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Rent Control: It Doesn't Work

Rent Control: It Doesn't Work

Excerpt #1 of 3: An Open Letter to State Representative Will Guzzardi, House District 39, Illinois General Assembly:

Why Rent Control is a Bad Idea for Chicago… and Everywhere Else.

IT DOESN’T WORK: Study after study has demonstrated that the intended benefit of rent control – to keep housing affordable for low and moderate-income people – not only fails to achieve this goal but, ultimately, makes things worse for all concerned.

There is a strong link between limiting the ability of property-owners and developers to raise rents to what the market will bear, and the amount of investment that will flow into housing. A reduction in investment in housing has two primary impacts. First, existing units will suffer from reduced maintenance as property owners are unable to realize a return on investment by increasing rent. Secondly, new housing production will decline for the same reason – both the developers of, and investors in, new-construction housing will be less likely to build or trade properties that are subject to rent restrictions.

As housing unit quality and quantity both decline, the market will diverge. Rent controlled units will be more affordable, but also less well maintained. New construction units will become scarcer and more expensive as developers build fewer new apartment buildings.

Ironically, demand for rent controlled units in desirable locations will increase as the supply stagnates. Lower-income families will still be driven out of these desirable communities as higher-income / higher-credit families submit stronger applications for rent controlled units as they become available. Ultimately, many lower-income families will migrate to less desirable communities, despite the best efforts of rent control to prevent this from happening. With rent control in place, the entire market will suffer from lower maintenance of the existing housing stock, lower production of new housing, and much higher rental prices for new housing as supply contracts. Thus, it is the very people your legislation seeks to help – namely, those families with limited financial resources – who will suffer the most from the long-term impacts of rent control.

Studies have conclusively demonstrated that lower-income people move more frequently than middle and upper-income families. Higher-income families in rent controlled markets will often stay in the same apartment for longer periods of time simply to maintain the price advantage of low rents that have been locked in over many years. Lower-income families typically have less job and income security, and must move more frequently. Over time, these families are the most likely to lose the benefit of low-cost rental housing in desirable areas.

You don’t have to look far to see how this plays out in places that have implemented rent control.  There is a direct, causal, inverse relationship between housing affordability and the implementation of rent control. New York, San Francisco, Los Angeles and Washington DC are all prime examples of cities where the primary beneficiaries of rent control have been upper-income renters. These are the people who have been able to stay in their apartments for decades. Over time, lower-income people gradually lose these benefits and have been driven out of the most desirable areas of these cities.

Cambridge, Massachusetts is an especially interesting example. Cambridge had rent control between 1970 and 1994.  In 1995, rent control was repealed in Cambridge when the state of Massachusetts outlawed it in all municipalities. A Massachusetts Institute of Technology (MIT) study of the impact of this repeal found that investment in housing increased once rent control was banned, resulting in major gains in housing quality and increases in supply. While lower-income families were indeed pushed out of Cambridge after 1995, this was not a new phenomenon. A 1985 study by Peter Navarro concluded the “poor, the elderly, and families – the three major groups targeted for benefits of rent control – were no more likely to be found in controlled than uncontrolled units.” Demand for rent control units had been intense prior to its deregulation, and rarely available units were in high demand. The people most likely to be approved for new rent-control leases had higher incomes and better credit. Thus, rent control did little to help all but a lucky-few families, and did much to hurt the overall Cambridge housing market.

The present experience of San Francisco and New York, and the past experience of Cambridge, demonstrate that rent control has limited benefits for low and moderate-income families, but clear negative impacts on overall housing quality and price. In many ways, rent control produces the “worst-of-all-worlds,” with both lower quality housing and ever-increasing prices for new or unregulated units. The 1985 Navarro report concludes, “the economics profession has reached a rare consensus: Rent control creates many more problems than it solves.”

 

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