Control Freak: Rent Control Resuscitated

0

Rent control is being considered as a viable option to address the affordability crisis.

By Fred Tayco and Alex Rossello

“Rent control is a problem for other places, not here.”  It’s a familiar refrain. After all, there are only five states (California, Maryland, New York, New Jersey and Oregon) and the District of Columbia that allow for rent control. Moreover, 36 states explicitly preempt localities from implementing it. By the numbers alone, it could reasonably be assumed that this doesn’t affect most of the country. Considering the broad agreement among academics, public policy researchers and industry experts about the disastrous consequences of this policy, this mindset is no surprise. This agreement is backed up by the experience in those areas with historical ties to this kind of regulation.

Unfortunately, as the saying goes, history tends to repeat itself.

As it revolves, old political ideas tend to return in modern times in shiny new packaging hiding tired old fallacies. Rent control is being yanked, again, from the waste bin of history and given new life as a viable option to address the nation’s housing affordability problem. This time rent control has received a round of rhetorical plastic surgery that redefines the policy in more “practical” terms.

Oregon is patient zero in this budding epidemic. Its newly adopted, state-wide rent control law has opened Pandora’s box, prompting several states to follow suit with their own rent regulation proposals (see chart and map). The law, which caps rent increases at 7 percent plus inflation, represents a successful attempt by advocates to characterize rent regulation as “anti-rent gouging,” giving it a thin gilding of reasonability. Advocates in California have used this blueprint to get a similar bill introduced this session by the state Assembly’s Housing Committee Chairman David Chiu.

Advocates have never stopped talking about rent control; they’ve just rebranded it to seem more acceptable under the guise of setting sensible limits on annual rent increases. With “housing as a human right” as a call to action, renters’ rights advocates and their champions in government are looking for a quick fix to an emotionally-charged issue. Rent regulation provides an out-of-the-box solution for policymakers that is easy for voters to understand, simple to implement and affords short-term relief to low-income households who are fortunate enough to reside in the small segment of newly rent-controlled apartments.

Keeping Score

Consensus today is rare; consensus among economists is exceedingly rare. To bolster that point, some cite a poll conducted by the American Economic Review that resulted in 93 percent of economists agreeing that “a ceiling on rents reduces the quantity and quality of housing available.”

Socialist economist Assar Lindbeck frames rent control in stark but clear terms: “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”

Why do these arguments no longer resonate? Because factual arguments are giving way to emotional politics. Political forces have shifted to create an environment-friendly to this new wave of rent control.

Consider the following: As the economy has continued to improve since the financial crash, there has been a concerted effort to legislate in favor of the populations perceived as being “left behind.” At the same time, the apartment industry, compared to other real estate sectors, has done well during the economic downturn and subsequent recovery. The number of people choosing to rent, whether by choice or because of financial constraints, has quickly risen and continues to rise.

Despite this growth, the industry continues to suffer from a supply and demand imbalance, largely because of government-imposed barriers to construction at the local level and not-in-my-backyard (NIMBY) community opposition. Meanwhile, states and localities are plagued by housing affordability challenges. Elected officials are feeling the pressure to provide relief to cost-burdened renters or populations in their communities who are facing homelessness or displacement, stifling the growth of housing supply and increasing the cost of developing and operating rental housing. Given the perceived solvency of the apartment industry, apartment owners and operators are an easy target for shouldering the resulting impacts of regulation.

Making matters worse, housing policy is being driven by a generation of elected officials who have no practical real estate experience nor knowledge of the historical failures of rent regulation and are under pressure to adhere to an ideology of “housing justice.”

The Numbers Are Scary

For decades, the industry has warned of the consequences of supply failing to keep pace with demand. In 2017, NAA and NMHC committed the problem to paper by producing a report, “U.S. Apartment Demand– A Forward Look,” which identifies the need for 4.6 million new units by 2030.

At that time, it would have required the construction of 328,000 units per year just to keep pace with demand. We have only begun to meet those goals within the past two years. But even so, decades of under-construction have left a massive shortage in the overall apartment housing supply, which were not accounted for in the Demand Report. Add to that the existing older stock of apartments, which could number up to 11.7 million units, that need to be rehabilitated.

Policymakers understand this and are concerned; however, they are pressed to do something in the short-term, even if that “something” hobbles the sustainable solution: Construction of more units. Unfortunately, that “something” is often to force affordability. Enter Rent Control.

We Need You

Jason Furman, former Chairman of the White House Council of Economic Advisors to the Obama Administration, states it perfectly: “The U.S. could build a lot more apartments, but multifamily housing units are the form of housing supply that is most often the target of regulations.”

To overcome this hurdle, the industry must actively engage with governments at all levels to prioritize, plan and partner with policymakers at all levels of government to reach our shared goals:

PRIORITIZE the Development of Apartment Housing. Apartments make the most of a community’s limited infrastructure and resources through their design and efficient use of land. Communities should capitalize on these efficiencies by removing regulatory barriers to apartment construction and rejecting proposals that act as barriers to investment and development.

PLAN for a Diversity in Apartment Housing. Apartments represent America’s most affordable housing option. They are both responsive to the needs of residents and flexible enough to accommodate the demands of a modern-day workforce. Today’s successful communities serve residents of all economic levels. Those that encourage this diversity best position themselves to remain competitive in an increasingly global economy.

PARTNER with your local Apartment Association. Not all communities are alike. What works for one may not work for another. To find the best solution for each community, policymakers should work directly with NAA’s network of more than 150 affiliates. As active members of the apartment industry that reside in the communities that are served, NAA members are best positioned to act as partners in a community’s success, because they are vested in its success!

Placing A Face with the Name

California voters overwhelmingly rejected Proposition 10, an effort to repeal the state’s 1995 Costa-Hawkins Rental Housing Act, which preempts localities from instituting rent control after its passage. Two campaigns were waged against Proposition 10 and included all the right messaging against the expansion of onerous rent control. That said, it wasn’t just the message that won the day, it was the messengers.

The campaigns engaged and assembled the groups of people who would be hurt by the passage of the policy. The diversity of opponents came from the affordable housing community, seniors, civil rights, labor, veterans, ethnic organizations, civic groups, elected officials and the business community. Notably, this included groups like the California State Conference of the NAACP, State Building & Construction Trades Council of California and the California Senior Advocates League.

This year, the Illinois legislature refused to advance a bill that would have overturned its statewide preemption on rent control. Like California, the SHAPE Illinois Coalition assembled a diverse group to articulate what the adoption of rent control would do to their communities. With the help of groups like the Chicago & Cook County Building & Construction Trades Council, Hispanic Housing Development Corporation and South Suburban Mayors and Managers Association, the industry was able to communicate the impact to the broader community in a very personal way.

At the end of the day, successful campaigns communicate their effect on people and their well-being, not an economic or policy argument. By communicating that impact, these campaigns were successful in exceedingly challenging environments. They were successful because they put a large community behind their effort—a concept this industry knows a thing or two about.

Different Flavors of Rent Control

Rent Control or Rent Cap: A government-run board sets the maximum rent—this is exceedingly rare.

Rent Stabilization or “Anti-gouging”: A government-run board sets the amount that rent can be increased within a specified time—this is more common.

Inclusionary Zoning: The government requires a percentage of apartments to be set aside with rents at a specific income level as a condition of approval—currently the most common.

Rent Control Support: The Road to Ruin Is Easy to Travel

Rent control’s main supporters are professional advocates, armed with the notion that our current housing affordability problems are insurmountable by anything less than government intervention, and cannot get any worse. To them, rent control is an off-the-rack “solution” with little to no cost to government (or so they think).

That combination tempts legislators, especially when they look at the alternative of having to wait for years to build new supply in an environment that was hostile to begin with.  Rent control represents an easy out. It satisfies the cries to do something today without having to deal with the future fallout.

The good news—and the bad news—is we don’t have to wait for the future to know what awaits the implementation of rent control. It’s a lesson we’ve learned many times and many ways.

Other Perspectives

To get an idea why policymakers would ignore this broad consensus, look at the helplessness with which they view the crisis. Try to see the issue from these perspectives:

Their Constituents: While most have recovered from The Great Recession, some have been “left behind.” The number of people renting apartments is at an all-time high. What’s more, that number is growing at a faster pace than previous generations, making renters a more potent voting bloc.

The Real Estate Industry: By and large, the rental housing industry has done well – particularly when compared to other real estate sectors. However, despite strong demand for rental housing, communities have not built enough apartment homes to keep up with demand, leading us to today’s crisis.

The Body Politic: There is a generation of public officials that have inherited the housing crisis and have no practical experience with the many failures of rent control. This is exacerbated by last November’s election, wherein a distinct movement of left-leaning candidates, buoyed by far-left progressives, focused on topics like social justice and equity.

The Apartment Industry: These factors have converged on the rental housing industry. It seemingly shoulders both the blame and the responsibility to alleviate years of active and passive neglect.

On one side, the industry has been unable to develop new supply because of onerous government regulations which appease Not-In-My-Backyard (NIMBY) community hostility. On the other side, the industry is challenged to keep units affordable in the face of escalating operations and management costs—therefore finding itself caught in the crossfire with little control and less sympathy.

Further, it has been so long since the industry has dealt with the idea of preemption that not many people within the industry can either remember or articulate why preemption is necessary. Given that, what makes you think your state policymaker will know?

 

Fred Tayco is Director, External Affairs, and Alex Rossello is Manager, Public Policy, for NAA.

 

Click here to read the article at the National Apartments Association’s Units Magazine.

 

About Author

Director of Education & Outreach, National Real Estate Investors Association

Comments are closed.