Debunking Rent Control Naysayers
I was recently sent this Brookings Institute article from 2018 entitled 'What does economic evidence tell us about the effects of rent control?' written by Rebecca Diamond as a counter argument to rent control advocacy. This article is one of many published by increasingly desperate economic think tanks. I've debunked many articles like this before in various places (and probably this one, they're all pretty indistinguishable), but I thought I'd put it together in one place as succinctly as possible. In my writing I treat the quoted piece with exactly the amount of respect and formality it deserves, which is to say, very little. So, let's take a look at what Rebecca Diamond tells us about what economic evidence tells us about rent control!
"Steadily rising housing rents in many of the US’s large, productive cities have reignited the discussion whether to expand or enact rent control provisions. Under pressure to fight rising rents, state lawmakers in Illinois, Oregon, and California are considering repealing laws that limit cities’ abilities to pass or expand rent control. While rules and regulations of rent control vary from place to place, most rent control consists of caps on price increases within the duration of a tenancy, and sometimes beyond the duration of a tenancy, as well as restrictions on eviction."
"New research examining how rent control affects tenants and housing markets offers insight into how rent control affects markets. While rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhood."
Because this is the Brookings Institute, this will all be very selectively chosen, pro financial capital research. Anyone expecting an actually objective article from an economic think-tank is clearly looking in the wrong place. These people's one job is to legitimize capitalism. Still, it's worth looking at their points because in this case, both their arguments and the underlying studies are both morally and logically shoddy.
"A substantial body of economic research has used theoretical arguments to highlight the potential negative efficiency consequences to keeping rents below market rates, going back to Friedman[!!!] and Stigler (1946). They argued that a cap on rents would lead landlords to sell their rental properties to owner occupants so that landlords could still earn the market price for their real estate. Rent control can also lead to “mis-match” between tenants and rental units. Once a tenant has secured a rent-controlled apartment, he may not choose to move in the future and give up his rent control, even if his housing needs change (Suen 1980, Glaeser and Luttmer 2003, Sims 2011, Bulow and Klemperer 2012). This mis-allocation can lead to empty-nest households living in family-sized apartments and young families crammed into small studios, clearly an inefficient allocation. Similarly, if rental rates are below market rates, renters may choose to consume excessive quantities of housing (Olsen 1972, Gyourko and Linneman 1989). Rent control can also lead to decay of the rental housing stock; landlords may not invest in maintenance because they can’t recoup these investment by raising rents. (Downs 1988, Sims 2007).
First of all, any article that quotes Milton Friedman is immediately suspect. He is irrelevant to economics and his ideas have had disastrous consequences for our economic system. But let's take a look at the arguments and their basic logical flaws:
Rent control leads landlords to sell their properties - This is a good thing. Landlords are an unnecessary middleman in the housing market and a drain on the economy.
Rent controls lead to "Inefficient Allocation" - A completely irrelevant argument considering a lack of rent control does nothing to increase this efficiency. Rather than people who already lived in "inefficiently allocated" apartments, however, they just go to the highest bidder.
"if rental rates are below market rates, renters may choose to consume excessive quantities of housing" - please.
Landlords wont invest in maintenance - In what world do landlords maintain their apartments anyway? Landlords will always do the bare minimum. The free market forces them to. That's market efficiency at work.
"Of course, rent control also offered potential benefits for tenants. For example, rent control provides insurance against rent increases, potentially limiting displacement. Affordable housing advocates argue that these insurance benefits are valuable to tenants. For instance, if long-term tenants have developed neighborhood-specific capital, such as a network of friends and family, proximity to a job, or children enrolled in local schools, then tenants face large risks from rent appreciation. In contrast, individuals who have little connection to any specific area can easily insure themselves against local rental price appreciation by moving to a cheaper location. Those invested in the local community are not able to use this type of “self-insurance” as easily, since they must give up some or all of their neighborhood specific capital. Rent control can provide these tenants with this type of insurance."
"Until recently, there was little data or natural experiments with which to assess the importance of these competing arguments, and to assess how rent controls affects tenants, landlords, or the broader housing market. But newly-available housing-market data spanning periods of dramatic change in rent control laws in Cambridge, MA and in San Francisco, CA have allowed economists to examine these questions empirically. While these studies do find support for the idea that existing tenants benefit from the insurance provided by rent control, they also find the overall cost of providing that insurance is very large."
This is blatantly false. Rent controls have been around far longer than the USA. There is plenty of data and literally years of economic analysis on this stuff.
"From December 1970 through 1994, all rental units in Cambridge built prior to 1969 were regulated by a rent control ordinance that placed strict caps on rent increases and tightly restricted the removal of units from the rental stock. The legislative intent of the rent control ordinance was to provide affordable rental housing, and at the eve of rent control’s elimination in 1994, controlled units typically rented at 40-plus percent below the price of nearby non-controlled properties. In November 1994, the Massachusetts electorate passed a referendum to eliminate rent control by a narrow 51–49 percent margin, with nearly 60 percent of Cambridge residents voting to retain the rent control ordinance. This law change directly impacted properties previously subject to rent control, enabling landlords to begin to charge market rents."
Tragic. Let's see what the effects were.
"Autor, Palmer, and Pathak (2014) (APP), studies the impact of this unexpected change and find that newly decontrolled properties’ market values increased by 45 percent."
It inflated housing prices. Good for people to whom housing is an asset. Bad for people to whom housing is a… house.
"In addition to these direct effects of rent decontrol, APP find removing rent control has substantial indirect effects on neighboring properties, boosting their values too. Post-decontrol price appreciation was significantly greater at properties that had a larger fraction of formerly controlled neighbors: residential properties at the 75th percentile of rent control exposure gained approximately 13 percent more in property value following decontrol than did properties at the 25th percentile of exposure."
It made it more expensive to buy, not only in those houses, but the surrounding areas? Doesn't sound like it was making housing more accessible so far.
"This differential appreciation of properties in rent control–intensive locations was equally pronounced among decontrolled and never-controlled units, suggesting that the effect of rent control had been to reduce the whole neighborhood’s desirability."
Didn't they say earlier that rent controlled units were so desirable that people wouldn't move? Perhaps they mean desirability to outside landlords.
"The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock is large, boosting property values by $2.0 billion between 1994 and 2004. Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly controlled units, while $1.7 billion is due to the indirect effect. These estimates imply that more than half of the capitalized cost of rent control was borne by owners of never-controlled properties. Rent controlled properties create substantial negative externalities on the nearby housing market, lowering the amenity value of these neighborhoods and making them less desirable places to live. In short, the policy imposed $2.0 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments."
"Capitalized cost" being the keyword here. Their investments weren't as profitable. This does NOT translate to actual cost like the article suggests, much less for the tenants. None of the renters were maintaining the asset prices of their rentals on balance sheets because they are tenants not owners. "But the owners have to pay the costs!" you might say. True, but if it weren't profitable, then the landlords wouldn't be renting the buildings.
"Diamond, McQuade, and Qian (2018) (DMQ) examine the consequences of an expansion of rent control on renters, landlords, and the housing market that resulted from a unique 1994 local San Francisco ballot initiative. In 1979, San Francisco imposed rent control on all standing buildings with five or more apartments. Rent control in San Francisco consists of regulated rent increases, linked to the CPI, within a tenancy, but no price regulation between tenants. New construction was exempt from rent control, since legislators did not want to discourage new development. Smaller multi-family buildings were exempt from this 1979 law change since they were viewed as more “mom and pop” ventures, and did not have market power over rents.
This exemption was lifted by a 1994 San Francisco ballot initiative. Proponents of the initiative argued that small multi-family housing was now primarily owned by large businesses and should face the same rent control of large multi-family housing. Since the initial 1979 rent control law only impacted properties built from 1979 and earlier, the removal of the small multi-family exemption also only affected properties built 1979 and earlier. This led to a differential expansion in rent control in 1994 based on whether the small multi-family housing was built prior to or post 1980—a policy experiment where otherwise similar housing was treated differently by the law."
Well, the last example wasn't too convincing. Let's see if this one is any better.
"To examine rent control’s effects on tenant migration and neighborhood choices, DMQ examine panel data that provides address-level migration decisions and housing characteristics for the majority of adults living in San Francisco in the early 1990s. This allows them to define a treatment group of renters who lived in small multi-family apartment buildings built prior to 1980 and a control group of renters living in small multi-family housing built between 1980 and 1990. Their data allows them to follow each of these groups over time up until the present, regardless of where they migrate."
So, before getting into it, what would be the ideal outcome here? If the rent control laws were effective, we would see tenants in the rent controlled buildings experiencing:
more economic freedom due to decreased housing costs
less displacement of rent controlled tenants.
The first point is pretty unambiguously clear, and supported by mountains of evidence. The real question pertains to the second point: Can the tenants benefiting from these cost reductions stay in their apartments and continue to see these benefits?
"Between five and ten years after the law change, the beneficiaries of rent control are 19 percent less likely to have moved to a new address, relative to the control group’s migration 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."
So older people more integrated with their neighborhood didn't have to move? This rent control thing sounds great!
"Renters who don’t 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, DMQ find 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."
"Rent control made me do it," - landlords.
"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 condos. 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."
"DMQ find that rent-controlled buildings were 8 percentage points more likely to convert to a condo 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."
An unfortunate side effect, but there are a few things to note:
Landlords moving into their own units works exactly once.
While some renters being pushed out is bad, at least the housing is owned by individual people rather than one landlord. If anything this increases the stability of housing in the area.
"This 15 percentage point reduction in the rental supply of small multi-family 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). "
If only there were a way to control those rent increases.
"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."
Except we already know people in rent controlled units experience greater overall stability even considering the housing converted into condos, so this less important movement is more than offset by the benefits.
"DMQ find that this high-end housing, developed in response to rent control, attracted residents with at least 18 percent higher income."
This is an INCREDIBLY dubious causal claim. This housing was developed after rent control, but we can look at any other city to see this isn't some unique trend. In fact, the original study cited here finds that, if anything, the displacement in rent controlled units is contingent on gentrification and not vice versa. They argue, "This evidence is consistent with the idea that landlords undertake efforts to remove their tenants or convince them to leave in improving, gentrifying areas. In addition, the rent control tenants are more likely to remain at their address within the less gentrifying areas[…]These combined effects lead tenants treated by rent control to live in lower quality areas." (Diamond, McQuade & Qian, 2019) An argument against rent controls that seems reasonable on the surface level, but is absurd upon closer inspection. These tenants remain in neighborhoods which are less desirable by choice. The argument here depends on the idea that displacement is ever acceptable, justifying it with the data suggesting some tenants on average might have been displaced into slightly higher income neighborhoods. It's a justification which I'm sure will bring great comfort to those being pushed out of their homes due to increasing rents.
Hidden deeper in this argument, however, is another flaw. The entire point is tautological. Gentrification IS the displacement of lower income tenants, so to argue that rent control pushed people out of gentrified neighborhoods and kept people in non-gentrified neighborhoods is like saying gentrified neighborhoods gentrified and non gentrified neighborhoods didn't gentrify. This isn't to suggest that this point is lost on Diamond, McQuade & Qian. I'm quite sure they understand what gentrification is and would never unintentionally make such an error.
"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."
As said above, this supposed contribution to gentrification seems to actually be the reverse. Neighborhoods which were able to push out rent controlled tenants were more gentrified. It's not a particularly salient point, but to claim any more would be to make unsubstantiated causal claims. I would also like to note that this is not the policy's intended goal. Rent control is meant to keep rents cheaper in rent controlled units. Of course if you expect rent control to be a silver bullet to every problem of gentrification and urbanization, then it will be a failure in your eyes. This is doubly true in cases where the rent control is not universal.
Additionally, the fact that "preventing displacement of minorities" is a point against rent control here shows exactly who the author's sympathies are really for.
"It may seem surprising that the expansion of rent control in San Francisco led to an upgraded housing stock, catering to high-income tastes, while the removal of rent control in Cambridge 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 regulation, and no longer perform maintenance on the building and allow it to decay."
Finally a great point! Landlords ARE bad, Rebecca, keep going…
"In the rent control expansion case, one would see an increase in condo 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 didn’t 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."
This whole section is meant as some sort of justification for the fact that getting rid of rent controls leads to the same exact results that counted against rent controls in the main argument. The only point it really makes is that we shouldn't get rid of rent controls. Anyone who can't see the absurdity at this point has ulterior motives. Ultimately, one should only expect landlords to do the bare minimum, rent control or no rent control. That is why we need legal protections, and most importantly tenant organizing to make sure landlords actually keep these places livable.
"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."
Decreases affordability?? You have to wonder how the author came to that conclusion so contrary to the very first point in the article (housing prices decreased). This alone shows how deceitful this Diamond is being.
We've already seen why the gentrification point is moot. As for those "negative externalities," I fail to see how increased rents in non-rent controlled apartments is a satisfactory argument for anything but an expansion of rent control.
"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."
What in this hypothetical is stopping the landlords from just increasing the rent in the long run to counteract the subsidies and tax credits?
Additionally, we see a hint of another popular anti rent control fallacy here. "Decrease housing supply" is misleading because housing supply is not decreasing. In fact, housing for sale temporarily increases. There are however two factors which lead to a decrease in the rental supply. The first is the conversion into condos, which does push rents up. This is irrelevant to the problem, however, considering that rent controls directly counteract that and any other supply based fluctuations. The other decrease of supply in the rental market, ironically, is exactly what rent controls are intended to do. This decrease is due to people renting apartments and not being forced to move. This decrease in supply also roughly coincides with a corresponding decrease in demand because people can be confident and secure staying in the rentals they choose to rent.
"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."
