APPENDIX II – REVIEW OF LITERATURE ON THE IMPACT OF RENT CONTROL ON HOUSING QUALITY AND QUANTITY, DISPLACEMENT, AND INCLUSION
Evidence suggests that rent control measures can have various impacts on a city’s housing stock and affordability, which are in turn related to the type and extent of the city’s rent control policies. Broadly speaking, researchers have found that while rent control measures keep rents from rising as quickly as they would otherwise for the affected units, they also reduce the quantity and quality of available housing stock over time,[1] as some landlords respond to lower revenues by selling or converting rental buildings to condominiums, declining to rent units that require extensive maintenance, or expending fewer resources on rent-controlled buildings through maintenance or renovations.
Do rent control policies reduce the housing stock?
One criticism of rent control policies is that they shrink the supply of rental units by making developers less inclined to build new housing, even when new buildings are not subject to existing regulation. The possibility of future profit-curbing legislation, then, makes building new residences far less appealing to developers. Several studies show that the impact of rent control laws is greatest on the rent-controlled stock itself, as rent control incentivizes landlords to convert their rental apartment buildings to condominiums to escape the impacts of the law. In San Francisco, rent-controlled buildings were 10 percent more likely to be turned into condos than comparable non-controlled buildings,[2] while New York City has lost 152,000 units of rent-stabilized housing since 1993.[3] In New Jersey, rent-controlled cities have about 25 percent fewer rental units than do non-controlled municipalities.[4]
However, other studies have also shown rapid growth in housing during times of especially restrictive rent control, such as New York’s construction boom during the periods of the federal housing price controls during and after World War I and World War II. Other evidence focuses on “relative growth,” such as what is presented in a 1980 study on New Jersey. [5] By comparing the rate of construction between 1970 and 1972 (pre-rent control) and 1975 and 1977 (post-implementation of rent control ordinances), the authors find that while apartment construction fell by 52 percent in New Jersey cities which had implemented rent control policies, construction fell by 88 percent in cities that had not.[6] Other studies suggest that rent control does not have a measurable effect on supply: a 2007 study on rent decontrols in Boston found that decontrolling rents (in 1985, 1989, 1993, and 1998) had “little effect on the construction of new housing.”[7],[8]
Do rent control laws reduce the quality of the housing stock?
When rents are restricted, landlords may pull back on maintenance,[9] or simply stop renting deteriorating units that are in disrepair.[10] In New Jersey, for example, rent-controlled housing units are more likely to have consistent plumbing problems.[11] The evidence for deteriorating quality is weaker in jurisdictions where the rent control laws allow for price increases, as opposed to immovable price ceilings.[12] Others show that when rent control laws result in less maintenance and capital investments by landlords, the tenants sometimes invest in improvement and maintenance costs themselves.[13]
Do rent control laws reduce housing values?
Rent control, by design, limits operating incomes, which, in turn, depresses the values of apartment buildings under rent control. For example, when New York City adopted its universal rent control laws, the sales prices for multi-family buildings impacted by the change have reportedly declined by over 17 percent.[14] But recent evidence suggests the impacts could extend further and depress values for entire neighborhoods, not just the rent-controlled stock.
Between 1970 and 1994, all rental units in Cambridge built prior to 1969 were subject to strict caps on rent increases and restrictions on the removal of units from the rental stock. In 1994, a state-wide referendum removed the rent control ordinance, enabling landlords to begin to charge market rents.[15],[16] The elimination of rent control raised the market values of both decontrolled and never-controlled properties in Cambridge. Researchers’ estimates suggest that during the rent control era, rent-controlled properties were valued at a discount of about 45 to 50 percent relative to never-controlled properties with comparable characteristics in the same neighborhoods. Further, values across all properties increased, especially those in the same neighborhood as the rent-controlled buildings. Overall, removal of rent control increased values by $2 billion between 1994 and 2004. Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly rent-controlled units, while $1.7 billion is due to the indirect effect. That is, more than half of the capitalized cost of rent control was borne by owners of never-controlled properties.
Do rent control laws reduce displacement?
When combined with strong anti-eviction rules, rent control can increase the duration of renters’ tenure, and thereby help reduce displacement. Tenants in rent-controlled housing have a greater incentive to stay where they are, especially if their monthly rent is significantly lower than market rate. The secondary benefit from this impact on tenure in gentrifying neighborhoods can help existing residents remain during times of change, or even increase inclusion.
Some evidence does support the idea that rent control does help increase tenancy duration and help reduce displacement. In San Francisco, for example, tenants who live in rent-controlled buildings are between 10 and 20 percent less likely to move than residents renting at the market rate.[17] Similar effects were observed in Santa Monica and New York.[18]
However, the same research also shows that while tenancy can increase for some tenants, displacement (and economic segregation) can increase if landlords take their units out of the rental market. In the Bay Area, landlords are legally allowed to offer their tenants monetary compensation for leaving, so they can lease the unit at a higher rate. In practice, these transfer payments from landlords are common and can be quite large. But importantly, when rents by law are restricted, landlords can still evict tenants, by either moving into the property themselves, or by taking their buildings out of the rental market and converting them to condominiums. A recent study, which utilizes a quasi-experimental variation in the assignment of rent control in San Francisco, shows that this effect could be so large that the number of low-income renters that are displaced could be much larger than the number of those who stay in place longer.[19]
San Francisco’s rent control ordinance was enacted in 1979, in the form of regulated rent increases linked to the CPI. The ordinance exempted smaller multi-family units (with fewer than five units), similar to D.C.’s rent control laws. A 1994 ballot initiative lifted this exemption, adding small multi-family buildings constructed before 1979 to the rent-controlled stock. This created differential treatment of small buildings built prior to or post 1980, allowing for a policy experiment. The study uses panel data with address-level migration decisions and housing characteristics and compares the migration decisions of renters who lived in small buildings built before 1980 to those who lived in small buildings built between 1980 and 1990. The authors find that between five and ten years after the law change, the tenants in newly rent-controlled buildings were 19 percent less likely to have moved to a new address. These effects of limited mobility are stronger among older households and households with longer tenancy at the same address (prior to the law change). These effects are also somewhat higher for racial minorities.
Thus, the newly imposed rent-control on smaller buildings did help counter displacement, but other, less desirable impacts also followed. Landlords have several means of removing their units from the rent-controlled stock: they can move into the units themselves, convert their buildings into cooperatives, or simply pay tenants to move away. These payments are frequent and can be quite large. The study found that rent-controlled buildings were 8 percentage points more likely to convert to a condo than buildings constructed after 1980 (and thus not subject to rent control). Following these conversions, small buildings built before 1980 showed a 15 percent decline in the number of renters compared to buildings built after 1980. Furthermore, the number of tenants declined by 25 percent in these buildings compared to before the imposition of rent control.
The decline in the number of tenants in the newly rent-controlled units suggests that units were taken out of the rental stock, thus increasing rents and increasing housing costs. Shifting units out of the rental stock into (typically more expensive) condominiums likely increased the pace of displacement and increased income inequalities—exactly the opposite of what rent control was intended to do. The presence of restricted land use (and discriminatory) practices can magnify this negative feedback. There are hints of this in the District of Columbia’s housing market, which remains highly segregated.[20] Similarly, in San Francisco, five neighborhoods host 60 percent of the entire city’s affordable housing stock.[21]
Another way of thinking about the ability of rent control laws to create inclusive neighborhoods is to consider whether they can mix high- and low-income renters in the same buildings or in the same neighborhoods by offering lower rents to lower-income households. Because rent-control lacks income targeting, it does not automatically translate into lower housing burdens for lower-income households. In California, for example, the presence of rent control did decrease the number of housing-burdened middle-income families (those earning between $35,000 and $75,000 a year) but had no significant effect on the number of lower-income families who were rent-burdened. Importantly, evidence suggests that a significant number of high-income residents reap the benefits of rent control. For example, as of 2013, 57.3 percent of rent-controlled units in California were rented by middle- and high-income renters. In fact, low-income renters (57.1 percent of whom did not live in rent-controlled housing) were more likely to live in a property built before 1980—the cutoff date for rent control in the state—if it was in a city not subject to rent control policies.[22] Similarly, wealthy professionals occupied the bulk of rent-controlled units in Cambridge.[23]
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Notes
[1] Martin Micheli and Torsten Schmidt, “Welfare Effects of Rent Control — A Comparison of Redistributive Policies,” Economic Modelling 48 (August 1, 2015): 237–47.
[2] Rebecca Diamond, Tim Mcquade, and Franklin Qian, “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” 2019.
[3] Kim Barker, “Behind New York’s Housing Crisis: Weakened Laws and Fragmented Regulation,” The New York Times, 2018.
[4] Joshua D. Ambrosius et al., “Forty Years of Rent Control: Reexamining New Jersey’s Moderate Local Policies after the Great Recession,” Cities 49 (December 1, 2015): 121–33.
[5]John I. Gilderbloom and Lin Ye, “Thirty Years of Rent Control: A Survey of New Jersey Cities,” Journal of Urban Affairs 29, no. 2 (May 2, 2007): 207–20.
[6] Cited in Jake Blumgart, “In Defense of Rent Control,” (Pacific Standard, 2017). Also see “Local Rent Control Initiative: Proposition 10 Analysis,” LURN Network. October 2018.
[7] David P. Sims, “Out of Control: What Can We Learn from the End of Massachusetts Rent Control?,” Journal of Urban Economics 61, no. 1 (January 1, 2007): 129–51.
[8] For a review of economists’ disagreements on the impact of rent control legislation on the housing stock, see also Blair Jenkins, “Rent Control: Do Economists Agree?,” Econ Journal Watch 6, no. 1 (2009): 73–112.
[9] Robert P. Albon and David C. Stafford, “Rent Control and Housing Maintenance,” Urban Studies (Sage Publications, Ltd., 1990).
[10] Bengt Turner and Stephen Malpezzi, “A Review of Empirical Evidence on the Costs and Benefits of Rent Control,” Swedish Economic Policy Review 10, no. 1 (2003): 11–56.
[11] Ambrosius et al., “Forty Years of Rent Control: Reexamining New Jersey’s Moderate Local Policies after the Great Recession,” Cities 19 (2015): 121-133.
[12] Nandinee K. Kutty, “The Impact of Rent Control on Housing Maintenance: A Dynamic Analysis Incorporating European and North American Rent Regulations,” Housing Studies 11, no. 1 (January 1996): 69–88.
[13] Choon-Geol Moon and Janet G. Stotsky, “The Effect of Rent Control on Housing Quality Change: A Longitudinal Analysis,” Journal of Political Economy 101, no. 6 (1993): 1114–48; Joseph Gyourko, Albert Saiz, and Anita Summers, “A New Measure of the Local Regulatory Environment for Housing Markets: The Wharton Residential Land Use Regulatory Index,” Urban Studies 45, no. 3 (March 1, 2008): 693–729; Edgar O. Olsen, “What Do Economists Know about the Effect of Rent Control on Housing Maintenance?,” The Journal of Real Estate Finance and Economics 1, no. 3 (1988): 295–307.
[14] Kathleen Howley, “Rent Control Law Sends New York Building Values Tumbling,” The Wall Street Journal, June 25, 2019.
[15] David H Autor, Christopher J Palmer, and Parag A Pathak, “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts,” Journal of Political Economy, vol. 122, 2014.
[16] The referendum passed on a tight vote of 51 percent to 49 percent, but 60 percent of Cambridge residents favored keeping the ordinance.
[17] Rebecca Diamond, “What Does Economic Evidence Tell Us about the Effects of Rent Control?,” 2018.
[18] Amee Chew and Sarah Treuhaft, “Our Homes, Our Future: How Rent Control Can Build Stable, Healthy Communities,” (Oakland, CA, 2019).
[19] Diamond, Mcquade, and Qian, “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco.”
[20] Sayin Taylor, “Taking Stock of the District’s Housing Stock.”
[21] Adam Brinklow, “San Francisco Renters: More than 60 Percent Have Rent Control,” (SF-Curbed, 2018).
[22] Christopher Thornberg et al., “An Analysis of Rent Control Ordinances in California” (California Apartment Association, 2016).
[23] Autor, Palmer, and Pathak, “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts.”