Rent Control Is Out of Control

Progressives+like+Rep.+Alexandria+Ocasio-Cortez+have+supported+rent+control.+%28Courtesy+of+Twitter%29
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Rent Control Is Out of Control

Progressives like Rep. Alexandria Ocasio-Cortez have supported rent control. (Courtesy of Twitter)

Progressives like Rep. Alexandria Ocasio-Cortez have supported rent control. (Courtesy of Twitter)

Progressives like Rep. Alexandria Ocasio-Cortez have supported rent control. (Courtesy of Twitter)

Progressives like Rep. Alexandria Ocasio-Cortez have supported rent control. (Courtesy of Twitter)

Sean Franklin, Staff Writer

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This week, Rep. Alexandria Ocasio-Cortez called for a nationwide rent control policy that would cap rent increases at 3% annually. The proposal was part of a wider slate of anti-poverty initiatives that Ocasio-Cortez put forth in a recent bill to the House of Representatives. Many of them, such as a provision prohibiting discrimination against tenants based on their income, are excellent ideas. Rent control, however, is not.

The issue of housing affordability weighs heavily on many politicians’ minds. Ocasio-Cortez, in particular, is intimately acquainted with it, as she represents a district in one of the nation’s most unaffordable cities. It’s great that she wants to do something about it — it would be wrong to sit idly by as the promise of a home slips out of the reach of ordinary Americans. This makes it all the more frustrating that the way she has decided to address the issue is so misguided.

Rent control is a policy that sounds great on paper but is horrifically ineffective in real life. It’s a classic case of treating the symptom and not the disease. The reason that housing prices are so high in many American cities is that the supply of housing is not high enough to meet the demand for it. There simply aren’t enough homes to go around. Rent control does nothing to address this. Instead, it tries to attack prices directly, ignoring the factors that caused them to be so high in the first place.

Even more insidiously, rent control policies distort economic incentives in such a way that actually causes rents to increase faster than they would otherwise. If the amount of money you can charge for rental housing is set at a certain level, developers will opt not to build new apartments, further exacerbating the problem of an inadequate housing supply. The return on investment thus isn’t high enough to outweigh the costs.

Furthermore, many existing landlords, faced with low returns on apartment housing, will elect to convert their properties into condos instead. In 1994, the city of San Francisco instituted a new rent control policy. Subsequently, the city’s stock of rental housing shrunk by 15% and rents increased by 5% citywide. Owners were faced with a choice: rent to current tenants at below-market rates or convert and sell at a higher fair-market price. It’s not surprising that many chose the latter.

Rent control distorts other parts of the market as well. Many landlords choose not to upgrade or repair the rent-controlled apartments they manage because the return on investment is minimal. If you can’t charge a higher price to reflect the improvements you’ve made, there’s no incentive to improve. The city of Cambridge, Mass. removed its rent controls in 1994, the same year that San Francisco instituted its own. A flurry of property improvements followed, boosting property values in Cambridge by $2 billion over the next 10 years.

Rent controls also present distorted incentives to tenants. They increase the incentive to stay put, lowering the rate of turnover considerably. This creates quite a lot of inefficiency. Empty-nesters with no incentive to downsize will stay in three or four-bedroom apartments simply because they are rent-controlled while newcomers and young families with children are forced to squeeze into whatever housing remains.

It’s not even clear that rent control helps the people it’s supposed to. Ocasio-Cortez included it in a bill intended to reduce poverty. However, there’s no guarantee that it will do that. Currently, there are 25,000 rent-controlled apartments in Manhattan occupied by households with annual incomes of $200,000 or more. Rent control helps only those who happened to sign a lease in the right place at the right time, while doing nothing for newcomers or young people looking for their first place.

Rent control is simply NIMBYism in another form — a policy that entrenches the advantages of those who are lucky enough to have good housing while locking everyone else out of it. The story of the housing market is more complex than a battle between greedy landlords and overcharged tenants. Landlords can only afford to get greedy when they know what they’re selling is in short supply, and in today’s cities, it is.

The true antidote to the housing crisis is simple: we have to build more housing. Until we do that, no amount of price-fixing will be enough to ensure that there are homes for all who need them.

 

Sean Franklin, FCRH 21, is an urban studies and economics major from Alexandria, Virginia.