How Should We Think About Rent Control
Rent control does not make housing more affordable; it just slows the rate at which housing becomes less affordable. Strong rent control can protect tenants from displacement, but it is not a recipe for broad housing affordability.
What is rent control?
“Rent control” refers to any regulation that limits the ability of landlords to raise the rent.
Can you be more specific?
Rent control can take a lot of different forms, depending largely on how strict it is and what kind of rental housing it applies to. There’s a big difference between capping annual rent increases at three percent and capping them at five percent plus inflation. Similarly, it matters a lot whether a given rent control policy includes vacancy control (see below).
If we are going to regulate rents, we want to do so in a way that protects renters’ stability of tenure without discouraging new development or creating unintended side effects. The details matter!
What’s vacancy control?
Vacancy control is a type of rent control that puts limits on the amount that a landlord can raise the rent in between tenants. Under vacancy control, the new tenant pays the same amount of rent as the old tenant.
This is in contrast to what’s called “vacancy decontrol,” where the landlord can raise a unit’s rent to the market rate when a new tenant moves in. Vacancy decontrol can create incentives to evict long-time tenants who are paying far below market rates.
Why regulate rents?
The primary reason to regulate rents is to prevent economic displacement, or people being forced to move out of their long-time homes because the market price of housing has risen steeply.
In other words, rent control provides tenants with security of tenure by preventing them from being priced out of their homes when there’s a surge of housing demand in their neighborhoods. Note that rent control does not make housing more affordable; it just slows the rate at which housing becomes less affordable. Strong rent control can protect tenants from displacement, but it is not a recipe for housing affordability.
Are there any potential downsides to rent regulation?
Regulations that limit the amount of rent a building owner can charge discourage people from building new buildings and maintaining existing ones.
Applying rent stabilization to brand-new buildings discourages new housing construction because it makes development financially riskier and therefore more expensive. Explaining why this is the case requires a brief foray into real estate development finance.
Developers borrow money from investors to finance the construction of new buildings. For building new homes to be worth the effort, developers need to collect enough from rent or sale to pay back the investor with interest, usually over a 25 or 30 year term. (The developer also expects a decent profit on top of the paying back their creditors.)
If a developer gets unlucky and their building opens during a period of low housing demand, they may have to lower their rent price or offer incentives to attract tenants. This is great for renters, who get a sweet deal on a nice new apartment. It’s not great for developers, who may have to take rents that are not high enough to cover their loan payments until the market rebounds.
Opening a new building during a recession becomes a much bigger issue with rent control. If the people getting a sweet deal on rent can keep that deal indefinitely, then it becomes much harder to pay back the cost of construction. This, in turn, makes development financially riskier, which means that investors will demand higher returns. If developers don’t think the rents they can collect will be enough to cover repayments to investors, then the housing won’t get built.
That doesn’t sound great. Anything else I should be worried about?
Poorly designed or overly aggressive rent regulations can also distort housing markets by locking people into below-market rents. This encourages them to stay in homes that don’t fit their needs. For example, researchers estimate that San Francisco’s rent control policy, which covers apartments built before 1978, increases renters’ probability of staying at their address by nearly 20 percent. In extreme cases, it can encourage people who own houses elsewhere to hold onto rent-controlled apartments for use as pied-a-terres.
Where vacancy control is in effect, rent control can create black markets for below-market homes. Where it isn’t, it can create strong incentives to illegally evict tenants so landlords can reset rents to market rates.
However, careful policy design, combined with housing abundance, can provide security of tenure for renters, reasonable returns for developers, and enough revenue for landlords to cover operating costs and building maintenance.
Why does it make sense to exempt new buildings from rent control?
Remember how rent control can discourage housing development? Cities and states can easily avoid this issue by exempting buildings from rent control for the first 15 or 20 years of their existence. By the time rent control kicks in, most developers will have paid back their loans, meaning the risk they face from rent regulation is greatly diminished.
Also, the point of regulating rents is to protect vulnerable tenants who may not be able to find replacement housing at prices they can afford. Because brand new apartment buildings tend to be at the high end of the market, they attract wealthier tenants who are more able to absorb rent increases than long-time residents of older buildings.
In short, reserving rent stabilization for older, less-expensive buildings protects the most vulnerable tenants without creating financial risks for developers that discourage them from building badly-needed housing.
What is the case for allowing landlords to raise the rent at all? Why not just cap rent increases at inflation?
At the risk of stating the obvious, maintaining and operating a building costs money.
If the rent a landlord can collect is not high enough to cover maintenance and operating costs, they will neglect their buildings. We see this in declining industrial cities with high vacancy rates like Detroit, where the market price of rent is not high enough to keep buildings in good condition. In such places, landlords neglect their properties, with deleterious effects for tenants.
Similar neglect issues persist in cities with high housing demand and extreme rent control, like Mumbai, where strict rent controls and inflation have eroded the value of the rent that landlords are allowed to collect. Some rents are held at pre-1940 levels, which works out to less than $10 a month for some apartments. Because that rent is nowhere near enough to cover basic structural maintenance costs, older buildings regularly collapse in heavy rains, killing dozens of people.
Allowing for modest rent increases, roughly in line with inflation or wage growth, preserves tenants’ stability of tenure while ensuring landlords have enough operating income to maintain their buildings.
What’s the problem with vacancy control?
Vacancy control may sound good in theory, but it can have serious unintended consequences.
First, it can create black markets for below-market-rate apartments. If the rent-regulated price for an apartment is far below its market price, landlords and master tenants have a strong incentive to capture some of the value of the subsidy, whether through outrageous “broker fees,” key money (essentially a bribe to a current tenant or landlord), or illegal subletting.
Second, vacancy control can encourage landlords to pull apartments from the market and keep them vacant. New York City’s rent control system forbids landlords from raising rents on tens of thousands of vacancy-controlled prewar apartments. These units need significant investment to bring them up to modern habitation standards—many have not been updated in decades—but the allowable rent increases are not high enough to cover the cost of renovation. As a result, landlords “warehouse” the units by keeping them vacant and off the market.
While vacancy control is not workable in practice, a sensible rent stabilization policy without vacancy control can avoid these issues.
It sounds like you YIMBYs really don’t like rent control.
When paired with abundant housing supply, rent regulations are a great policy for protecting tenants from displacement. However, rent control on its own will not make housing broadly affordable, and poorly-designed rent controls have unintended consequences, which we discussed earlier.
As such, it’s important to design rent regulations to maximize tenant stability while avoiding the negative consequences that can come from bad policy design.
Okay, so what does a good rent control regime look like?
In general, successful rent control regimes exempt newer buildings from rent regulations, allow reasonable rent increases for existing tenants, and let landlords raise rents to market rates for new tenants. Additionally, rent control is most successful when paired with pro-housing policies that prevent housing shortages and promote affordability. Housing abundance can slow down rent growth even for buildings that are not covered by rent control.
Where can I go to learn more?
Here are some resources if you’d like to know more:
This primer was prepared by Max Dubler.