The Political and Policy Conundrum of Rent Control

Over the past two years, rent appreciation has slowed in many of the country's largest rental markets. Rent growth has slowed particularly at the high end of the market, where there has been substantial investment in new supply. However, many renters continue to feel stretched after a half-decade of sharply rising rents.

• The typical renter nationwide now spends about 28.8 percent of their income on rent, above the historical average of 25.8 percent. In some markets, the median is much higher: 47.6 percent in Los Angeles, 39.7 percent in San Francisco, and 42 percent in Miami.

• Among low-income renters, the share of income necessary to pay rent is above 45 percent in all but one of the country's 25 largest metro areas. The median bottom-tier rent in New York, Los Angeles and San Francisco now requires essentially all of a bottom-third earner's wages, which has led lower-income households to double up and to move farther outside the urban core.

• In the most dire cases, rising rents can push families into homelessness, but for many more renters it contributes to a lingering anxiety. Controlling for age and income, renters in ZIP codes with the fastest rising rents are five times more likely than renters in ZIP codes with slower rent growth to say that they are worried about not being able to remain in their homes as long as they want.

It is perhaps unsurprising then that the idea of rent control is very popular.

• When asked whether there should be limits on how much rents can change in a given year, 75 percent of respondents surveyed in the 20 largest metro markets said yes – ranging from 81 percent in Tampa, 80 percent in New York, 79 percent in Los Angeles and 78 percent in Seattle and Minneapolis to 72 percent in St. Louis and 70 percent in Dallas, according to the Zillow Housing Aspirations Report (ZHAR) from October 2017.

• This popularity transcends housing tenure (84 percent of renters and 70 percent of homeowners support the idea), age (74 percent of young adults age 18 to 34, and 76 percent of prime working age and older adults support the idea), and political party affiliation (80 percent among respondents who "lean Democrat" and 66 percent of respondents who "lean Republican" support the idea).

And it is perhaps even less surprising that, given this level of popularity, some lawmakers – notably in California, Illinois and Washington – are proposing laws that would repeal existing bans on rent control or otherwise limit how cities can regulate rent increases.

However, rent control is an issue for which political sentiment and good policy can run counter to each other. Economists overwhelmingly agree that rent control ultimately backfires for renters by reducing investment in rental housing, which reduces rental supply and raises rents higher than they would otherwise have been. A recent study on rent control in San Francisco found that it reduced rental housing supply by 15 percent and caused a 5.1 percent increase in rents citywide.

This is not intended to imply that rent control can never be part of the policy toolkit.

First, in emergency situations – such as in the aftermath of natural disasters when there is a temporary spike in demand from displaced households and a sudden drop in the number of habitable units – housing supply is naturally unable to respond in real time to these sudden shocks and temporary rent controls may be appropriate to prevent price gouging. As long as they are explicitly temporary in nature, these emergency rent limits are unlikely to permanently remove the market incentives to rebuild.

Second, while there is little doubt that rent controls distort a market's natural response to add supply as prices rise, there are broad swaths of public policy where market distortions are tolerated because they advance other aims – such as protecting vulnerable or meritorious populations. One prominent example in the housing market is property tax credits or exemptions for senior citizen, disabled and veteran homeowners. In the case of senior citizens, the objective is often to protect longtime homeowners on fixed incomes from displacement if their property tax liabilities rise in line with local home values. Property tax breaks are similar to price controls in that they protect certain homeowners from market fluctuations but also distort markets to some degree by removing price-based incentives to move.

There is little in the economist's toolkit to identify to what degree policymakers should be willing to tolerate market distortions for broader societal goals. But it is worth noting that these distortions are hardly uncommon in practice.

Overall, despite the idea's popularity among the general public, there are strong reasons to take a cautious tack when it comes to rent control. While we would not go so far as to say that rent control should never be considered – indeed, it may be appropriate in some limited cases – it should be applied judiciously and with eyes wide open to the long-term distortions that it can create, which can ultimately harm the renters it aims to help.

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