TCS Daily

Out of Control

By Richard L. Cravatts - June 7, 2004 12:00 AM

Recent calls for a 'kinder, gentler' form of rent control -- as was proposed last year in Boston, for instance -- clearly causes concern for property owners, particularly at a time when, in some municipalities, vacancies are rising and rents are being reduced, not through regulation but by the actions of the marketplace itself.

While lawmakers have often looked to regulation in the rental housing market to induce desired social benefits, the lessons of rent control are simple: not only has it consistently failed to serve those very individuals it was designed to help, but it has a number of perverse effects, namely, of actually creating a scarcity of affordable housing; speeding the deterioration of existing rental stock; depriving owners of constitutionally protected property rights; creating strong disincentives for new development; and skewing the marketplace with artificially high and low rent levels.

Just as important to consider, in the face of declining commercial tax revenues and escalating municipal expenses, is that rent control tends to artificially lower the overall property tax base of a locality. Controlled properties generate less income and must therefore be taxed at a lower rate than they would have had the buildings been rented at market rates. Cities and towns with rent control programs thus inevitably demand greater amounts of state aid, depriving other localities of their respective shares. It was precisely this issue that convinced Massachusetts voters, as one example, to reject rent control completely in 1994.

Before any new form of rent regulation is thrust upon the housing market, even with mechanisms by which owners would have more control and tenants would have less, state and city officials and housing advocates would do well to consider how rent control historically created more problems than it solved in the municipalities that chose to use it:

  • Rent control fails to actually assist those groups -- the poor and the elderly -- it was ostensibly designed to help, since the absence of any form of means testing and a general fear of lower-income tenants encourages landlords to rent their controlled units to people with higher incomes and more secure lifestyles. A Department of Housing and Urban Development study supported that same conclusion when it suggested that "the benefits of rent control are poorly targeted . . . Significant numbers of well-to-do renters live in rent-controlled apartments and enjoy substantial benefits, while many lower-income renters receive little or no benefit."
  • There is no way -- short of an entire new bureaucracy -- to efficiently, fairly, or accurately assess tenants who are elderly, disabled, or 'low or moderate' income, those individuals generally identified as being most in need of protection. Tenants groups, and the rent control boards who have essentially served as their advocates, have assiduously resisted any attempt at means testing, positioning it as invasive and in violation of tenant privacy. But while they are happy to let tenants "self-assess" their right to landlord-subsidized housing without any review of their actual ability to pay, they see no problem in evaluating every financial detail of a landlord's ownership -- up to and including determining the return he or she can enjoy on a property, how the property is maintained or improved, and at what profit it may be operated or sold.
  • Cities with rent-regulated housing have a great disparity in the rent levels between rent controlled units and market rate units. The Cato Institute's William Tucker observed how price controls, including rent controls, typically create a 'shadow market' in which demand exceeds supply, creating a shortage -- in this case of affordable rental units. Renters who cannot access controlled units, therefore, are faced with the option of having to choose from units elsewhere in the market with disproportionately high rent levels. "Although rent controls are widely believed to lower rents," Tucker wrote, "data . . . collected from eighteen North American cities show that the advertised rents of available apartments in rent-regulated cities are dramatically higher than they are in cities without rent control."
  • Rent control limits, rather than increases, the supply of affordable housing. It makes controlled units scarcer by encouraging renters never to give up their units. Without a means test, with a scarcity of other controlled units to move to, and with the miniscule vacancy rates characteristic of cities with rent regulations, tenants have many disincentive to move or even look for alternate housing. This often results in an unfair and inefficient allocation of scarce resources when, for instance, retirees remain in a large, multi-bedroom unit after their children have left home. "Even moderate rent control ordinances reduce mobility noticeably," a HUD study noted, "thereby leading tenants to occupy units whose characteristics are not well-suited to their current circumstances, such as family size and job location."
  • Related to the decline in the market value of buildings put under rent control is the trend of owners to defer maintenance and repairs, since in the face of controlled rents an adequate return on investment is difficult to realize. That would be particularly true in Boston, where the acquisition costs for properties is currently among the highest in the nation and owners have significant debt service to be offset by rental income. MIT's Center for Real Estate recently studied the effect of rent control on the deterioration of housing stock and found that in a variety of categories controlled units consistently reported a higher percentage of maintenance deficiencies than market-rate apartments.
  • Rent regulations serve to discourage home ownership opportunities and the creation of new housing. A tenant fortunate enough to have obtained a controlled unit rarely is likely to give it up, meaning that the resident is less apt to become a homeowner rather than a tenant. New Yorkers, for instance, have a home ownership rate of 28 percent, roughly half that of residents of other major, non-rent controlled U.S. cities. In regulated housing markets, investment capital also is not likely to flow in the direction of new construction. Investors are loathe to put capital at risk when government interference limits their return, exposes their projects to uncertain approvals and permits, and offers no long-term guarantees for future rent levels and cash flows.

Richard L. Cravatts, Ph.D., writes frequently about rent control, real estate development, law, entrepreneurship, and other public policy issues. He recently wrote for TCS about A Real Harlem Renaissance.


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