vegas—where both jobs and new housing are plentiful. Every day, more people choose this route.

Does it seem fair that San Francisco’s zoning laws require renters to relocate to Texas in order to obtain affordable housing? Not really.

However, relying solely on rent control to maintain that renter within the same house comes at the expense if there is no new housing supply. That in turn causes rents to rise for all residents of the city. This doesn’t seem fair to me either.

Even worse is that rent control allows for a whole new elite class of tenants to be protected from the types of supply-increasing, zoning reforms which would increase the affordability of cities in the short and the long terms.

Many people are now embracing rent control and ignoring the affordability issues in America’s most expensive cities. Still, I am concerned.