Economists are pretty much united in their opposition to rent control. Yet, as I’ve written before, price controls on rents have been making something of a comeback in recent years across the country.
One new “rent stabilization” proposal is Bill 52–20 in Montgomery County, Maryland (MoCo). This legislation would institute an annual cap on rent increases for currently uncontrolled properties that are close to rail and bus transit stations. The maximum increase would be linked to the previous year’s residential rent component of the Consumer Price Index for urban consumers in the Washington‐Metropolitan Area. To translate: landlords wouldn’t be able to raise rents above some variant of rent inflation for the whole region.
In recent history, properties in affected locations have, on average, tended to see rents increase more slowly than this metric. But market rents are likely to differ year‐to‐year and property‐to‐property. If the demand for rental accommodation was strong in MoCo transit areas relative to supply in a given year, the rent regulation would “bind” – keeping rents depressed below market levels, in turn creating shortages of rental property in the area. Many rent control proposals seek to protect tenants against “economic eviction” by capping rent increases within tenancies, while allowing them to adjust between tenancies. This policy would not allow such market adjustments in prices when tenants move out. So, the dislocations would worsen over time.
It’s almost impossible to predict the magnitudes of the negative economic impacts, given they are influenced by the business cycle and a range of other economic phenomena. But economists have a good idea of their direction. An Economic Impact Assessment by the Office of Legislative Oversight, written by analyst Jacob Sesker, is scathing about the likely consequences:
Residents of rent stabilized units would periodically benefit from lower rent increases. Residents of non‐rent stabilized units would likely face increased rent costs. The economic benefit to households is smaller than the economic cost to businesses, in part because the household sector would absorb employment and earnings losses associated with decreased revenue for businesses in the real estate industry. Artificially constrained rents will also have a negative impact on asset values and property tax revenues.
Research indicates that rent stabilization could lead to reduced supply of rental housing and upward pressure on the prices of unregulated units (including owner‐occupied units). This reduced supply could occur as a result of condominium conversion or reduced construction activity. Research also indicates that rent stabilization programs often result in disinvestment by owners, including deferred or foregone maintenance. There is evidence that rent stabilization has led to neighborhood deterioration or increased crime in some locations.
This damning verdict is a good summary of what the economic literature predicts. But evidence from previous rent control experiences suggests it could be worse still. Rent controls can harm the labor market by deterring mobility, since they encourage those lucky enough to benefit from the controls to remain in properties unsuited to their circumstances or prospects. This can also lead to a shadow economy of bribes and waitlists for accommodation. The retardation of supply is likely to be exacerbated further as well, because landlords will rightly perceive rent stabilization as the thin of the wedge. In response to a lot of the negative consequences outlined, in time politicians are highly likely to propose additional legislation to control other aspects of the landlord‐tenant relationship.
I also contributed a chapter on rent regulation to an excellent overall volume on price controls edited by Christopher and Rachel Coyne, entitled “Flaws and Ceilings: Price Controls and the Damage They Cause.”