What Is Rent Control?

When I looked ahead to 2019 to see what was perhaps in store for the real estate investing business, one of the things I saw was misguided calls for rent control and other restrictions upon landlords.  I did not have to wait long.  Oregon seems set on passing SB608 which will enact rent controls state wide.  In this post I want to examine what is rent control to provide landlords a basic understanding of rent control and its repercussions.

Rent Control Defined

Black’s Law Dictionary defines rent control as “Laws or ordinances that set price controls on the renting of residential housing.”  What is meant by price controls?  Price controls in this context set the maximum amount of rent that may be charged on a rental property.  Rent control laws set a price ceiling.  In effect, the government tells the landlord how much they can charge the tenant in rent.  Rent control laws can go by an assortment of names, including rent stabilization, rent regulation and rent freezes among others.

There are many jurisdictions across the United States that have some form of rent control laws on the books.  New York City and San Francisco are two of the more well known examples.  But other locations in California, Maryland, New Jersey and Washington D.C. have rent controls.

Rent controls are enacted by local governments because an increase in the demand for housing drives up the price (rent).  In New York City for example, rent control laws were enacted just after World War II because so many people were returning home or looking to restart their lives after the war that demand for housing far outstripped supply.  Thus the price for housing rose and the government enacted a rent control price ceiling to make housing “more affordable.”  While a few may reap that benefit, the effects rent controls have on landlords, tenants and the housing stock are counter-productive and substantial.

What Rent Control Does

Landlords under rent control are prohibited from charging market rate rents.   They can only charge the controlled, “more affordable” price.  Most rent control laws also prohibit landlords from raising the rent above a certain amount every year, allowing only perhaps a two or three percent increase every year.  What is more, many rent control laws, including the proposal in Oregon, prohibit landlords from using a no fault eviction.  Since most ordinances allow a landlord to raise rent to a market level once a tenant moves, this ban on no fault evictions is done to prevent landlords from evicting existing tenants in order to do just that.

Rent control also has effects on tenants and the housing supply.  These laws distort and change economic incentives.  By legislating a price ceiling or maximum price, these laws dissuade landlords and other entrepreneurs from investing in housing.  This lack of investment actually compounds the problem the rent control laws were trying to fix.  The incentive to create new housing (increase supply) and maintain existing housing is removed.  Supply is thus often further restricted which in turn further drives up market prices (as long as demand remains steady).

Rent controls also restrict the housing supply in another way.  By prohibiting market increases in units that are already rented (rent stabilized), these laws incentivize existing tenants to stay put.  Why move if it will cause your rent to drastically increase?  These laws therefore remove housing stock from the market that might have otherwise been made available.

Finally, rent control laws can take what is often already a potentially adversarial landlord-tenant relationship and make it worse.  Just as there is no incentive for the tenant to move, there is no incentive for the landlord to maintain or fix-up the property.  Thus disrepair, blight and antagonism become the norm rather than the exception.

Long Tern Effects

Rent control once enacted, tends to never go away.  It also tends to increase the size and scope of both government and government regulation.  New Your City for example is using rent control laws enacted to protect returning soldiers over 70 years ago.  Since rent control laws create new incentives and distort others, landlords tend to get creative in order to make up for lost rent.  They do so by charging for “furnished” units or large key deposits.

These creative endeavors by landlords then create a ratcheting up effect of laws to prevent such things.  This in turn places enormous burdens on the courts, city budgets, landlords and tenants as they all try to enforce or grapple with ever escalating rules.  New York City, again for example, has had to set up a specific court just for housing related complaints.  This housing court has 30 judges which handle over 300,000 cases per year!

Going Forward

We landlords must constantly remind people that we are not just sitting around enjoying the income that higher rents bring.  Landlords also have increased costs in the forms of more expensive materials, taxes, insurance, utilities and everything else.  We also need to make sure that the understanding of the effects of rent control is clear.  Rent control, while sounding good and holding much appeal is simply devastating.  Rent Control reduces total housing stock.  It reduces the quality of existing housing stock.  It creates perverse incentives.  Rent control also increases both the size of government and the amount of government regulation thus increasing costs on the whole of society.   To demonstrate these points, I end this post with a quote from economist Assar Lindbeck.  “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”