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rate. Further, impact on the likelihood of remaining in San Francisco as whole was the same, indicating a large share of the renters that rent control caused to remain at their 1994 address would have left San Francisco had they not been covered by rent control.
These effects are significantly stronger among older households and among households that have already spent a number of years at their address prior to treatment. This is consistent with the fact that both of these populations are likely to be less mobile. Renters who do not need to move very often are more likely to find it worthwhile to remain in their rent-controlled apartment for a long time, enabling them to accrue larger rent savings. Finally, Diamond, McQuade, and Qian found these effects are especially large for racial minorities, likely indicating that minorities faced greater displacement pressures in San Francisco than whites.
While expansion of rent control did prevent some displacement among tenants living in San Francisco in 1994, the landlords of these properties responded to mitigate their rental losses in a number of ways. In practice, landlords have a few possible ways of removing tenants. First, landlords could move into the property themselves, known as move-in eviction. Second, the Ellis Act allows landlords to evict tenants if they intend to remove the property from the rental market, for instance, in order to convert the units to condominiums. Finally, landlords are legally allowed to offer their tenants monetary compensation for leaving. In practice, these transfer payments from landlords are common and can be quite large.
Diamond, McQuade, and Qian found that rent-controlled buildings were 8 percentage points more likely to convert to a condominium than buildings in the control group. Consistent with these findings, they find that rent control led to a 15-percentage point decline in the number of renters living in treated buildings and a 25-percentage point reduction in the number of renters living in rent-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by converting existing structures to owner-occupied condominium housing and by replacing existing structures with new construction.
This 15-percentage point reduction in the rental supply of small multifamily housing likely led to rent increases in the long-run, consistent with standard economic theory. In this sense, rent control operated as a transfer between the future renters of San Francisco (who would pay these higher rents due to lower supply) to the renters living in San Francisco in 1994 (who benefited directly from lower rents). Furthermore, since many of the existing rental properties were converted to higher-end, owner-occupied condominium housing and new construction rentals, the passage of rent control ultimately led to a housing stock that caters to higher income individuals. Diamond, McQuade, and Qian found that this high-end housing, developed in response to rent control, attracted residents with at least 18% higher income. Taking
all of these points together, it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. Indeed, by simultaneously bringing in higher income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city.
It may seem surprising that the expansion of rent control in San Francisco, California led to an upgraded housing stock, catering to high-income tastes, while the removal of rent control in Cambridge, Massachusetts also lead to upgrading and value appreciation. To reconcile these effects, it is useful to think about which types of landlords would respond to a rent control expansion versus a rent control removal. In the case of rent control expansion, some landlords will choose to recoup some of their losses by converting to condo or redeveloping their building to exempt it from rent control. However, other landlords may choose to accept the rent control regulations, and no longer perform maintenance on the building and allow it to decay. In the rent control expansion case, one would see an increase in condominium conversions and upgrades, driven by the landlords that chose to respond in this way. However, when rent control is removed, the landlords who own the rent-controlled buildings are the ones who did not choose to convert to condo or redevelop in response to the initial passage of rent control. Indeed, one would expect this subset of landlords to choose to upgrade and invest in their properties once the rent control regulation is removed.
Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood. These results highlight that forcing landlords to provide insurance to tenants against rent increases can ultimately be counterproductive. If society desires to provide social insurance against rent increases, it may be less distortionary to offer this subsidy in the form of a government subsidy or tax credit. This would remove landlords’ incentives to decrease the housing supply and could provide households with the insurance they desire. A point of future research would be to design an optimal social insurance program to insure renters against large rent increases.
The authors did not receive any financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.
The author, Rebecca Diamond, is a Professor of Economics at the Stanford Graduate School of Business. This article is reprinted with the permission of its author and the Brookings Institution, a nonprofit public policy organization based in Washington, DC. For more information about the Brookings Institution, go to its website at www.Brookings. edu.
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