Governor Kate Brown recently signed into law the rent-control control legislation passed by the Oregon House of Representatives. Unaffordable housing and heart-rending stories of tenants forced to move after steep rent hikes have triggered another policy response, including capping statewide rent increases to seven percent per year above the Consumer Price Index (currently three percent.)
This latest wheeze, though, will ultimately please nobody. It not only fails to solve for the underlying problems of the Oregon housing market, but also risks exacerbating them.
Why? In areas where tenants face rent increases above earnings but below the cap, rent controls will have no effect. Increases will eat into families’ incomes further, and with affordability worsening, tenant groups are likely, in time, to demand tighter controls.
Yet where market rents really are spiraling, capping them to prevent so-called “economic eviction” dampens the incentive for developers to bring new supply to market. Some tenants will benefit from lower rents. The cost will be worsened availability of housing precisely where it is needed most.
Liberal and conservative economists both have understood these impacts of rent control for decades. Practitioners of the dismal science believe prices are signals of supply and demand. Fixing rents below market levels gives the false signal that housing is plentiful. That ensures a shortage, with demand for rental property exceeding supply. Landlords find converting properties to other uses more attractive and developers find new rentable accommodations less profitable to build, compounding this scarcity problem.
A 1994 rent-control expansion in San Francisco, for example, led to landlords converting rental properties to condos for higher-income families, and market rents increased by over 5 percent. Rent control not only increased the cost of non-controlled accommodation, but it also accelerated gentrification. On the flip side, positive effects have been seen when rent controls were abolished. In Cambridge, Massachusetts, for example, economists found that direct dollar investments in housing units more than doubled over a few years.
This evidence might prove cold comfort to Oregon families with crippling rent bills today. But it strongly suggests rent control will not help.
That’s not to say there is not a problem, or potential solutions. Demographia calculates affordability measures for U.S. metropolitan housing markets each year, comparing house prices to income levels. They find that, of Oregon’s three biggest cities, two have “severely unaffordable” housing markets (Eugene and Portland), and Salem is “seriously unaffordable” too.
As my Cato colleague and Oregon resident Randal O’Toole has long explained, Oregon’s land use laws are an important cause. Urban growth boundaries create severe restrictions on building outside of cities. This shifts demand into urban areas, driving up land and housing prices.
That regulatory burden has tightened too. Between 2000 and 2010, Oregon added more land-use regulations than 43 other states. All this supply less responsive to rising demand. As incomes rise and demand increases, this feeds through into higher rents rather than more accommodation.
The only way to improve affordability and prevent abrupt rent spikes is to deliver a flexible housing supply. That requires abolishing or relaxing these cost-inflating urban growth boundaries around cities.
Oregon's policymakers are to be commended in recognizing the plight of renters. Sadly, their intervention will ultimately make things worse.