How Rent Control Reduces the Affordable Supply
by Ted Thurn
Rent control is often considered by some state and local government officials as a means to create more affordable housing by limiting the amount a property owner can charge for renting out a home, apartment, or other type of real estate. As rental rates rise, demand for apartments increases and Americans see a larger portion of their income go to paying rent. As policymakers search for answers to combat this growing problem, one of the first solutions they consider is rent control.
Over the last few years, property managers and owners have addressed rent control legislation in their respective states. Rent control (also known as rent stabilization) is a government-enforced price control measure limiting the price of rents that property owners may charge for rental housing.
The theory behind rent control is to allow certain tenants to reside in an area that may otherwise be out of reach. With rent control, the rent charged to a tenant who lives in qualified housing is strictly regulated, with a maximum placed on the amount the landlord may charge the tenant. Therefore, rent control is effectively a price ceiling imposed by the governing entity.
During the 2019 legislative session, several states introduced bills to establish rent control; Oregon and Illinois are two of those states. At first glance rent control appears to be a quick fix to provide instant housing affordability. However, a closer examination shows the many negative, unintended consequences of rent control that can result in a significant reduction of affordable rental housing, along with other problems.
On Feb. 28, Oregon Governor Kate Brown signed Senate Bill 608 into law. With the signing of the bill, Oregon became the first state in the nation to impose statewide limits on how much landlords can raise rents. The new law generally limits rent increases to 7 percent annually plus the change in the Consumer Price Index. Some smaller and newer apartment buildings would be exempt.
The measure’s passage comes as median rent in Oregon has increased by more than 14 percent statewide in recent years. In Portland, the epicenter of the crisis, median rents have risen 30 percent since 2011, adjusted for inflation.
Illinois state legislators have introduced several bills to address rent control. Illinois House Bill 255 is the first of four similar pieces of legislation introduced thus far this legislative session that would repeal the Rent Control Preemption Act, which prohibits local governments from enacting rent control. A second rent control bill, House Bill 2192, would not only repeal the Rent Control Preemption Act, it would also create six regional rent control boards to impose rent control statewide.
Although rent control is well-intended, it is widely discredited by many, if not most economists, and many housing advocates. In a National Multifamily Housing Council survey conducted in 2016, 93 percent of economists with the American Economic Association agreed that rent control undeniably reduces the quality and quantity of available housing.
The primary reason rent control doesn’t work is that artificially depressed rents discourage private investors from constructing new rental units or improving their existing properties. It also encourages owners to convert buildings from residential to non-residential use. Without profitability as an incentive, investment capital is directed to other markets and maintenance on existing properties is deferred.
The arguments against rent control include the following economic and social impacts:
Reduces the quantity of available housing
Most economists assert that setting a price ceiling on housing reduces the housing supply in a market. With maximum prices set, there is less incentive to repair and rent spaces or to build new rental property.
Reduces the quality of available housing
Because rent control reduces the return on rental housing investments, it can lead to a decline in the existing rental quality. Property managers faced with decreasing revenues may be forced to reduce the amount they invest in maintaining and repairing existing property.
Reduces new construction
By forcing rents below the market price, rent control reduces the profitability of rental housing, directing investment capital out of the rental market and into more profitable markets. Construction declines and existing rental housing is converted to other uses.
Reduces property tax revenues
Rent control reduces the market value of controlled rental property, both in absolute terms and relative to property values in unregulated markets. The tax implications of this reduction can be significant, as the taxable assessed value of controlled rental property declines relative to unregulated property.
Reduces incentive to maintain controlled property
Rent control discourages property managers from maintaining their property. When rent ceilings limit supply and turnover, property managers are less motivated to maintain properties and attract new tenants.
Reduces a property manager’s ability to meet expenses
Because rent control forces rents below the market price, it reduces the profitability of rental housing. This loss of revenue may make it difficult for a property manager to meet routine expenses.
IREM is opposed to government control of rents and supports a property owner’s right to establish pricing that produces sufficient income to accommodate the basic needs of residents and encourage investment in new construction and existing properties. IREM urges elected officials at all levels of government to oppose rent control as it significantly affects the housing inventory by accelerating the deterioration and loss of existing housing while discouraging the new construction.
Ted Thurn is director of government affairs for the Institute of Real Estate Management