Update: this post originally linked to the wrong state law that showed rent control as illegal. Thanks to Stephen F for the pointer.
Kshama Sawant has come out for rent control, as you can see in the debate against Richard Conlin above. The pro-rent-control debate is rather confused in my mind: in the video Sawant mentions San Francisco as a place where rent control as worked, which I think the facts don’t bear out, and I’m not sure it matters anyway because rent control is illegal at the state level and Sawant is running for city council. Still, rent control has been proven as such a terrible idea that I feel like it’s worth calling out that idea specifically, and rather than write one 2,000 word behemoth, I’ll spread it over a few posts. In this post, I’ll go over the basic theory with some data to show why it’s a bad idea.
It’s true rents have gone up quite a bit in Seattle over the last decade or two, from a little more than $700 in 1997 to about $1438 today. In response to that, a tremendous number of units have been built, and more units are going to be built. So far, these units have not been enough to bring supply in-line with demand, which is one reason rents have increased so much. One idea to combat rising prices is to put price controls on rent of some or all of the housing, limiting either the total price, or the rate prices increase. Both of these policies are usually referred to as “rent control”, though limiting the rate of increases is sometimes specifically referred to as “rent stabilisation”. At first glance these seem like an okay way to stop price increases, however, over time, they actually worsen the situation by reducing new housing construction and the create a perverse system of preferential treatment and descrimination.
Rent control reduces the incentives to build new apartments by reducing the amount of money that can be collected from current and apartments. This is rather obvious, for someone who wants to build an apartment, if that unit will be rent controlled, that means less money in the future. Furthermore, rent control on some units creates a possibility that at some future date the non-rent controlled units will switch to be come rent-controlled. This happened several times in New York, where housing units that were exempt from earlier rent controls were brought under the previsions later. Both of these aggravate the affordability situation long-term by decreasing the incentive to create new units. Investors will find other places to put their money (maybe apartments in Portland or Vancouver where there’s no rent control), maybe cheap weekly hotels for those who can’t find apartments.
Renters in rent-controlled units are less likely to move – there are long waiting lists at the other rent controlled places – this means they may be unwilling to take jobs that are farther away from their current apartments, this is bad for the economy. According to this review of the literature around rent control, tenants in New York stayed an average of 18 years longer in rent controlled units than non-rent controlled. Landlords in turn will become scared of long-term tenants – whose rent cannot be raised – and will prefer a string of short-term tenants – between which rents can go up. So they’ll discriminate in whatever way they can against the tenants most likely to stay long-term: families, the elderly, etc. Landlords will also become more eager to evict bad tenants. This article describes the old lady effect, which is a less-than-politically-correct-way of illustrating the perverse incentives when an apartment is worth more than its rent:
Consider the case of a two-parent, four-child family that has occupied a ten-room rental dwelling. One by one the children grow up, marry, and move elsewhere. The husband dies. Now the lady is left with a gigantic apartment. She uses only two or three of the rooms and, to save on heating and cleaning, closes off the remainder. Without rent control she would move to a smaller accommodation. But rent control makes that option unattractive. Needless to say, these practices further exacerbate the housing crisis. Repeal of rent control would free up thousands of such rooms very quickly, dampening the impetus toward vastly higher rents.
Demand outpaces supply because new units aren’t being added. Landlords can’t raise prices, so they begin to create strange standards for renters and stop responding to renter’s complaints. This isn’t just a theory, here’s a New York Times article titled “In San Francisco, Renters Are Supplicants” about the hoops renters have been asked to go through in San Francisco, where a significant portion of the apartments are rent-controlled.
Rental agents are suggesting that prospective tenants come armed with renters’ resumes detailing their credit and job history, credit reports and references. They also suggest that renters wear professional attire and show enthusiasm for the apartment, as though the $1,800-a-month junior one-bedroom walk-up overlooking the freeway were their dream pad, the place they wanted to make a home for life.
Next, bribes and a shadow market become common place. From the previous article:
”In 22 years, it has never been this crazy, this good,” said Don DeShon, who co-owns 13 rental properties in San Francisco. Last week, he was offered $5,000 just to hold an $1,800-a-month one-bedroom apartment in an industrial neighborhood that he had yet to advertise.
It’s worth asking who, in these stories, is getting the benefit of the rent control? Renters in “professional attire” with $5,000 cash for a bribe don’t strike me as the people rent control is supposed to help. Worse still, several studies have shown that landlords racially discriminate significantly more in rent controlled units than non-rent controlled units. And don’t fool yourself into thinking this is something that is easy to police; if it were easy to root out discrimination in housing, the discrimination wouldn’t show up as statistically significant year after years in market after market.
Rent control goes against basic economic theory around price controls. If we want more affordable units, we should do the obvious things. We can increase supply by increasing zoning, reducing red-tape and removing expensive barriers to housing construction such as parking quotas. We could figure out ways to increase the number of subsidised housing units through incentive programmes. We could create or expand voucher programmes for those who with low incomes. Rent control has been tried and has been shown not to work well, and many jurisdictions have been working to remove rent control and rent stabilisation laws and have shown no obvious ill-effects (Massachusetts comes to mind). We admit a long list of mistakes urban planning and regulation made in the 20th century: huge highways, sprawl, parking quotas, etc. We wouldn’t want to repeat any of those mistakes today. Rent control is one of those, let’s not repeat it.
 Adjusted for inflation, $700 would be a little more than $1000 today.
 Another reason is that new units are expensive to build, and many groups are actively fighting against cheaper units (those without parking, apodments, etc.)