What Economists Get Wrong About Rent Control
Researchers fail to account for anti-growth land use policies that often preceded the implementation of rent control.
Part 2 of my rent control opinions. Part 1 here.
Most economic research on rent control highlights its negative effects. Recently, St. Paul’s ordinance was highlighted for disproportionately harming lower-income landlords and declining property values by $1.57 billion. If supply-based policies resulted in a similar property value decline then it would be seen as a success by pro-housing development advocates. The decline in property values is not a negative for renters and the well-being of landlords is not the concern of tenant activists.
The well-known Stanford study on rent control found that in San Francisco during the 1980s and 1990s it reduced tenant mobility but prevented displacement. This was measured by finding that low income households, who moved more often than middle and higher income ones, didn’t move as frequently. It also found that rental supply ended while condo supply increased. My problems with the study are two-fold.
Firstly, San Francisco’s 1980 rent control, though classified as “strict” due to a low rent ceiling, was weak in auxiliary requirements. It didn’t apply to any new construction built after its passage and rents could reset after vacancy. SF’s rent control certainly fueled conversion of existing and new housing to condos over rentals, but it’s not evident it caused the overall tremendous decline in housing construction. Housing construction decline occurred in neighboring cities as well as the Bay Area during a period of rampant NIMBYism and anti-growth populism.
Secondly, acknowledging that low-income households have higher housing churn than other income groups is most likely a reflection of housing instability and frequency of eviction rather than needing different types of housing with time. If fewer tenants were evicted and mobility was on-par with middle- and high-income households under rent control then that’s an obvious win for low income renters.
The Urban Displacement Project used incredibly precise tracking data on households of various incomes. They found that rent-controlled neighborhoods with no new housing supply in the Bay Area last decade had virtually no low income tenants moving in, but also none leaving. This corroborates the Stanford study’s findings that rent control correlates with declines in mobility and it’s also a frequent talking point of landlords.
The decline in mobility is nationwide issue, not just a rent control issue, and it’s at record lows, per a USC study, as the country’s vacancy rates reach all-time lows. Remedies do exist without dismantling rent controls. Urban Displacement found that in areas where housing (both market and subsidized) was built, the low income in-migration into rent-controlled neighborhoods increased while rent control stemmed displacement. That’s again the fallacy of blaming unrelated housing policies on rent control’s impact on supply. I’m not denying that rent control contributes to a decline in building rates, it almost certainly does as all regulations do, but not the dramatic losses it’s frequently attributed to causing.
The best research I’ve seen on rent control is a study conducted by Berkeley’s Planning Department in 1998. Berkeley passed the state’s first post-WWII rent control program which exempted new construction but kept strict vacancy control, rental registration and applied to everything denser than a duplex. The study found that Berkeley lost only slightly more housing units in its census tracts than neighboring non-rent controlled cities, to the point that unit decline was virtually identical. The study also found that new construction in neighboring non-rent controlled cities’ census tracts was at the same rate as Berkeley’s. Most importantly, the decline in construction happened after downzoning but before the rent control ordinance.
This confirmed that when new construction was exempted from an otherwise strict rent control ordinance, the impacts of rent control on new housing supply were much smaller. The primary cause of Berkeley and San Francisco’s housing shortages which flared up dramatically during the decade of strict rent control was the citywide downzonings, not really rent control. Many studies fall into a correlation fallacy, like a recent one from 2020 by a developer lobbyist that simplistically does a regression on pre- and post-Costa Hawkins rent control periods from 1980 to 2000.
Any rent control study that looks at places with low rates of construction like New York or San Francisco, and fails to parse out and control for mid-century downzoning and anti-growth laws is a flawed study. Sadly that’s most of them. Without an intimate knowledge of these cities it is easy to fall into this conflation issue.
Berkeley’s citywide downzoning occurred in 1973, just a year after the city passed its first rent control law and by 1980 had finalized its rent control law. San Francisco similarly downzoned through the city in the 1970s and then passed a rent control law in 1979. Same story for the rest of California’s rent controlled cities. The California housing crisis is decades old and housing development has been down for decades statewide. One must ask what’s unique about the dozen or so cities with rent control?