With rising rents and financial strife from the COVID-19 pandemic rippling through U.S. cities, some municipalities are turning to rent regulation as a policy to help tenants stay in their homes.
Voters in St. Paul, Minnesota, passed one of the nation’s strictest rent regulation measures in early November, capping rent hikes there at 3% annually. Unlike other ordinances, rent regulation in St. Paul is not linked to inflation and new construction is not exempt. The St. Paul ordinance is also unusual in that it applies to all types of rentals in buildings of any age.
The law is set to take effect next year, though the city still has to work out the details and some housing developers have told the Minneapolis Star Tribune they will re-evaluate their building plans.
Other cities are moving in the same direction. Minneapolis also recently paved the way for rent regulation; Santa Ana, California, passed a rent cap ordinance; and Boston Mayor Michelle Wu is on the record as a rent regulation supporter.
Rent control versus rent stabilization
Rent regulation is a blanket term for government intervention in the residential rental market involving either rent control or rent stabilization measures. Rent control generally refers to hard rent caps, limiting the amount a landlord can charge for a protected unit. Rent stabilization allows for yearly rent increases, usually a small percentage of the previous year’s rent.
Economists typically think strict rent caps constrain housing supply in the long run. The argument boils down to this: The U.S. needs more housing, not less, and rent control stifles developers’ profit incentive to build. For economists, it’s about how supply and demand affect prices. When it comes to rental housing, supply and demand are out of whack — there’s more demand than supply. Freddie Mac, the government-sponsored mortgage buyer, estimates the U.S. is short 3.8 million residential units — apartments or houses for rent or sale. More supply should lead to lower rents, the economists’ argument goes.
“Advocates argue that, in some markets, rent control policies are a necessity to ensure affordability, tenant stabilization, and the rights of tenants,” write University of Dayton political science professor Joshua Ambrosius and his co-authors in one of the papers featured below. “Critics, including many economists, free-market supporters, and landlords, counter that these policies — even in mild forms — create inefficiencies in the rental housing market and have adverse effects on the quantity and quality of rental housing.”
Research focuses on dollars and cents
Economists have tended to focus on the quantity, quality and cost of housing when they study rent regulation. From an academic perspective, it can be difficult to study in detail how tenants benefit by being able to stay in their neighborhoods for years.
These benefits could include relationships, professional, personal and educational, that develop over time and can promote upward economic mobility. Maybe a tenant in a rent-regulated unit can afford to live close enough to walk their kids to school, or have a short commute to work. Simply put, there are non-monetary benefits that come with housing stability.
Public financial data captures monthly rents, property sales and new construction that developers undertake (or don’t) in response to rent regulation. That data can’t quantify the value an individual or family gets from being in a neighborhood for a long time. Such data can be gathered through surveys or interviews with tenants, but qualitative studies can be costly and there are ethical considerations for researchers, such as ensuring confidentiality for subjects. In short, the data that is easily available on tenants and rental buildings is the data that gets studied.
“Economists tend to slight the importance tenants attach to security of tenure,” University of California, Riverside economics professor Richard Arnott wrote in 2003. “A housing unit is a tenant’s home. Coming to know her neighbors and the local shops, she will develop at least some sense of community.”
A brief history of rent regulation in the U.S.
California, Maryland, New Jersey, New York and Oregon offer various forms of rent regulation at the state level, according to the nonprofit National Multifamily Housing Council. There are 25 states that prevent municipalities from enacting rent control.
Rent control emerged in the U.S. after the country entered World War II. “Putting the country on a war footing required massive relocation of labor, with consequent pressure on many local housing markets,” Arnott explains in a 1995 paper. “Controls were imposed to ensure affordable housing and to prevent profiteering.”
After the war came a homebuilding boom. By 1950, New York City was the only place that kept wartime rent controls, essentially freezing rent increases. Arnott refers to those measures as first-generation rent control. They form “the basis for the common opposition to rent control among economists,” according to Arnott.
Most modern versions of rent regulation emerged in the 1970s, including in Boston, Los Angeles, San Francisco and Washington, D.C. These second-generation rent regulations “commonly permit automatic percentage rent increases related to the rate of inflation,” Arnott writes.
They often allow landlords to apply for exemptions — for example, if they are having trouble with cash flow. The new St. Paul ordinance allows landlords to apply for exemptions for a variety of reasons, including property tax changes and unavoidable maintenance costs.
The third generation of rent control, which Arnott explores in the 2003 paper, is called tenancy rent control. This is where rent increases are controlled for a particular tenant, but the base rent can be adjusted for new tenants once the original tenant vacates.
Arnott argues in the 2003 paper that tenancy rent control can be a decent compromise between the need for tenants to achieve housing stability and landlords to make money and invest in building upkeep. For example, when a tenant vacates a unit, the landlord could raise the base rent above market rate to front-load profits, in anticipation of gaining below market rent in later years of the new tenant’s tenure.
In a recent non-peer-reviewed policy brief from the New York University Furman Center, Sophie House and her co-authors propose rent regulation measures should focus on preventing egregious rent hikes and include targeted subsidies, such as property tax credits for landlords.
Local building regulations and the design of specific rent regulation ordinances will vary. It’s important that journalists understand whether proposed or adopted rent control ordinances look more like first wave or third wave historical rent regulation. And it’s not just rent control that can affect housing supply — zoning laws on the books in certain jurisdictions can limit the supply of multifamily housing.
Here are a few takeaways from the papers featured in the research roundup below:
- Rent regulation helps tenants stay in their homes, but landlords and developers may respond in the long run by building more expensive housing not subject to rent regulation.
- Buildings covered by rent regulation may still be subject to investor takeovers aimed at displacing tenants from rent-regulated units.
- Strict rent controls can depress property values for rent-controlled and nearby market-rate buildings.
- But less restrictive rent regulation is not associated with lower rates of new housing construction or lower overall property values.
Read on for more.
The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco. Rebecca Diamond, Tim McQuade and Franklin Qian. American Economic Review, September 2019.
The research focus: The authors explore whether a 1994 rent control expansion in San Francisco meant tenants were more likely to stay in their homes and in the city.
- Because rent control was linked to the year a building was built, the law produced a natural experiment, leaving “very similar buildings and tenants without rent control,” the authors write.
Key background: Buildings in San Francisco with five or more apartments became subject to rent control in 1979. New construction was exempt — so were owner-occupied buildings with four or fewer units. Over the years, investors would buy those smaller buildings, then sell a portion of building shares to someone living in the building or someone who would move in, making the buildings owner-occupied.
- “These small multi-family structures made up about 44% of the rental housing stock in 1990, making this a large exemption to the rent control law,” the authors write.
- For buildings built before 1980, the 1994 law removed this mom-and-pop loophole investors were exploiting.
The data: The authors use address history for San Franciscans from 1980 to 2016. This dataset from private firm Infutor includes subsequent addresses of people who left the city and moved somewhere else in the U.S. during those years. They parse renters from buyers using property records from private firm DataQuick, and they track large building investments with permit data from the city planning office. Lastly, they track condo conversions with parcel history data from the city assessor’s office. The authors split renters into two groups: those living in a small multifamily building built between 1900 and 1979 and those in a small multifamily building built between 1980 and 1990.
- The second group covers a much smaller timeframe, so it includes fewer renters. But, they span many neighborhoods across the city.
What the research says: Tenants in rent-controlled apartments stayed in their homes longer — they were 10% to 20% more likely to be at their 1994 address 10 years on. They were also less likely to leave San Francisco compared with tenants not living in rent-controlled apartments. Black, Hispanic and Asian tenants in rent-controlled apartments were all more likely to stay in the city relative to white tenants covered by rent control.
- “We find tenants covered by rent control do place a substantial value on the benefit, as revealed by their choice to remain in their apartments longer than those without rent control,” the authors write.
- But, because landlords and investors responded to the 1994 law with condo conversions and new construction, rent control “not only lowered the supply of rental housing in the city, but also shifted the city’s housing supply toward less affordable types of housing that likely cater to the tastes of higher income individuals,” the authors find.
New Dynamics of Rent Gap Formation in New York City Rent-Regulated Housing: Privatization, Financialization, and Uneven Development. Benjamin Teresa. Urban Geography, March 2019.
The research focus: Benjamin Teresa, an assistant professor of real estate and finance at Virginia Commonwealth University, takes a close look at how investors in 2005 bought the Riverton Houses, a rent-regulated, multifamily housing development in Harlem, New York, to try to profit from rent gaps.
- A rent gap is the difference between rent charged and rent that could be charged in the market if the building owner regularly invested in things like building upgrades and grounds maintenance — or, if the owner neglected the property.
- “Since 2001 professional investors connected to broader capital markets, such as private equity firms, have purchased tens of thousands of rent-regulated housing units, with some estimates placing investors’ market share at 10% of the total regulated rental housing stock and higher in some neighborhoods,” Teresa writes.
Key background: The New York City Council in 1994 loosened renter protections through something called vacancy decontrol. If rent on a stabilized unit reached $2,000 per month and the tenant moved out, the landlord could charge market rates thereon. Stabilization permitted landlords to impose only modest rent hikes. The threshold for vacancy decontrol bumped to about $2,700 per month in 2015. State law eliminated vacancy decontrol in 2019. Teresa explores one example of how investors profited from 25 years of vacancy decontrol.
The data: Teresa used public data on deed transfers, mortgage agreements and tax records for the Riverton Houses from 2005 to 2014, and the Commercial Mortgage Backed Security prospectus where investors projected the property’s income growth.
- Plus, Teresa interviewed 18 experts in affordable housing, including attorneys who represent tenants and staff members of housing development organizations. He also interviewed five real estate finance experts.
- Teresa focuses on the injection of speculative capital into the rent-stabilized market — less so on what happened to tenants in the Riverton Houses as a result of that speculation.
What the research says: The rent gap, and the potential for profit, was large for the Riverton Houses. Teresa calculates the average rent-stabilized unit would have taken about three decades to reach the deregulation threshold, where it could then be rented for market rates. The investors noted they would need to achieve market rates faster than that to make their debt payments. They didn’t meet their marks, “throwing Riverton into foreclosure and a series of new owners,” Teresa writes.
- The case of the Riverton Houses is ultimately a snapshot of the interplay between profit potential and inner city revitalization that occurred throughout the 1990s and 2000s across the U.S.
- The potential for high rents in low-rent buildings was “no longer limited to disinvested neighborhoods,” and “‘already gentrified’ neighborhoods may experience new cycles of investment because previous reinvestment waves have further increased potential rents,” Teresa finds.
A caveat: The paper explores one residential development in the nation’s most populous city. The findings are informative, but not necessarily generalizable to other developments in other cities.
- Still, “situating changing rent control law within the realm of privatization, and in this case more specifically the state’s role in expanding the scope for private extraction of urban land rent, connects this case with other examples of privatization that produce new income streams,” Teresa writes, specifically noting similar deregulation laws in San Francisco.
Forty Years of Rent Control: Reexamining New Jersey’s Moderate Local Policies after the Great Recession. Joshua Ambrosius, John Gilderbloom, William Steele, Wesley Meares and Dennis Keating. Cities, August 2015.
The research focus: There is no statewide rent control policy in New Jersey, but municipalities there can enact their own ordinances on rent regulation. The authors explore how 40 years of rent control in the state affect median rents, new construction and overall property values.
- “New Jersey, a national leader in tenants’ rights since the 1960s, is an excellent case study of the effects of moderate rent controls because so many (over 100) of its municipal governments have adopted these controls,” the authors write. “While not completely ideal, New Jersey is the best available laboratory for examining the impacts of rent control.”
Key background: Rent control ordinances in New Jersey cities arose during the 1970s. More recent rent control policies fall under the second wave of rent control, which tend to be less restrictive than the first wave. New Jersey has a variety of types of municipalities — cities, boroughs, towns and townships — but the authors refer to all of them as “cities” for short. Some cities tether allowable rent increases to cost of living calculations, while others allow a specific percentage increase within a range, most commonly between 3% and 4%.
The data: Focusing on 2010, the authors identified 87 cities without rent control and 74 cities with rent control, with an average population of 28,800. They use 2010 census data, the most recent available at the time, to parse differences between cities with and without rent control ordinances.
What the research says: Average monthly rents are $63 higher in non-rent control cities — $1,090 versus $1,027 in cities with rent control. Rent control cities have twice the population, on average, as non-rent control cities. From 2000 to 2010, the authors do not observe any major difference in new construction or changes in property values between rent control and non-rent control cities.
- “Rent control cities have, on average, 50% more rental units, 70% more Black residents, and nearly 25% lower median incomes,” the authors write, with rent control cities experiencing greater population growth and lower vacancy rates from 2000 to 2010.
- Median income, not the presence of rent control, is a stronger predictor of rents, rooms per unit and rent per room. The authors note that recent rent control ordinances in New Jersey often “lack the teeth of past approaches that created firm price ceilings.”
Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts. David Autor, Christopher Palmer and Parag Pathak. Journal of Political Economy, June 2014.
The research focus: The authors take advantage of a natural experiment occurring in the mid-1990s in Cambridge, Massachusetts, to assess how a strict rent control ordinance there for decades directly and indirectly affected rental prices. Roughly 100,000 people lived in the city at the time.
- “Distinct from the ‘direct’ effect of decontrol, which by definition operates only on formerly controlled properties, the indirect channel may affect the market value of both decontrolled and never-controlled properties by increasing the desirability of the neighborhoods in which they are located,” the authors write.
Key background: Certain rentals in Cambridge were subject to strict caps on rent increases from 1970 to 1994. The caps applied to rentals built before 1969 that were not owner-occupied. Rent-controlled units were often about 40% cheaper than non-rent controlled units, and controlled and non-controlled buildings stood side-by-side. A statewide popular vote in 1994 ended rent control by a 51%-to-49% margin, though 60% of Cambridge residents who voted wanted to keep the controls.
- Tenants in rent-controlled units tended to have less income than those in market rate units, “though a significant number of units were also occupied by wealthy professionals,” the authors write.
The data: The main data comes from city administrative records on the assessed value of every condo and house in 1994 and 2004, plus information on condo conversions and the prices of every residential property sale from 1988 to 2005. The authors also track demographic changes with a decade of data from the Cambridge city census.
What the research says: Rent-controlled buildings were about half as valuable as market rate properties. After rent decontrol, their values jumped 25% compared with non-rent controlled buildings during the period studied. Market rate buildings also appreciated in value.
- Residential property in Cambridge appreciated $7.7 billion from 1994 to 2004. The authors attribute $2 billion of that value increase to rent decontrol. About half of the appreciation came from units that were never controlled. The value of market rate properties was suppressed by the strict rent control ordinance, they find.
- Landlords invested more in their properties after rent decontrol, with the total permitted building improvements jumping from $21 million per year from 1991 to 1994 to $45 million per year from 1995 to 2004.
This article first appeared on The Journalist’s Resource and is republished here under a Creative Commons license.
Previously Published on journalistsresource with Creative Commons Licenses
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The post Rent Control and Stabilization Policies: 4 Studies To Know appeared first on The Good Men Project.