By David M. Greenwald
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.