February 15, 2019 12:30PM

Oregon’s Rent Control Bill Would Ultimately Please Nobody

The Oregon Senate has passed a rent control bill that would limit annual rent increases to 7 percent above the annual change in the consumer price index.

This sort of legislation is, in the longer term, likely to please nobody.

In markets where rents are rising faster than earnings, but slower than this cap, groups representing tenants will complain that the price restriction is not tight enough to help tenants financially.

In markets where demand for rental property is growing rapidly relative to supply, the controls will bind and bring the negative effects we’ve seen from rent control historically: reduced incentive to bring new supply to market (and so rising underlying market prices), a misallocation of properties, a lock-in of tenants reducing labor mobility, and a worsening in the quality of properties available.

So why introduce the legislation?

The stated goal of its proponents is that it’s a defense against so-called “economic eviction.” That is, to guard against instances where tenants face steep unforeseen rent hikes, that suddenly makes living in a rented property unaffordable.

To give these tenants more security and certainty, many polities around the world are experimenting with new forms of “rent regulation.” Most common is for the introduction of fixed term tenancies, say for three years, during which rent increases are linked to some inflation measures. Between tenancies, landlords can adjust rents as they wish.

Over time, these forms of regulation allow rent levels to track market fundamentals. They can still have some of the negative effects crude rent controls bring in the short-term, especially in overheating markets. They also tend to have to be coupled with other regulations that ensure security of tenure, restricting landlords’ rights to evict within tenancies. This change in who bears the risk might reduce the supply of available property, as might the perception this type of regulation was a precursor to more stringent regulation.

Overall though, these forms of rent regulation are not as damaging as first-generation price controls. By construction, they cannot improve overall affordability and will likely raise market rents. Their use really entails a trade-off: providing more time-limited security for existing tenants, at the cost of economic inefficiency and lower investment in the rentable housing stock.

The Oregon Senate’s bill - with a high but crude cap on annual rent increases – is quite different. The bill does contain some new restrictions on evictions, including prohibiting a landlord from terminating month-to-month tenancy without cause after 12 months of occupancy.  But the rent control cap proposed suggests policymakers also desire to signal to renters that they are concerned about general affordability within tight city markets too.

The stark truth is this: the only policy means of ensuring that both perceived problems are minimized is to set land-use planning and zoning regulations such that housing supply is responsive to new demand. Fail to recognize that, and the rent controls advocated will either result in disappointment and demands for tighter controls, or else exacerbate the relative scarcity of supply in tight markets.

Oregon is notorious for its land-use regulations. My colleague Randal O’Toole has long explained how extensive urban growth boundaries create severe restrictions on building outside of cities. This leads to demand substitution into the restricted urban areas, driving up the price of land and, ultimately, housing. And in recent decades it has been getting worse:  Vanessa Brown-Calder has noted that between the years of 2000 and 2010, Oregon added more land-use regulations per capita than 43 other states.

Little surprise then that, dividing the median house price by median income in each of Oregon’s three biggest cities, Demographia’s Median Multiple Index finds two to be severely unaffordable (Eugene with a multiple of 5.6 and Portland at 5.2) and the other merely seriously unaffordable (Salem at 5.0). For context, using these calculations there are just 13 severely unaffordable metropolitan markets in the whole of the U.S.

The best way to make housing more affordable and to lessen the prospect of abrupt rent hikes is to reform these cost-inflating rules on land use. In the absence of that, rent control amounts to little more than trying to muffle the message that rental and house prices are screaming about the relative scarcity of land developable for housing.