Why Rent Control may not be as good as it sounds

In the United States, rent control, in parallel with federal price control laws, was enacted in 1942. In New York, rent controls were enacted in 1943, and in the 1950s nearly all rental units in New York were subject to rent control.[1]  Many of these units remain coveted and well below market rent while most developers turned to condominiums in lieu of rental units, unsure about the ability to raise rents in the future.  Despite rent controls, New York remains as unaffordable as ever, while cities and states ponder new regulations aimed at dealing with the problem of affordable housing.

Another large city to enact rent controls aimed at protecting tenants was Montreal. Montreal first imposed rent control in 1979, providing economists with another long-term experiment on the impacts of rent control on housing affordability. From these two experiments in regulating rents, we can conclude that rent control in a city with an existing housing shortage is nothing short of self-sabotage.

Historically, Montreal’s economy was fairly insulated from the rest of Canada and North America, since its primary language for government and businesses is French. In the 19th and 20th centuries, it experienced very low population growth rates, but very high rental residential construction, with a lot of investment from the provincial and federal governments. With a stable population, a healthy amount of housing supply, low wages, and low rents, Montreal’s economy was historically stable until 2017, when it began to surge.

When the housing market in Montreal is further analysed, there is one common trend that contradicts this supposed stability. Rental housing supply has been continuously declining since rent control was enacted some forty years ago. Many rental units have since been converted to condominiums (which have had stable upward growth in the years that rental growth has declined), and there have been more permits issued for the owner market than rental apartments. The city has not seen new apartment development in years, creating a reputation for older, low-quality units. Tenants simply do not have the expectation of finding high-quality, recently built rental units in Montreal. In addition to lessened private investment in housing development, the governing bodies also reduced their investment in low-income housing, resulting in a new housing crisis in the 21st century.

These market reactions following the imposition of rent control are not specific to Montreal and New York. They have been analysed and proven by economists time after time, location after location. Analysts from the Seattle City Council Insight, who conducted a study on Montreal’s rent control impact, conclude:

“Montreal is far from the rent-control paradise that advocates suggest, and it was saved from the worst liabilities of its rent-control policy by a long-term investment in housing. But to the extent that Montreal is now “booming,” the problems with rent control are coming home to roost.” (Source)

Montreal shows us that even in cities with rent controls and profuse amounts of past public investment in low-income housing, housing shortages still exist in economically thriving cities. In simple terms, the housing shortage in these cities will exist even with rent control, if not more so. In a city with relatively stable population growth, jobs, low wages, and low rents, the main factor responsible for the reduced supply of rental units in Montreal was the imposition of rent control.

Rent controls actually make housing shortages worse, as construction of rental units consistently decline after the regulations are in place, especially if the population continues to grow. However, this policy with a history of never really working, does not seem to be going away, with old and new forms of it still being considered or imposed throughout the globe.

 

The New Forms of Rent Control

Rent control has been imposed in Europe since WWII, when rent ceilings were used to prevent war-time exploitations during an unsteady economical period. Since then, rent control has taken many different forms. The traditional form of rent control is the price ceiling, where rent prices either halt at a specific level, or can only grow by a specific amount each year, commonly tied to inflation.  In following years, different variations have emerged, like landlords only being able to raise rents to the market price when an existing lease ends. Regulatory agencies have dabbled with different forms of rent control to find one that may work, all without much success.

The “regulatory cluster” is a term typically associated with rent controls. In cities where rent control is introduced, it often comes with other regulations placed on rental units. These regulations dictate how landlords can evict tenants, or how they can rent out their properties. However, the additional regulations need not accompany typical rent controls and price ceilings, as they stand on their own in many instances as well.

The most commonly used rent control regulation other than price ceilings is “just-cause eviction”. These policies typically limit the grounds on which a landlord can evict tenants to non-payment of rent, intentional damage to units, or non-compliance with the terms of the lease. Just-cause eviction provides certain procedures for the landlord to follow when they need to evict a tenant. These evictions tend to take much longer than evictions without the additional regulation, which has resulted in limiting the discretion landlords can have in removing tenants. As a result, landlords typically have become more stringent with their tenant qualification screenings, and often choose tenants who are more likely not to renew their leases for long periods of time.

Yet another new form of rent control has emerged in the United States in the City of Seattle. Local government agencies are discussing a proposed emergency moratorium on evictions in the winter. Meaning that landlords will not be able to evict tenants, even with just-cause eviction, between November 1 and March 31. This harsh legislation comes with the intention of not leaving renters homeless during the coldest months of the year, but fails to accept the costs and realities of maintaining rental housing. Conversely, the intention is not backed by facts:

 “According to King County’s point-in-time study, only 6 percent of homeless people surveyed cited “could not afford rent increase” as the precipitating cause of their situation, pointing instead to a wide range of other problems — domestic violence, incarceration, mental illness, family conflict, medical conditions, breakups, eviction, addiction and job loss — as bigger factors.”

This drastic legislation warns of future trends. Although Seattle is one of the most progressive cities in the United States, it is likely that more cities will follow this legislation in years to come. The effects of it, however, may prove to be more drastic. The typical impacts of rent control will prevail – lessened supply, more condominium conversions, and low-quality units over time. But this legislation will provide even more tribulations. Landlords will increase pre-lease tenant qualifications for their units, not accepting tenants with less-than-perfect credit. It is likely that some mom-and-pop landlords will be pushed out of the market, selling their properties to institutional landlords, with deeper pockets for legal battles, who may one day control the rental housing market in the city. These potential impacts are immense, and the proposed legislation is not one to ignore, as rent controls become more and more draconian throughout the world.

 

Where Rent Control Is Emerging

Berlin enacted rent control in June of 2019, but there is a pending proposal to amend it in the early months of 2020. The outline of this rent control proposal is the most radical form of it to date. If the regulation goes through, rents that are determined to be too high will be lowered. Additionally, “the law would be retroactive from June 18th, so that anyone who attempts to jack up prices before it is passed could be fined €500,000 ($563,000). Landlords who want to make renovations that would push up prices by more than €0.50 per square metre will have to seek approval.” There is already a massive housing shortage in Berlin, where the city has grown by 50,000 people annually since 2011, but has only added 10,000 new units. Berliners have consistently voted against large, new developments in the past few years, making the development environment increasingly difficult. If these stringent rent controls pass, it is inevitable that the housing shortage in Berlin will only become far worse, as the long-term effects of rent control loom over the city.

In the United States, California became the second state to pass state-wide rent control, following Oregon, where landlords are restricted to increase rents by only 5% plus inflation each year until 2030. Like the proposal in Berlin, the California law is retroactive to March 15, 2019, and also includes a just-cause eviction ordinance. Rent control is becoming an increasingly popular form of regulation in Unites States cities, where housing affordability crises’ seem to always exist. In September of 2019, socialist presidential candidate Bernie Sanders, “unveiled a proposal for a national rent control policy as part of his overall plan to address the need for affordable housing nationwide.” Although economists have warned politicians and citizens of the negative long-term impacts of rent control, the regulations are alive and well in today’s political discussions.

Those in opposition of rent controls often provide alternatives that would work better in creating more affordable housing. The most common being pro-rating city fees for development to the size of the units being built. With lower overall fees, developers can build smaller, less-expensive units. With the current stagnant, high city fees, it is not financially feasible for developers to build these desired units. Other common alternatives are increasing allowed density (increasing height limits, or reducing minimum square footage requirements), reducing costly parking requirements, and speeding up the review and inspection processes of new developments. These private-market alternatives will allow for supply growth in cities with growing populations, therefore lessening the housing shortage overtime.

 

This is the latest in a series of pre-MIPIM 2020 posts from real estate students at the University of San Diego. More here!

[1] See Michael Cavadias “A Brief History of Rent Regulation in New York” ISSUE 81 | BUILDINGS | DEC 2017

Top image: Getty Images – Wipada Wipawin

About Author

Layla Khademi

Layla Khademi is a graduate student in the MSRE program at the University of San Diego. She received her B.A. from Seattle University in 2019, studying Businesses Administration, Marketing, and Finance. She is excited to be writing for MIPIM under the guidance of Dr. Norm Miller and Stath Karras.

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