Rent Control Is a Renter’s Nightmare

The latest attempt to destroy California’s housing markets is called Proposition 33 and is on the Nov. 5 ballot.

The proposition would eliminate the Costa-Hawkins Rental Housing Act (Costa-Hawkins) that was enacted in 1995.

Evidently, what Costa-Hawkins did was to limit what localities could do in terms of applying rent control measures.

In a nutshell, Costa-Hawkins:

• Prohibited rent control on single family houses
• Prohibited rent control on apartments built on or after Feb. 1, 1995
• Put no limits on what landlords could charge new tenants

In a short article I wrote, “Rent Control is Not the Answer,” I outlined some of the deleterious effects of rent control policies using standard economics tools.

To be clear, by the term “rent control” I mean any policy that prevents landlords from obtaining the market rent for their property. It can be direct control on rent, capping rent increases or forcing some fraction of the units to be “affordable.”

In that article I laid out the economics of rent control with the usual supply and demand curves. The article explained how the number of available units actually declines as owners turn the property into condos, for example.

Not only did I explain the theory but provided empirical evidence from cities around the world going back to the 1940s, from Sweden to Berlin to Cambridge, Massachusetts, to San Francisco.

The evidence could not be clearer. Since I wrote that article, more evidence has surfaced that continues to show the devastating effects of rent control policies.

What happens when rent controls are imposed is exactly what economic theory would predict.

But one need not know economic theory at all to figure out the effects. Just think of the incentives the various people have after the imposition of the policies.

Landlords may decide to stop renting the apartments, turning them into condos or living in them themselves. This reduces the available stock of apartments.

If landlords keep them as apartments they would have little or no incentive to maintain the apartments since the cost of maintaining the unit is not covered by the rental and apartments fall into disrepair, adversely affecting the neighborhood as well.

Developers certainly understand all those incentives, and therefore have no incentives themselves to invest in building new apartments.

Without the ability to adjust rents with changing market conditions and costs they would not get the necessary return on their investment.

Finally, tenants who are lucky enough to find an apartment are the short-term winners but will tend to stay longer in the apartment when labor market shocks occur, even if, under normal circumstances, they would want to move to another location where better opportunities may await.

So, let’s look at one of the latest examples.

Argentina introduced rent controls in 2020. See this article for a more in-depth description. After the policy’s introduction, some 45% of landlords stopped renting out their properties and either sold them or listed them as short-term rentals.

In 2019, before rent controls were established, there were about 10,000 properties listed on Airbnb, after rent control was introduced it soared to nearly 30,000. It was estimated that one in seven properties was vacant.

When Javier Milei took the president’s office in December 2023, he established Executive Decree 70/2023, or “Foundations for the Reconstruction of the Argentine Economy” that removed the rent control regulations.

Since that time real estate brokers have seen something like a 50% increase in notices for traditional rentals. In addition, new rental prices have fallen by 20% to 30%.

This just adds to the preponderance of evidence showing that trying to control prices has devastating effects on exactly those people the policies were intended to help.

But wait! There’s even more recent evidence.

The Netherlands expanded its rent control policies and a recent article had this for a headline: “Everyone Thinks the Netherlands’ Rental Reforms Are Nuts.”

Agencies such as the International Monetary Fund have spoken out against the expanded policies and the European Commission stated: “policies regarding the private rental market risk undermining its development.”

The article mentioned above states:

“The average waiting time for a nonprofit social-housing apartment in Amsterdam is 13 years. Yet the government would make it less lucrative to rent out homes for profit.”

Yes, 13 years! Indeed, as theory and the incentives of developers and landlords would predict, residential investment fell 64% in the first quarter of 2023 compared to the same quarter a year earlier.

92% of landlords said they are selling or thinking of selling their properties. Given the decline in availability of rental units, rental prices have risen 15% in Amsterdam and 12.5% in Rotterdam over the past two years.

What will happen if Prop. 33 passes in California? See above.

It would remove the guts of Costa-Hawkins. It would allow localities the ability to impose rent control on all units, no matter when they were built. Cities could impose rent increase caps as new tenants move in.

In addition, to impose and maintain the rent control policies, it is necessary to establish a rent control board or agency.

For example, in Santa Monica (about the same population as Santa Barbara), the rent control board consists of 24 employees with a budget of roughly $6 million.

In addition, landlords are further “taxed” by having to pay a per unit registration fee to the rent control board, half of which is allowed to be passed on to tenants in the form of higher rents.

I am not sure what the correct metaphor (opening a can of worms, going down a rabbit hole, etc.) is for all of the things that must be done to prevent the rental market from performing its function: efficient allocation of resources.

Housing affordability is a national and worldwide problem for sure. It is certainly a community problem as we all want our teachers, health care workers, firefighters, police and others to be able to live within our community.

However, housing affordability is NOT the fault of landlords. So, it seems unfair to tax only landlords through rent control to solve this problem.

By the way, food insecurity is another major problem. If the price of bread is “too high,” there is no section in a supermarket where suppliers are forced to take less than the market price.

The solution is to provide food stamps (vouchers) to help those in need. In that way, bread suppliers produce enough bread exactly because they are able to receive the market price for bread.

Summing it all up, policy makers are faced with a tradeoff. The winners in the short term are those who have won the rent “lottery” and are able to live in below-market rent apartments.

The losers are, basically, everyone else, now and in the future.

The available rental stock falls. Average rents in the locality rise. Both of those outcomes mean that others who wish to stay or move in are priced out of the market.

Neighborhoods can decline, given the lack of upkeep and maintenance, negatively affecting house prices and therefore decreasing wealth.

But it does not have to be that way. There are other better policies that work. Unfortunately most local policy makers have very few levers at their disposal, and the one they do have — rent control — has devastating effects.

We need to be much more inventive in our housing policy choices. Housing vouchers are a much better alternative. Some cities — such as Minneapolis or Auckland, New Zealand — have used changes in zoning laws, with apparent success.

An added benefit is that homelessness has fallen in Minneapolis while rising in similar Midwest cities. Due to regulatory policies, costs, etc., there is a dwindling supply of starter homes, see for example this article.

Relaxing zoning, regulations and allowing manufactured homes are some things that come to mind.

Policy makers, in their effort to help, have chosen what seems to be an easy and quick fix; but, as all the evidence shows, controlling prices just does not work.

Originally published on Noozhawk on October 4, 2024.