A new study demonstrates how rent control can do more harm than good in local housing markets. It shows that rent control will backfire on the demand for housing by decreasing the supply, along with a host of other negative impacts that will ultimately harm the local economy. Researchers say, rent control is not the answer and that policymakers need to work on “real solutions that provide tangible benefits.”
The National Apartment Association conducted the analysis with the help of Capital Policy Analytics in response to calls for rent control in many cities across the nation. Oregon made headlines recently as the first state to adopt statewide rent control. California has followed suit. You’ll also find residential rent control in some parts of New York, New Jersey, Maryland and Washington, D.C. According to Wikipedia, 37 states prohibit rent control. Another eight states allow it but cities haven’t adopted it yet.
Impact of a 7% Rent Cap in Four Metros
The Oregon policy caps annual rent increases to 7% plus inflation. Researchers for this study say the Oregon rule sets a “likely precedent” for other cities so they used that figure as a model in their analysis. (1) Their goal was to determine the impact rent control could have in the metropolitan areas of Portland, Oregon; Seattle, Chicago, and Denver.
The results include several ways that rent control would affect the housing market and the local economy.
1 – Return on investment will be lower for existing units that would have seen a higher annual increase than 7%. That would cut into the funds that property owners use for maintenance and upgrades and put many units at risk over the long term.
2 – Return on investment for new units will also be lower if those units would have experienced rent growth greater than 7%. That would reduce profitability for property owners and developers who may find a better place to invest their money elsewhere — where there’s no rent control.
3 – Limits on profitability will reduce the value of all rental property. The value reduction varies according to metro. In this study, the reduction was 2% for Portland and Chicago, 5% for Denver, and 9% for Seattle.
4 – The overall impact is reduced housing stock, not more, along with reduced tax revenue and a negative impact on the local economy, including jobs.
NAA CEO, Robert Pinnegar, says, “Putting a cap on rent leads to a host of unfavorable and unintended consequences. Investment in new construction dries up while maintenance and repair spending drops significantly. Because of this, fewer new units are built, fewer jobs are created and tax revenues decrease, which in turn harms important tax-funded services like schools and public safety.” (2)
Seattle Takes the Biggest Hit
In this study, Seattle would experience the biggest impact. Researchers say Seattle would lose more than $656 Million in property values, and the city would lose more than $5 Million in property taxes. They, say rent control would also take a $51 Million bite out of Washington’s sale tax revenue. As for the impact on housing, the study shows that Seattle will need more than 77,000 new units of housing by the year 2030, but that rent control could discourage the building of almost 21,000 badly needed units, and another 46,000 could experience deferred maintenance. That puts a total of about 67,000 units at risk. The total annual loss of rental income would be about $33 Million.
In Chicago, property values would experience a drop of about $488 Million, and almost 24,000 units would be at risk by the year 2030. The annual loss in rental income would be about $24 Million. In Denver, property value losses would add up to about $462 Million, with more than 44,000 units at risk in the next 10 years and annual rental income losses of about $23 Million. Portland property values would drop about $215 Million with almost 23,000 units at risk, and yearly rental income losses of about $10 Million.
Rent Control Is Not the Solution
Pinnegar says, “Many localities view rent control as an easy solution. However, rent control ultimately harms the individuals that it intends to help – because anyone can qualify for a rent-controlled apartment, these artificial caps don’t always help the citizens who truly need help. The housing affordability crisis didn’t occur overnight, and unfortunately, there is no silver bullet fix. It will take contributions from everyone to begin fixing the problem.”
The NAA says, the nation needs 328,000 new rental units annually, and that policymakers need to find solutions other than rent control to meet that demand. Making it easier to build new units is one of those potential solutions. As reported by Bisnow and the NAA’s Assistant Vice President, Paul Munger, the NAA would like policymakers to use this study as a tool for “common-sense reform.” (3) She says, “Things like rent control are well-intentioned, but what they end up doing is decreasing the supply of market-rate apartments in a time when we already have a housing shortage. So all that does is drive up rent, and that’s the complete opposite of what people who support rent control are trying to achieve.”
While Portland does already have rent control, Munger says, it’s still too early to see the real-time impact. She says, “We’ve seen more anecdotal data, but some actual data of rents declining and potential investors putting their dollars elsewhere, but that’s a market I’m going to be watching.” We’ll be watching as well, and will report any updates on the rent control issue.
(3) Biznow Article