Cat and Bear's Blog

Rent Control News and Studies Dump

A running dump of rent control studies and articles for my reference:

General Surveys

Last week’s survey of the US expert panel was a nice reminder that there are still issues on which economic opinion is mostly settled. The Biden administration’s proposals to cap rent rises for corporate landlords at 5% per annum might be politically popular with some voters but it certainly did not go down well with economists. US rents, alongside home prices, have been rising at an uncomfortably fast pace. But economic logic – together with decades of empirical evidence – suggests a cap will simply make things worse... Asked whether the proposed cap would make middle-income Americans substantially better off over the next decade, 74% of respondents – weighted by confidence – either disagreed or strongly disagreed. Just 16% were uncertain and only 2% agreed. The mechanism through which a cap would mean middle income Americans were exactly what theory suggests: lower supply. Asked whether such a cap would substantially reduce the amount of apartments available to rent over the next decade, 72% of respondents – again weighted by confidence – either agreed or strongly agreed and only 7% either disagreed or strongly disagreed. Finally, the panel was asked if such a cap would substantially reduce US income inequality over the coming ten years. Uncertainty, weighted by confidence, was a little higher at 21% but 57% disagreed and 22% strongly disagreed. None of the respondents either agreed or strongly agreed.

It is widely assumed that economists differ with each other on virtually every issue of relevance to their profession. Indeed, this supposed phenomenon is at the core of numerous jokes at their expense. Careful research, however, does not bear out this popular perception... only 4.7 per cent did not concur with the statement that 'A ceiling on rents reduces the quantity and quality of housing available'.

Academic Research

although rent control appears to be very effective in achieving lower rents for families in controlled units, its primary goal, it also results in a number of undesired effects, including, among others, higher rents for uncontrolled units, lower mobility and reduced residential construction. These unintended effects counteract the desired effect, thus, diminishing the net benefit of rent control.

Using a 1994 law change, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants and landlords. Leveraging new data tracking individuals' migration, we find rent control limits renters' mobility by 20 percent and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15 percent by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law.

On 23 February 2020, the Berlin Senate introduced the Berlin rent freeze (‘Mietendeckel’). The law was repealed on 25 March 2021. The Berlin rent freeze was an unprecedented market intervention in the German housing market. We analyse how the rent cap part of the legislation which fixed rents at below market levels affected the supply side in the short term. We find rent decreases accompanied by decreases in supply five times as large. We further investigate spillover effects on the purchase market, regionally heterogeneous effects as well as different effects by dwelling characteristics. We find the rent freeze did not have spillover effects on dwellings for sale which point to a ‘wait-and-see-attitude’ on the investors’ side.

The standard analysis of price controls assumes that goods are efficiently allocated, even when there are shortages. But if shortages mean that goods are randomly allocated across the consumers that want them, the welfare costs from misallocation may be greater than the undersupply costs. We develop a framework to empirically test for misallocation. The methodology compares consumption patterns for demographic subgroups in rent-controlled and free-market places. We find that in New York City, which is rent-controlled, an economically and statistically significant fraction of apartments appears to be misallocated across demographic subgroups.

We use the price effects caused by the passage of rent control in St. Paul, Minnesota in 2021, to study the transfer of wealth across income groups. First, we find that rent control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. A calibrated model of house prices under rent control attributes a third of these losses to indirect, negative externalities. Second, leveraging administrative parcel-level data, we find that the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities. For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.

A major social cost of rent control is that without a fully operational price mechanism the 'wrong' consumers end up using apartments. When prices are set below market price, many consumers want to rent apartments even though they receive little utility from those apartments. Unless apartments are somehow allocated perfectly across consumers, rental units will be allocated to consumers who gain little utility from renting and rental units will not go to individuals who desire them greatly. The social costs of this misallocation are first order when the social costs from underprovision of housing are second order. Thus for a sufficiently marginal implementation of rent control, these costs will always be more important than the undersupply of housing.

these regulations can generate unintended consequences, stifling housing supply, reducing labour mobility, and driving up rents in unregulated dwellings. Market distortions caused by rent controls can also lead to discrimination against marginalised groups and the emergence of black-market activities. Based on an analysis of 196 studies evaluating the impact of rent controls across 8 domains, this report finds that rent control has numerous negative effects. Though the majority of studies suggest rent controls leads to lower rents in controlled housing and higher homeownership they also result in:

The five essays by distinguished economists assembled in this Readings span five countries and 50 years of national housing policies. In such circumstances it would hardly be surprising to discern irrelevancies for modern problems or disagreement among the authors on policy issues. On the contrary, the essays are remarkable in two respects: first, for their topicality and relevance for current housing policy; second, for their broad agreement on the economic effects of rent control... Their common message is simple, but devastating in its criticism of policy. It is that in every country examined, the introduction and continuance of rent control/restriction/regulation has done much more harm than good in rental housing markets—let alone the economy at large—by:

The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock is large, contributing $2.0 billion of $7.7 billion in Cambridge property appreciation in the decade between 1994 and 2004. Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly controlled units (holding exposure constant), while $1.7 billion is due to the indirect effect. Notably, the majority of this indirect effect ($1.1 of $1.7 billion) stems from the differential appreciation of never-controlled units. When both direct and indirect effects are combined, our estimates imply that more than half (55 percent) of the capitalized cost of rent control was borne by owners of never-controlled properties.

Still, there are some “consensus findings” from empirical research... One thing that is consistent is that the variance of costs and benefits within a market is almost always very large. Net benefits are very poorly and in some cases perversely targeted. Analysis of individual costs and benefits in the markets mentioned above shows no consistent redistributive effect. Typical private landlords are better off than typical tenants, but in the few markets for which we have data, the differences are not great; in markets with many private tenants and landlords, there are surely some well off tenants benefiting from controls and landlords with modest incomes.

In 2020, Berlin introduced a rigorous rent-control policy responding to soaring prices by capping rents: the Mietendeckel (rent freeze). The German Constitutional Court revoked the policy only one year later. Although successful in lowering rents during its duration, the consequences for Berlin’s rental market and close-by markets are per se not clear. This article evaluates the short-term causal supply-side effects in terms of prices, quantities, and landlords’ strategic behavior... Mechanically, advertised rents drop significantly upon the policy’s enactment. A substantial rent gap along Berlin’s administrative border emerges, and rapidly growing rents in Berlin’s (unregulated) adjacent municipalities are observed. Landlords started adopting a hedging strategy insuring themselves against the risk of contractually long-term fixed low rents following a potentially unconstitutional law. Whereas this hedge was beneficial for landlords, the risk was completely borne by tenants. Moreover, the number of available properties for rent dropped significantly, a share of which appears to be permanently lost for the rental sector. This hampers a successful housing search for first-time renters and people moving within the city. Overall, negative consequences for renters appear to outweigh positive ones.

Netherlands

The Netherlands has the highest proportion of rent-controlled homes in Europe... To keep up with population growth, the Netherlands needs about 100,000 new dwellings a year, but over the past decade it’s built an average of two-thirds that many. The shortfall has driven up prices for unregulated flats by a third since 2012... While people at the lowest income levels will benefit from the tight rent caps, those a bit higher on the economic ladder are being squeezed into a dramatically smaller private market.

Over 3,000 rental properties have disappeared from the market since the introduction of the Affordable Rent Act, which regulated rent for mid-market rentals... “The supply of mid-priced homes has generally increased. That is an effect that the government had in mind with the Affordable Rent Act,” Bart Kappenburg of Rent.nl told NRC. “At the same time, there has been a huge impoverishment in the more expensive - and much larger - segment. Net, the supply on the rental market has deteriorated enormously due to the new legislation.”

Argentina

Argentina's recent repeal of rent control by libertarian President Javier Milei has led to a surge in housing supply, with the freedom to negotiate contracts, previously restricted, directly causing a drop in rental prices... Since Millei's repeal of rent control laws took effect on December 29, the supply of rental housing in Buenos Aires has jumped by 195.23%, according to the Statistical Observatory of the Real Estate Market of the Real Estate College (CI)...

Sweden

A shortage of accommodation in Stockholm and other cities, is causing a major headache for young Swedes - in a country which has been championing rent controls since World War Two... In theory, anyone can join a city's state-run queue for what Swedes call a "first-hand" accommodation contract.., Once you have one of these highly-prized contracts it's yours for life. But in Stockholm, the average waiting time for a rent-controlled property is now nine years, says the city's housing agency Bostadsförmedlingen, up from around five years a decade ago. This wait-time doubles in Stockholm's most attractive inner-city neighbourhoods. The traffic-jam has fuelled a thriving sub-letting or "second-hand" market, with "first-hand" renters and owners alike offering apartments to tenants for very high prices, despite regulations designed to stop people being ripped-off.

Building of rental homes almost dried up after a financial crisis in the early 1990s, and there is a dire shortage of properties. Demand is such that it is almost impossible to get a direct contract. With nearly half of all Stockholmers – about 500,000 people – in the queue, it can take 20 or 30 years to get to the top of the pile. Some of those who live in overcrowded accommodation are able to jump the queue, but there is no system of prioritising key workers or people in desperate need of a roof over their heads. Rents in newbuild apartments are higher because the companies have been exempted from rent controls, although quality is said by some to be higher. Low rents in the municipal sector mean many properties require renovation and repair. The result is a thriving rental property black market, with bribes of as much as 100,000 kronor per room to obtain a direct contract, McCormac says. Many people sublet space in their rental apartments. When one tenant advertised a tiny closet last year for rent, there were many potential takers.

Nobel laureate Gunnar Myrdal, an important architect of the Swedish Labor Party’s welfare state, on the “left.” Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” His fellow Swedish economist Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Ireland

Government measures to control rents have backfired and in many cases have led to an increase in rents, a new report has claimed. The study by economist Jim Power suggests that rent pressure zones (RPZs), introduced in 2016 to limit rent price increases, have resulted in significant "rent rigidities" and an inefficient two-tier system where the proper maintenance of rental properties is no longer economically viable. This has prompted many smaller landlords to exit the market and to be replaced by institutional landlords with new stock at higher rents.

Vietnam

Addressing a crowded news conference in the Indian capital, Mr. Thach, on a seven-day visit along with Communist Party Secretary Nguyen Van Linh, admitted that controls keeping prices of essentials far below their value had artificially encouraged demand and discouraged supply."We made a great imbalance and it has destroyed the economy," ..."The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy,” he said.

United States

The researchers find that while the policy prevented short-term displacement of incumbent tenants, landlords responded by converting rental housing to other uses, reducing the overall supply and ultimately making rents even less affordable. Rent control seems to have contributed to the gentrification of San Francisco, the exact opposite of the intended goal.

With the passage of the rent control ordinance, there’s now a useful real-world experiment taking place. Was the conventional wisdom true that rent control would reduce housing construction, and if so, to what degree? ...With three months of data on the books since the passage of the rent control measure in November, results are rather grim for anyone hoping for new apartment buildings in St. Paul. Compared to the same period during the previous year, multifamily building permits are down over 80 percent. Meanwhile, in Minneapolis overall construction is up as the economy has rebounded.

In the mid-1990s Cambridge, Massachusetts, scrapped its rent controls, while San Francisco made its regime even stricter. In Cambridge apartments freed from rent control saw a spurt of property improvements. San Francisco experienced its own residential investment boom, but one that was aimed at getting round the rules, for example by converting rental properties so that they could be sold. The subsequent 15% reduction in supply by affected landlords pushed up rents across the city by more than 5%.

Why wasn’t a single housing unit built in Melbourne in the nine years after World War II? Because rent control laws had made the buildings unprofitable. Why did Washington, DC, see its available rental housing stock decline from 199,000 to less than 176,000 in the 1970s? Because fewer people were willing to rent their homes because of price controls. Why did building permits decline by 90 percent in Santa Monica, California, in 1979 from just a few years earlier? Again, because rent control laws had made the building of new units unprofitable.

We have decades of research showing rent control makes housing shortages worse, which explains why there’s near-universal opposition to rent control policies among economists. Economists put the profession's conventional wisdom to the test, only to discover that it's correct... Economists Rebecca Diamond, Timothy McQuade and Franklin Qian have a new paper that looks at the effects of rent control in San Francisco, a city notorious for high housing costs. They find that the effects of rent control are pretty much what economics textbooks would predict... Landlords affected by the new 1995 policy tended to reduce rental-unit supply by 15 percent...There are two other important but invisible groups of people who were hurt by San Francisco’s rent policy. First, there are people who want to move to the city, but can’t. Second, converting apartments into condos reduces the supply of rental housing and raises rents. The authors’ model estimates that the 1995 policy raised rents in San Francisco by 5.1 percent.

Additional evidence shows that tenant benefits declined rather sharply between the two years, and that in each of the years benefits were higher for older tenants, richer tenants, and white tenants than for their counterparts. Finally, evidence presented here suggests that, due to the in-kind nature of the program, the cost to landlords exceeded the benefits to tenants by about 75 percent.

In Manhattan, we found that there was almost a 9% higher probability of an older and smaller building being in unsound condition if its units were rent controlled versus uncontrolled... Given the very small distributional impacts we have reported in other work, it is virtually impossible to justify this price control as good public policy.

Germany

And indeed a recent study by the German Institute for Economic Research found that rents in the newly regulated market of flats built before 2014 have declined by 11% compared with the still-unregulated market for newer buildings. But the problem, entirely foreseeable and foreseen, is that the caps have made the city’s housing shortage much worse: the number of classified ads for rentals has fallen by more than half. Tenants, naturally enough, stick to their rent-capped apartments like glue. Landlords use flats for themselves, sell them or simply keep them empty in the hope that the court will nix the new regulation. Meanwhile, rents and sale prices in the still-unregulated part of the market, and in cities close to Berlin, such as Potsdam, have risen far faster than in other big German cities.

#politics #urbanism