There has been increasing demand for rental housing due to multiple factors discussed elsewhere in my blog, including high home ownership costs, demographic shifts, lifestyle preferences, burdens of student and consumer debt. Supply has not kept up with this demand, especially in the area of affordable housing due to the increasingly high costs of construction (labor and materials), permitting, and land acquisition. However, income levels for many people has remained relatively stagnant, especially in relation to general inflation and frequently below the specific subset of higher rent inflation.
This increasing rental demand with insufficient supply and stagnant wages has resulted in a growing percentage of household income going to housing, whether as an owner or a renter. This disparity has increased so much that the number of renter households considered cost burdened (37.5% of renters spend 35+% of their income on rent) or severely cost burdened (23% of renters spend 50+% of their income) has become a widely perceived problem.
Government and politicians understandably view this as a valid, significant issue for their constituents. Not only does it limit people’s ability to afford the housing they desire, but it also takes funds away from consumer spending and other mechanisms of economic growth that the government generally likes to encourage.
There have been sporadic attempts to help the supply side. This warrants more awareness and focus than it receives, since supply side initiatives create a “rising tide raises all ships” environment where everyone can benefit and investors are incentivized to spend their hard earned money plus valuable life time creating affordable housing. In the current environment, without incentives, investors have no reasonable reason to create affordable housing. It is difficult to do, and the returns are paltry at best. So, why bother unless the investor is a government or non-profit organization whose purpose is to create housing without needing to create income or mutual benefit to an investor?
It has become conceptually easier and more politically expedient to focus on the existing base of properties and investors than help drive the supply side, and regulations have re-surfaced that limit the amounts that landlords can charge. This theoretically results in caps on increases in rent and keeps those rental increases from spiraling out of control for many income/cost constrained households, as has been occurring especially in high demand markets. The majority of voters are tenants (or home owners) and the minority are rental property owners. So, landlords are the easier target to place restrictions on and allow politicians to demonstrate they are “doing something” to address the affordable housing issue.
As a result, there is recent or pre-existing rent control legislation adopted in Oregon, California, Illinois, Maryland, New York, New Jersey, and Washington DC. As a counterpoint to that, it is interesting to note that 37 states actually have laws that prevent local governments from implementing rent control measures, presumably in response to the many studies showing that rent control can be an unintentionally bad thing. Landlord groups have recently filed lawsuits in federal court against some of these state rent control initiatives, claiming that they violate property owners’ constitutional rights.
There is extensive evidence from many different sources that rent control does not work overall or as intended. Experts against rent control include both liberal and conservative leaning political groups (spanning from Democrats and NPR shows to conservative and libertarian think tanks), the vast majority of professional economists, and even some well-informed housing advocates who go beyond a soundbite level of solutions.
A survey of economists with the long standing National Economics Association found that 93% of professional economists agreed “a ceiling on rents reduces the quality and quantity of housing available.” It creates a short term gain for long term pain situation. There have actually been some prior laws that were later removed after negative repercussions were observed in the real world from the initially well intentioned laws.
Here are examples of what rent control can inadvertently create:
- Landlords more likely to raise rents now even when did not plan to do so: Some landlords that did not plan to raise rents are now actively planning to raise them to the maximum allowed by new laws. This allows them to not get too far behind in the future, by taking incremental steps on a consistent basis rather than no or minimal rent increases for a while to encourage good tenants to stay. There is evidence that this is already happening in California, for instance.
- More likely to terminate leases that would otherwise be extended: Landlords are incentivized to terminate and not provide extensions for tenants who have leases well below market. If landlords feel trapped by their lower rents and ability to raise them closer to market rate at some point in the future, then the only way to get them up closer to market rate in some states is to completely end the existing lease and start fresh with a higher market rate lease and a new tenant. Different markets and legislation address this aspect differently, and it is considered a current plus future risk factor by property owners regarding potential future legislative change.
- Leases more likely to go month to month than long term: Instead of locking landlords into lower rate rents, they are more likely to be short term month to month leases which increases flexibility for landlords to get higher rate rents by starting fresh with a new tenant. This reduces landlord risk while increasing tenant risk of location disruption and moving costs.