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Featured Story
What Does Economic Evidence Tell Us About the
SEffects of Rent Control?
By Rebecca Diamond, Associate Professor of Economics - Stanford Graduate School of Business
teadily rising housing rents in many of the U.S.’s large, productive cities have reignited the discussion whether to expand or enact rent control provisions. Under pressure to fight rising rents, state lawmakers in Illinois, Oregon, and California are considering repealing laws that limit cities’ abilities to pass or expand rent control. While rules and regulations of rent control vary from place to place, most rent control
consists of caps on price increases within the duration of a tenancy, and sometimes beyond the duration of a tenancy, as well as restrictions on eviction.
New research examining how rent control affects tenants and housing markets offers insight into how rent control affects markets. While rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhood.
A substantial body of economic research has used theoretical arguments to highlight the potential negative efficiency consequences to keeping rents below market rates, going back to Friedman and Stigler (1946). They argued that a “cap” on rents would lead landlords to sell their rental properties to owner occupants so that landlords could still earn the market price for their real estate. Rent control can also lead to “mis-match” between tenants and rental units. Once a tenant has secured a rent-controlled apartment, he or she may not choose to move in the future and give up his or her rent control, even if his housing needs change (Suen 1980, Glaeser and Luttmer 2003, Sims 2011, Bulow and Klemperer 2012). This misallocation can lead to empty-nest households living in family-sized apartments and young families crammed into small studios, clearly an inefficient allocation. Similarly, if rental rates are below market rates, renters may choose to consume excessive quantities of housing (Olsen 1972, Gyourko and Linneman 1989). Rent control can also lead to decay of the rental housing stock; landlords may not invest in maintenance because they cannot recover these investments by raising rents. (Downs 1988, Sims 2007).
Of course, rent control also offered potential benefits for tenants. For example, rent control provides insurance against rent increases, potentially limiting displacement. Affordable housing advocates argue that these insurance benefits are valuable to tenants. For instance, if long-term tenants have developed neighborhood-specific capital, such as a network of friends and family, proximity to a job, or children enrolled in local schools, then tenants face large risks from rent appreciation. In contrast, individuals who have little connection to any specific area can easily insure
themselves against local rental price appreciation by moving to a cheaper location. Those invested in the local community are not able to use this type of “self-insurance” as easily, since they must give up some or all of their neighborhood specific capital. Rent control can provide these tenants with this type of insurance.
Until recently, there was little data or natural experiments with which to assess the importance of these competing arguments, and to assess how rent controls affects tenants, landlords, or the broader housing market. But newly available housing-market data spanning periods of dramatic change in rent control laws in Cambridge, Massachusetts and in San Francisco, California have allowed economists to examine these questions empirically. While these studies do find support for the idea that existing tenants benefit from the insurance provided by rent control, they also find the overall cost of providing that insurance is very large.
From December 1970 through 1994, all rental units in Cambridge, Massachusetts built prior to 1969 were regulated by a rent control ordinance that placed strict caps on rent increases and tightly restricted the removal of units from the rental stock. The legislative intent of the rent control ordinance was to provide affordable rental housing, and at the eve of rent control’s elimination in 1994, controlled units typically rented at 40%-plus below the price of nearby non- controlled properties. In November 1994, the Massachusetts electorate passed a referendum to eliminate rent control by a narrow 51%–49% margin, with nearly 60% of Cambridge residents voting to retain the rent control ordinance. This change in the law directly impacted properties previously subject to rent control, enabling landlords to begin to charge market rents.
Autor, Palmer, and Pathak (2014), studies the impact of this unexpected change and find that newly decontrolled properties’ market values increased by 45%. In addition to these direct effects of rent decontrol, Autor, Palmer, and Pathak find removing rent control has substantial indirect effects on neighboring properties, boosting their values too. Post-decontrol price appreciation was significantly greater at properties that had a larger fraction of formerly controlled neighbors: residential properties at the 75th percentile of rent control exposure gained approximately 13% more in property value following decontrol than did properties at the 25th percentile of exposure. This differential appreciation of properties in rent control–intensive locations was equally pronounced among decontrolled and never-controlled units, suggesting that the effect of rent control had been to reduce the whole neighborhood’s desirability.
The economic magnitude of the effect of rent control
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