Rent control on the run firms up regulation New York's decision earlier this summer to curtail its longstanding and highly controversial rent control laws provides yet more evidence of the steady erosion of rent regulation in the United States. New York now joins, Massachusetts, Tennessee and Illinois in the movement to roll back rent regulation. California has agreed that it will prohibit cities from dictating rents for vacant apartments, while Massachusetts, Tennessee and Illinois recently prohibited local jurisdictions from imposing, on their own initiative, rent controls. All told, 33 states have preempted their local jurisdictions from enacting rent control provisions. With the exception of the District of Columbia, one small town in Maryland and several communities in New Jersey, rent control is waning and the free market is reigning.
Rent control opponents have long contended that rent regulation ignores the basic laws of economics governing the housing market. By treating privately held rental housing as a public utility, government reduces -- rather than expands -- the supply of shelter. Negative consequences include:
Inhibiting new construction. Rent control undercuts the competitiveness of rental housing, causing investment capital to seek other transactions with higher returns.
Accelerating the deterioration of existing housing. Owners faced with declining revenues may be forced to substantially reduce maintenance and repairs, convert rentals to condominiums, or abandon unprofitable properties.
Reducing property tax revenues. Both in absolute terms and relative to the increase in property values in unregulated markets, rent control diminishes the market value of controlled rental property. This leads to a decline in taxable assessed rental property values when compared to unregulated property.
Increasing administrative costs. Rent controls require elaborate enforcement systems. In Santa Monica, Calif., for example, the Rent Control Board in 1996 had an annual budget exceeding $4 million to control rents on only 28,000 apartments.
Inhibiting resident mobility. Residents of rent-controlled housing are often reluctant to move to smaller or larger homes, or closer to their jobs because they want to protect their rental subsidies. Loss of mobility can be particularly costly for families whose job opportunities are geographically limited and may have to travel long distances to reach jobs that are available to them. Rent control proponents counter that without government regulation, rents will soar, evictions will become commonplace, elderly and low-income residents will be displaced, and homelessness will rise. But this simply has not been the case, as witnessed in Cambridge, Mass., where rent control was completely eliminated at the outset of this year.
To safeguard Cambridge's elderly and low-income residents, the Massachusetts legislature granted them "protected status" two years ago when rent control was outlawed. This allowed these individuals to remain in their homes an extra two years at lower rents. Only 6% of all rent controlled residents qualified for this protected status. Rampant evictions and mass dislocation were predicted by some when the exemption expired at the end of 1996, but this failed to materialize.
"Area homeless shelters reported no post-control homelessness increase," says Lenore Schloming, president of Cambridge's Small Property Owners Association. "At most a handful of tenants spent time in homeless shelters, and all quickly found housing. Neither did Cambridge's main elder services agency find great elderly distress. About 50 to 75 sought help out of their 5,000 caseload, and they too quickly found housing. Furthermore, not a single decontrol-related elderly death, predicted by the Cambridge Hospital, has ever been documented. One man, featured prominently as an elder who risked being thrown out on the street without rent control, promptly went out and bought a condo after rent control's demise."
Meanwhile, decontrol's benefits far outweigh the inconveniences it imposes on a tiny minority of people. With rent control no longer scaring housing developers away, and as landlords finally have the means to fix up their buildings, building permits for construction work in Cambridge have soared. New paint jobs and face lifts on former rent-controlled ruins are obvious to all walking through the streets.
"Decontrol is also pumping tax revenue into city treasuries that far exceeds the amount needed to subsidize any former rent-controlled tenants still in need," says Schloming. "Ironically, our most compassionate and wealthy city of Cambridge has, from day one, steadfastly refused to dedicate any of that money for tenant relief, claiming it would be too expensive."
The Cato Institute, a public policy think tank in Washington, D.C., is another rent control skeptic. After studying the impact of rent regulation in New York City and San Francisco, the institute's researchers concluded that "rent control in both these cities appears to make housing spectacularly unaffordable."
The study examined the advertised prices for apartments in 18 major cities. In Philadelphia, the most common rent was between $450 and $500, while in Chicago it was $500 to $550. Unregulated cities such as Philadelphia, Chicago, San Diego, Phoenix and Seattle seem to have almost perfectly competitive housing markets, with housing available at every price level, but clustered at the low end. In the rent controlled cities of New York and San Francisco, however, the median advertised rent was $1,350 and $1,400 respectively. In both cases, there was almost no rental housing available at the low end of the market.
"What is going on in these markets? The answer seems fairly straightforward," the report explains. "Rent control splits the housing market into two sectors; the regulated segment and the shadow market. As prices in the regulated sector are forced lower, prices in the shadow market go higher. At a certain point, the differential between the two markets becomes so stark that tenants in the more regulated sector begin hoarding their apartments. They hardly ever move. In New York, 88% of tenants living in pre-war, rent-controlled apartments have not moved in more than 25 years."
With the regulated portion of the market locked away, "all new demand is funneled into the unregulated sector -- the shadow market. Eventually the competition for this limited number of apartments creates highly inflated prices. It is like squeezing a balloon at one end -- the pressure will simply create a bulge at the other end," the study reports.
Economists concluded long ago that rent control is a failed housing policy. After a greatof debate and a tremendous amount of research to validate this conclusion, politicians and bureaucrats at long last are coming around. Rent control is on the run.
Clarine Nardi Riddle is senior vice president for government affairs, and Jim Bowe is vice president of communications for the National Multi Housing Council based in Washington, D.C., and its Joint Legislative Program with the National Apartment Association.