A July 16, 2024, a White House “Fact Sheet” reported that the president “is taking action to make renting more affordable for millions of Americans.” Biden wants to require rental owners to “cap rent increases on existing units at 5% or risk losing current valuable federal tax breaks.” Also proposed are building more affordable housing units in Nevada and fixing distressed housing including “building more affordable housing and revitalizing neighborhoods,” to alleviate the shortage of “affordable” housing.
The plan affects only those properties with 50 or more units. Of the 49,547,000 rental units in this country,18,738,000, 38 percent, consist of more than 50 units,. Assuming Congress passes it (a huge assumption), rental owners of more than 50 units who increase rents more than 5 percent, will lose those “valuable federal tax breaks” including depreciation tax breaks on their properties.
Rent control has been a staple in several cities and states for supposedly making housing more affordable and plentiful.
How has that worked?
Has rent control made more affordable housing available? It hasn’t. In fact, looking at the history of rent control in such cities as New York, Newark, and Chicago, it does just the opposite. A study by the National Multihousing Council in 2018 citing a 2000 article by Dirk Early in the Journal of Urban Economics reported that 30 percent of the tenants in rent controlled housing are in the top half of income.
Early also reported that landlords prefer to rent to smaller household, such as one or two people, and seniors, leaving people with two, three, or more children, possibly low-income, with a more difficult time finding “affordable” housing.
It was also supposed to result in more integrated neighborhood. It didn’t. In New Jersey, for example, they found rent control increased segregation.
An advantage to landlords is that rent-controlled tenants stay longer, even though that may not offset the disadvantages. Tenants, a study found, may tolerate homes that are too small or too large because it not only costs so much to move but the rent would be higher elsewhere. Edward Glaeser and Erzo Luttmer pointed out in a 2003 article in American Economic Review that 15 to 21 percent of New York City tenants lived in units that were too small or too large, with presumably a comparable situation in every city that has rent control.
In total and in addition, the National Multihousing Council explained in its report, “Rent control and rent stabilization laws generally led to a reduction in the available supply of rental housing.”
Rent control laws generally lead to a lower supply of rental housing as rental owners do several things to ensure their properties actually make a profit. That includes condo conversions and taking properties out of the rental market. In Boston, for example, David P. Sims wrote in a 2007 article in the Journal of Urban Economics, that thousands of rental properties went off the market because of condo conversions.
Rent control often benefits people who could just as easily pay market rent. Richard Green, a USC professor and director and chair of the Lusk Center for Real Estate there wrote, “One of the reasons I don’t like [rent control] is because it’s not targeted. You could have rich people living in a luxury building in Manhattan who now get the benefit of rent control, and that’s just silly to me.. . . It helps people who just don’t need help.”
In the category of “you can’t do just one thing,” rent control can mean a loss of tax revenue for cities. For example, in the late 1980s New York City lost about $4 billion in property tax revenue because the assessed values of properties, which are based on the net income of owners, dropped because of lower rents, meaning lower property tax revenue. A similar situation faced Cambridge, Massachusetts which lost between five and ten million dollars per year in property tax revenue in city of about 100,000 at the time. As an aside, when Cambridge eliminated rent control in 1994, real estate values grew by $1.8 billion reported the National Bureau of Economic Research.
Rent regulations change the jobs and administrative processes of city governments because they have to hire inspectors and bureaucrats to administer the rent control. In Cambridge, they estimated that rent control cost about $40 per unit. In the vicious circle, less tax revenue means there’s less money to hire inspectors, so housing quality slides slowly into disrepair creating blight and more slums.
The chances of this rent control plan passing are slim to none. The rental housing industry, which contributes millions of dollars to Congressional campaigns and the Realtors, the second largest lobby, will come out in force against any such legislation. But rent growth has slowed in the last year, anyway. Realtor.com reported that asking rents fell 0.4 percent in June, year over year, so the surge in rent hikes may have abated for now.
Just think about the bureaucracy and cost a nationwide rent control would require. To keep up with all the rental properties ensuring their rent increases remained below the mandated five percent, the government would have to hire hundreds or thousands of inspectors and bureaucrats. Lacking those, the ability to enforce the law would be curtailed. At some point, it could require more money to operate the program than it could ever possibly earn without fees charged rental owners that would put some owners out of business. Think about the problem Cambridge, Massachusetts had where it cost $40 a unit to administer that city’s rent control. That was in the 1980s. Assuming that those costs appreciated at the rate of inflation, it would cost more than $106 a year to keep up with each rental property. For the 18-million-plus rental properties with more than 50 units, the administrative costs would approach $2 billion.
Rent control, state, local, or in this case national, is just a bad idea, one that would inflict further difficulties and costs on rental owners and renters that comes with the side effects ending in a bloated bureaucracy unable to handle the work of dealing with the nearly 19 million rental units it would have to administer with no increase in available affordable housing. The move for rent control is afoot but fortunately unlikely to become law in the near future.
