There is little debate as to whether the United States has a housing affordability problem. Twenty million American households now pay more than 30% of their income on rental costs. And the problem grows worse each year as stagnant household incomes collide with rising housing costs, putting the squeeze on household budgets.
But if it feels bad now, just wait. The number of new renter households could exceed 4.4 million by 2025, further exacerbating the marketwide imbalance between the demand for rental homes and the available supply.
This is a big problem, and one that requires some intervention. However, in the face of such significant housing challenges, some lawmakers are revisiting rent control as a strategy to control housing costs.
New efforts are under way in California, Illinois, Oregon, and Washington to challenge and, ultimately, change decades-old state laws and best practices restricting and/or prohibiting rent control in local jurisdictions.
Why It Doesn’t Work
To some, rent control would seem a fast and easy fix—a local jurisdiction sets limits on how much property owners/managers can raise rents on residents, theoretically making units more affordable. But it’s not the panacea some lawmakers seem to think it is. The real impact of rent-control policy is a decline in property maintenance, stifled development activity, shrinking affordability, and a chronic undersupply of rental homes.
In 1999, just days before the world was going to end with Y2K, Forbes magazine published an article called “The Dumbest Ideas of the Century,” which included a list of the 10 worst economic ideas of the 20th century. Rent control was second on the list. “Here we have a policy initiative that has done huge damage to cities around the globe. It is very hard today to find an economist supporting rent control,” the article stated. Damage to cities, indeed, but damage to low- and middle-income renters most of all.
Many things in the world have changed since then, but the realities of rent control have not. Rent control remains a harmful policy for the very population it seeks to serve, in four main ways.
1. Rent control does nothing to increase affordable supply. According to new research by the National Low-Income Housing Coalition, there is a massive gap in the number of available affordable rental homes for low-income families. On a national basis, for every 100 households making less than half of the area median income (AMI), there are just 55 available rental homes. And the poorer the family, the greater the gap. There are just 35 available and affordable rental homes for every 100 extremely low-income households. That’s a 7.4 million–unit shortfall that rent control can’t address because it’s a policy that applies only to existing rental units.
2. Rent control can actually decrease available rental supply. Artificial caps on rent growth make it difficult for multifamily owners to meet investors’ target returns. Consequently, investors are likely to seek alternative asset classes, resulting in a decrease in supply of new apartments. Similarly, rent control also encourages the conversion of apartment buildings from residential to nonresidential use, taking additional units out of stock. As an example, between 1978 and 1990, Berkeley, Calif., which has some of the strictest rent-control laws in the country, saw its rental supply drop 14%.
3. Rent control doesn’t always help the people who need it most. Rent control creates no incentive for residents to move out of those units, even if their incomes increase and they can afford more-expensive units. In New York City, households are able to live in rent-stabilized units (essentially a first cousin to rent control) until their income exceeds $200,000 a year. Longer resident tenures mean fewer affordable units available for people who really need them.
4. Rent control provides little incentive to maintain quality. Rent control can harm multifamily properties’ quality and, ultimately, value to the surrounding community. By providing little to no opportunity for profit, rent control decreases owners’ motivation to maintain and reinvest in their properties. Deferred maintenance eventually drives properties into disrepair.
What Will Work
While pressure from advocacy groups can be fierce, policymakers need to look beyond ineffective and harmful rent-control policies and consider more-modern, innovative approaches.
First and foremost, we need to increase the housing supply. The market’s big supply–demand imbalance is putting immense pressure on housing costs. And an aging housing stock is threatening to further strain the supply shortage.
According to U.S. Census Bureau data, 10.3 million apartments now exist that were built before 1980, suggesting a growing need for renovation. Moreover, the NMHC estimates that roughly 100,000 are lost every year to obsolescence, destruction, and the like.
In addition, we need to encourage the growth of all types of housing—single family, townhome, and multifamily—to ensure we have a variety of housing to meet a variety of household needs.
Progressive cities in the country are removing obstacles to the construction and renovation of apartments to help increase supply and address affordability. These obstacles and delays make it more difficult for buildings to be financially viable, and they are ultimately paid for by the residents living there.
One way cities can help increase the housing supply is to sponsor land swaps or land donations so developers can build more low-cost housing in underutilized or vacant properties. Cities can also use tax abatements and other incentives to get developers to voluntarily incorporate affordable housing into existing and new developments. Municipalities can ease parking, ground-floor retail, or other requirements that add to the cost of building. Finally, cities can fast-track the approval and permitting process for properties that are specifically targeted to provide additional lower-cost housing options.
For an interactive map of where rent control is alive and well, go to www.nmhc.org/Research-Insight/Rent-Control-Laws-by-State.
