Commentary: Study Questions the Benefits of Rent Control

By David M. Greenwald
Executive Editor

Los Angeles, CA – One of the solutions that many look to for rising rental costs is rent control.  While I have generally backed rent control measures, particularly since landlord groups have tended to oppose them, I have taken a skeptical view that rent control is the answer—particularly when it comes to student housing, where students are severely disadvantaged by their high rate of turnover.

Thus in places like Davis, with a high percentages of student renters and rapid turnover, rent control is not an effective means of stabilizing rents.

A recently published article looks at the price effects caused by the passage of rent control in St. Paul Minnesota.

Kenneth Ahern and Marco Giacoletti of USC in a published work found that rent control did indeed harm landlords by causing property values to decline anywhere from six to seven percent, leading to an aggregate loss of $1.6 billion in property value.

Basically they estimate that had voters not passed a three percent annual cap on rent increases, residential properties would have been about six to seven percent higher.

“Prices tend to reflect what’s happening in the future,” Ahern said in a recent interview. “We know that in the future, rents are going to change. If I as an investor anticipate that, I’m not going to pay as much today for something that’s going to have less cash flows in the future.”

“Both owner-occupied and rental properties lost value, but the losses were larger for rental properties, and in neighborhoods with a higher concentration of rentals,” the study found.

However, the benefits of rent control tended to help those with higher incomes who also happened to be white—while the owners who lost the most had lower incomes and tended to be people of color.

Moreover, they found, “For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”

They write, “In contrast to the stated goals of the rent control law, we find that the largest transfer of wealth occurred in the low disparity subsample (8.52%) in which renters are relatively wealthier, while the smallest transfer occurred in the high disparity subsample (0.89%), in which renters are relatively poorer. This pattern persists in cross-sectional regressions. Wealth transfers are positively related to renters’ income and negatively related to owner’s income.”

But some advocates question whether St. Paul is the place to test this theory.

One person on Twitter noted, “A problem with badly designed rent control programs like St Paul’s is that opponents of tenant protections will use its failures to argue for ‘all rent control is very bad.’ Getting the details right matters.”

Another argued, “Poorly designed rent control is very bad, and St. Paul’s was about as badly designed as it gets. Rent stabilization with exemptions on new buildings, on the other hand, can do plenty of good with limited downsides. Pair that with housing abundance and you’re golden.”

The study here argued, “The central contribution of this paper is to provide new evidence that rent control substantially reduces property values and that the transfer of wealth caused by rent control is poorly targeted.”

Given the criticism by some of St. Paul’s rent control policy, it would be good for the follow up research to replicate their study elsewhere to see if the results hold or if the findings are indeed an artifact of St. Paul’s policy.

The Star Tribune reported that Mayor Melvin Carter has already created a 41-member rent-control stake holder group.

“Saint Paul voters overwhelmingly voiced their support for rent stabilization in November,” Carter said in a statement. “I believe in our ability to meet this housing crisis with thoughtful policy that drives our goals for both equity and growth.”

The paper is not yet peer-reviewed, however, but some believe while the time frame has been limited, the study appears to be methodologically sound.

“This study provides some reasonable evidence … though we need more time and more research before reaching definitive conclusions,” said Evan Mast, a University of Notre Dame economist.

With huge increases in rents and now inflation that is spiking, rent control is gaining a third wave of popularity.

However, from my perspective at least, rent control is at best a partial solution, stabilizing rents perhaps for long-term residents and possibly only for those on the wealthy side of the equation.

I think ultimately, the best way to deal with costs of housing is not by capping pricing, but rather by dealing with it on the supply side, and meeting the spiking demands with sufficient supply to allow for prices to stabilize naturally.

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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18 Comments

  1. Keith Olson

    I think ultimately, the best way to deal with costs of housing is not by capping pricing, but rather by dealing with it on the supply side, and meeting the spiking demands with sufficient supply to allow for prices to stabilize naturally.

    That’s called capitalism.

  2. Ron Oertel

    What an odd article.

    The title would have one believe that it would focus on benefits (or drawbacks) for renters.  Instead, it focuses on losses for landlords.  Really?  David’s worried about losses for landlords? I mean, I realize that he’s an advocate for developers, but I didn’t expect him to come right out and say that he’s also an advocate for landlords. (Which are usually the same people as developers, anyway.)

    I think ultimately, the best way to deal with costs of housing is not by capping pricing, but rather by dealing with it on the supply side, and meeting the spiking demands with sufficient supply to allow for prices to stabilize naturally.

    I think the best way to deal with it is from the demand side, which is one of the reasons I’m concerned about DiSC (and the housing shortage it would create). (Though truth be told, it would simply be used to justify the other proposals in that same area, including Shriner’s, Palomino Place, the “other half” of DiSC, and the space inside of the Mace curve.

    Look no further than the Bay Area to see communities which purposefully increase the demand side of the equation, and the result of that on rental prices.

     

  3. Craig Ross

    What an odd take.

    Key finding is that rent control didn’t lead to a transfer of wealth from the wealthy landlord to poor renter.

    However, the benefits of rent control tended to help those with higher incomes who also happened to be white—while the owners who lost the most had lower incomes and tended to be people of color.

    Moreover, they found, “For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”

    Do you just read what you want to see?

    1. Ron Oertel

      Do you?

      Kenneth Ahern and Marco Giacoletti of USC in a published work found that rent control did indeed harm landlords by causing property values to decline anywhere from six to seven percent, leading to an aggregate loss of $1.6 billion in property value.

      Basically they estimate that had voters not passed a three percent annual cap on rent increases, residential properties would have been about six to seven percent higher.

      “Both owner-occupied and rental properties lost value, but the losses were larger for rental properties, and in neighborhoods with a higher concentration of rentals,” the study found.

      However, the benefits of rent control tended to help those with higher incomes who also happened to be white—while the owners who lost the most had lower incomes and tended to be people of color.

      As far as “value” of properties (both rentals and non-rentals), how about using San Francisco or Berkeley as locales for a study like this? And the same question, regarding the impact on tenants?

       

       

  4. Ron Oertel

    The Stanford paper fully supports the conclusion that rent control works to keep people in their homes: “We find that rent control increased the probability a renter stayed at their address by close to 20 percent.” The stabilizing effects are “significantly stronger among older households and among households that have already spent a number of years at their treated address.” In other words, seniors and long-term tenants find longer-term stability because of rent control.

    Equally importantly, the study confirms how rent control prevents displacement from the city. “We can see that tenants who receive rent control protections are persistently more likely to remain at their 1993 address relative to the control group. Not only that, but they are also more likely to be living in San Francisco.”

    The paper also acknowledges the substantial financial benefit conferred on tenants because of the expansion of rent control in San Francisco in 1994. “Across the entire population, the aggregate benefit was $7.085 billion dollars, reflecting an annual average of $394 million dollars. Note also that these welfare numbers are only for the 1994 population impacted by the rent control expansion. It does not take into account the welfare benefits for renters who moved into the impacted properties in later years, which presumably were also quite large.”

    The $7 billion savings for tenants is the tip of the iceberg, relating only to the studied group—tenants in small buildings who lived in their homes in 1994 when they became rent controlled. As the authors note, it does not measure the benefit for all of the tenants who moved into the studied properties after they gained rent control.

    The Stanford authors, however, were not content to recognize these successes of the 1994 expansion. They have a different story to tell, with flawed assumptions aplenty.

    (You can read about the flawed assumptions in the article, itself. In any case, it took me all of 5 minutes or so to find an article like this.)

    But again, I’d suggest addressing the demand side of the equation in the first place. I was just reading an article regarding an attorney who works for Google, who apparently purchased a building in San Francisco and is now fighting with his neighbors over the changes he wants to make (regarding adding additional units in the side yard).

    Regardless, how many of us can “compete” with a Google attorney, when attempting to purchase a property in the first place?

    https://shelterforce.org/2018/03/28/rent-control-works/

    1. Ron Oertel

      Oh, wait – the attorney who works for Google is suing the city of San Francisco, itself:

      https://www.sfchronicle.com/bayarea/article/S-F-developer-sues-city-after-it-denies-his-plan-17076720.php

      Hilarious.

      There’s also a photo of him and his wife looking quite “solemn” in his yard. I assume that this is the same yard in which they want to build units, after splitting the lot.

      By the way, The Chronicle is consistently on the “same page” as the Vanguard (and the YIMBYs). But no matter how they try to frame it, the truth comes out anyway.

      Oh, and their comment section also has resident YIMBYs.

      1. Ron Oertel

        Regarding the comment section, they don’t usually use actual names, so it’s not possible to determine who they actually are.  (I did not mean to imply that the YIMBYs are resident “neighbors”, and I don’t think they are. It’s usually the same user names in every one of the YIMBY articles, putting forth the same tired nonsense.)

        In any case, who among us (other than those in the tech industry, including its attorneys) has the money to purchase these properties (and then engage in lawsuits when they’re not happy with the result)?

        I say, “send ’em off to Austin”.

  5. Ron Oertel

    I know someone who has personally benefited from rent control, in a desirable neighborhood in San Francisco.

    Pays well-under $1,000/month, for a two-floor apartment (with a functional garage, no less).  As well as a roof deck.  A view of the Golden Gate bridge from the deck, as I recall.

    Which really helped him, as he has limited income.

    No – I’m not lying about any of this.

     

    1. Alan Miller

      I’ve shared before my friend in Santa Monica first met when he was about 18.  Now 60, lives in same apartment just off SMB — rent has barely risen since early 80’s.  How can one ‘afford’ to move?  Not destitute at all – just ‘lucky?’.

      1. Ron Oertel

        It’s similar to Affordable housing, but doesn’t hold you back from earning income (if you’re able to). As such, it works “better” than Affordable housing.

        There’s another article in the Chronicle regarding Cleve Jones, who was a friend of Harvey Milk.  He has apparently decided not to fight the new owner’s eviction notice, and will simply move to his place in Guerneville.

        The new owner of his building is apparently an immigrant, who is (not surprisingly) more successful than most Americans (including Cleve Jones, apparently).

        https://www.sfchronicle.com/sf/article/San-Francisco-LGBTQ-activist-Cleve-Jones-uprooted-17026884.php

        In any case, there seems to be a “cat-and-mouse” game going on, regarding some of the rent control requirements. The article I posted earlier might refer to those as “loopholes”.

        I’m always surprised that the person I know doesn’t mysteriously “disappear” one night. To be found at the bottom of San Francisco Bay, sometime later.

  6. Keith Y Echols

    Thus in places like Davis, with a high percentages of student renters and rapid turnover, rent control is not an effective means of stabilizing rents.

    I don’t know why Rent Control is so hard for people to figure out.  Rent control works when you want to prioritize to protecting long term renting residents (like seniors).  It doesn’t work well if you’ve got a fairly transitory population of renters.  It’s not hard to figure out why.  Since landlords can’t raise rental prices on existing residents, they raise them on new residents.  So the rent controlled units add to the rental cost of the units currently available for rent.  So if you have a population that comes and goes frequently….oh…say like students….rent control is not going to do much good.  In fact it’s going to make renting for all new comers even more expensive.   On the other hand it would protect families and seniors that are long term renters from the effects of student rents in the city.

    1. Bill Marshall

      Good points, but it depends… including whether the landlord owns multiple, multi-family units, or one to five SF units… the dynamics are quite different, and ‘unitizing’ all landlords as a cohesive unit is fallacious, at best.  “Profiling”, if you will…

      Most ‘small-time’ landlords want to ‘protect’ long term tenants, to avoid turnover (expensive), and wanting good tenants to be even longer term tenants.  They have a small ‘profit margin’, and are looking to long-term appreciation of their property, rather than huge cash-flows.  Different completely from corporate owners of large MF complexes, where they look at ‘depreciation’ write-offs as equal or better to ‘appreciation’.

      The main problem (my view) is that those pro/con rent control advocates make no distinction as to ‘landlords’… be they corporate MF business folk, or the ‘mom/pop’ folk who own 1-5 SF units…

      As a (former) landlord of a single SF house, I made sure our expenses were covered, that our tenants took care of the property, that they could afford to continue being our tenants, and we gained a small profit besides… we may be ‘outliers’, but we would be lumped into the restrictions some would impose due to egregious ‘profiteering’ by the ‘big time’ players.

      “Rent Control” is NOT simple…

       

      1. Keith Y Echols

        Most ‘small-time’ landlords want to ‘protect’ long term tenants, to avoid turnover (expensive), and wanting good tenants to be even longer term tenants.  

        This is true but also depends on the individual landlords and the specific market.  I had an old lady landlord in San Francisco that valued her current tenants over newer ones.  She would even let long time renters sublet while they were away for a couple years because they valued the tenant’s reliability as a renter.   I caught her trying to fix small things….climbing up ladders and such that she had no business doing….very unsafe for a not physically fit lady in her (I’m guessing) late 70’s.  On more than one occasion I offered to go up the ladder to change a garage light or something.  Rent control in San Francisco is a max increase of 2% a year.

        On the other hand, I rented a place in Davis for a couple years and the landlord said he was moving in and gave us notice.  I heard from the neighbors that he did this regularly.  He never moved in (I ended up buying a place a block away) and sure enough new renters moved in (and rent went up by over $400/month).  About 4 years later, I think he eventually sold the place.

        I too prefer a longer term tenant; I don’t think I’d like a lease term for longer than 3 years.  I think there’s a balance/optimal cash flow to stability plus the amount of personal work you want to put into a place every time a tenant moves.

        But it’s the market that primarily dictates how Rent Control will effect the people.  Students come and go.  Most aren’t going to commit to a place for 4 years.  So their coming and goings are going to create the imbalance and place the transfer of wealth from students to the long term renters.

        1. Ron Oertel

          On the other hand, I rented a place in Davis for a couple years and the landlord said he was moving in and gave us notice.  I heard from the neighbors that he did this regularly.  He never moved in (I ended up buying a place a block away) and sure enough new renters moved in (and rent went up by over $400/month).  About 4 years later, I think he eventually sold the place.

          He could have done this without kicking you (or any other tenant out), in Davis.  There was no statewide rent control until very recently.

          It’s not clear if the rent increase you’re referring to in this case would “trigger” that new law had this action occurred now.

          There might have been other reasons for him to kick you and others out, which he did not want to share with you.  (Including the possibility that he was embarrassed about raising the rent that much for a current tenant.)

          I don’t believe he could have used this as a pretext to break a lease, either. So, I’m guessing that he did this at the end of your lease (or, if you had a month-to-month arrangement).

        2. Ron Oertel

          And that’s assuming it was an apartment unit, not a house.

          Rent control doesn’t apply at all, to single-family houses.

          Rent control can work well for “local workers”, but not as well for students due to turnover of units.

          You can than Costa Hawkins law, for that.  Every once in awhile, there’s an effort to overturn that (which inevitably fails, due to heavy lobbying by the rental industry and their political allies).

          Don’t look to state leaders (such as Wiener or Newsom) to fix this, either.  As usual, they’ve picked their “side” – and it’s business interests.

  7. Alan Miller

    If I owned a property and the town started thinking about rent control, I would sell that property, probably at a loss, and buy somewhere else, maybe in another state.

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