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Why the Conventional Wisdom on Rent Control Isn’t All That Wise

It’s gospel among economists that regulating rents is a bad idea. But there’s evidence that the burdens it imposes might be an acceptable price for society to pay.

Overhead view of a busy street scene on 1st Avenue in New York City.
Apartment buildings of all sizes line 1st Avenue in New York City.
(Ryan DeBerardinis/Shutterstock)
There are three reliable ways to get the average economist mad at you. One is to make a derogatory comment about free trade. Another is to extol the benefits of raising the minimum wage. The third is to say something nice about rent control.

The modern anti-rent-control crusade goes back to the mid-1940s, just after a rent freeze was imposed on New York City apartments to deal with runaway price inflation during World War II. In 1946, renowned economists Milton Friedman and George Stigler of the University of Chicago published a paper they called Roofs or Ceilings: the Current Housing Problem. They argued that controlling rents allowed landlords to neglect their units and resort to devious means to force their tenants out, enabling rent increases. Friedman and Stigler had a reasonable point to make about a rigid New York-style rent ceiling. But it didn’t invalidate the idea of restricting property owners to modest annual increases in times of intense housing inflation.

Nevertheless, the Friedman-Stigler doctrine quickly emerged as gospel among economists and especially among landlords, who saw that it suited their profit-making interests just fine. Eventually, 37 states passed legislation prohibiting any form of rent regulation. A poll in 1990 conducted by the American Economic Review reported that 93 percent of economists thought rent control was a serious mistake. “It’s become almost a textbook cliché: in any intro econ class you learn about why rent control is a bad idea,” in the words of J.W. Mason, an economics professor at the John Jay College of Criminal Justice in New York who has devoted much of his career to challenging the conventional rent-control wisdom.

But the anti-rent-control fortress may be showing a few cracks at a time when rent inflation is rampant again in affluent parts of the country. Americans now pay out an average of 37 percent of their monthly income on housing. States and cities are looking at serious regulatory experiments. Oregon passed a state law in 2019 that provided for a limit on annual rent increases for apartments more than 15 years old. The law also imposes tougher standards on eviction and holds that renovation of a unit is not an acceptable standard for tenant removal.

Next month, voters in Minneapolis and St. Paul will decide whether to drop rent control restrictions. The referendum in St. Paul is part of a campaign to cap annual increases at 3 percent on most units in the city. In Illinois, a law that would repeal a 27-year-old rent-control ban is under consideration in the Legislature. Altogether, about 200 communities in the United States have some form of rent regulation in place. Most of them are in California, New Jersey and New York.

The original rent control law promulgated in New York City, which froze rents at their existing levels, was indeed the meataxe that Friedman and Stigler warned would depress new construction, and it probably did. But over the years it evolved into a “stabilization” program of modest allowable annual increases, which in most recent years have averaged about 3.5 percent. It came to apply only to older units, and whenever most of these acquired a new tenant, they switched from control to stabilization. As of 2017, there were still about 20,000 apartments in New York under strict rent control but nearly a million in the stabilization program. In 2019 the law was revised in a pro-tenant direction, denying landlords the right to jack up rents by 20 percent when an apartment acquired a new resident.

Even a relatively strict law like the one in New York constitutes a strong argument against the idea that rent regulation retards new construction. Mason has written persuasively that it’s “hard to believe that builders are thinking twice about putting up new buildings because of rent stabilization when it hasn’t applied to new buildings in nearly 40 years.”

THERE ARE, HOWEVER, OTHER DEBATES over whether rent regulation is a long-term solution to urban housing inflation. Many of them revolve around the rent-stabilization program enacted in Cambridge, Mass., in 1970. It was a tough law — it imposed a strict monetary cap on increased rents for all the units in the city and restricted the removal of any unit from rental stock. The provisions stayed in place for nearly a quarter-century, then were repealed in a statewide referendum in 1994. Cambridge residents voted overwhelmingly to keep the law, but it went down statewide by a 51-49 count.

Since the Cambridge law fell, a succession of studies has sought to determine what the impact of that and other rent-regulation regimes actually was. The conclusions are not clear-cut. Most of them have found no significant decline in new construction and have documented clear short-term benefits for the tenants living under regulation, although they detected an increase in conversion of apartments to condominiums, slightly shrinking the number of units in the affordable category.

Perhaps the most comprehensive study, published in the Journal of Political Economy in 2014, reported that the market value and rental costs of buildings rose 45 percent in Cambridge after they were decontrolled, for a total increase in property values of $2 billion. “In short,” the study’s authors wrote, “the policy imposed $2 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.” That might suggest that the burdens of rent regulation can be an acceptable price for the society to pay.

San Francisco has lived under a rent-regulation regime since 1979. It enacted tough limits —outright ceilings on rents — but it exempted new construction and buildings with five or fewer units (although the five-unit exemption was repealed in 1994). A study conducted in 2018 by three Stanford University economists found that rent-regulated buildings in San Francisco were 8 percent more likely to convert to condominiums than unregulated buildings and that there had been a reduction of 25 percent in the number of renters living under regulation. It also concluded that residents of the newly created condos had incomes 18 percent higher than their predecessors. In short, the study suggested that rent control was bringing more gentrification to San Francisco, adding to its continually rising costs of housing.

But given the sluggish condo market of the past few years, condo conversion is not the threat to regulated apartments that it may have been earlier in this decade. The condo market nationwide clearly failed to keep pace with rental prices in 2020. Condos may be coming back a bit this year, but the contention that landlords will flock to condo conversion to escape the strictures of rent regulation seems a bit out of date.

And even with some 60 percent of San Francisco’s apartments under some form of regulation, the rents remain startlingly high: The average rent on a one-bedroom unit in the city earlier this year was more than $2,800. That can be treated as evidence that rent regulation isn’t working very well. Or it can be seen as evidence that things would be much worse without it and that this is no time to take it away.

OF COURSE, THERE ARE OTHER SUGGESTIONS for how to deal with galloping rent inflation. One would be for local governments to simply subsidize the rent payments of tenants with low incomes. Another would be to provide the tenants with a new rental tax credit. Both of those would come out of the public treasury, and would impose on it a significant fiscal burden. They would also likely prove less attractive to voters than taking a chunk out of landlords’ substantial profits. The voters would have a point.

But the most compelling case for rent regulation goes beyond the research and the statistics. It is that continuity and stability are vital elements of any neighborhood’s social health. They are weapons against the alienation and loneliness that prevail in any community in which nothing, not personal relationships nor physical familiarity, ever seems permanent. J.W. Mason put it eloquently a couple of years ago. “I don’t see security of tenure for renters as charity for the needy,” he wrote, “but as a basic feature of a civilized country.” I can’t say it better than that. Most economists don’t get this, and never will, because they can’t slap a number on it.

You may remember the old joke about the two economics professors, one a fresh-faced novice and the other a tenured veteran. The novice comes up with a promising new idea. The older man sneers at him. “That may be all right in practice,” he says, “but it will never work in theory.”

OK, it’s a joke. But it’s also a reminder not to take economists too seriously when they start talking about things like the regulation of rent.
Alan Ehrenhalt is a contributing editor for Governing. He served for 19 years as executive editor of Governing Magazine. He can be reached at ehrenhalt@yahoo.com.
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