An Analysis of Rent Control Policies

Rent control refers to a type of price ceiling that governments impose on the housing rental market in effort to reduce the price of rent. The intention of rent control policies is often to keep the price of rent and affordable housing low to consumers by forcing landlords to lease their properties at prices that are below the market rate. Yet, despite the benevolent intentions that motivate rent control policies, microeconomic wisdom dictates that rent controls lead to market inefficiencies that lead to housing shortages and the reduction of the quality of housing options for consumers. However, an evaluation of economic research reveals that the potential of rent control policies to increase producers’ surplus and the disputable impact of rent control on the availability of housing reveals that rent control policies in some markets may yield benefits for both producers and consumers.

In 2012, rent control policies in New York City were the target of public scrutiny when opponents attempted to challenge the practice in the Supreme Court. As The Wall Street Journal reported, New York apartment owners asserted that the government imposed price ceilings violated their Fifth Amendment rights against being forced to forfeit their private property without fair compensation (Kendall). Documenting the economic burdens imposed by the New York Rent Stabilization Law, plaintiffs to the case argues that they were required to rent several of their apartments at prices as low as 59 percent of the market rate in order to comply with city regulations (Kendall). These complaints reveal that the price ceilings imposed by New York City created a consumers’ surplus that was unacceptable to many New York City landlords.

However, despite the protests of landlords, rent control policies have received reliable political report in New York City. In March 2012, Mayor Michael Bloomberg permitted a three-year extension of the Rent Stabilization Law without hesitation (Riley). Yet, Nicole Gelinas of the Manhattan Institute asserted that New York City policies caused housing shortages because landlords had less incentive to incur the costs of preparing their properties to be rented (Riley). Further Gelinas noted that the incentive to build housing for the poor and middle class decreased because developers could build luxury homes for purchase that fell outside of the restrictions of rent control policies (Riley). Thus, detractors argue that the inefficiencies created by rent control policies ultimately harm the residents that it seeks to help.

In addition to New York City, San Francisco has warranted attention for similar attempts to reduce prices in the housing market. A 2001 study on San Francisco rent control policies suggests that city policies did result in the inefficient allocation of housing, finding that 49 percent of the city apartments subject to rent control were only occupied by one individual (Rent Control and Its Damage). Suggesting the decreasing quality of housing made available under the policy, the report revealed that three-fourths of affected rentals where over fifty years old, and 44 percent of the rent-controlled properties in the city were 70 years old (Rent Control and Its Damage). Further, the study reported that the policy did not necessarily increase the availability of housing to the poor because over one-fourth of rent-controlled properties were leased by individuals or families with annual incomes that exceeded $100K and pricing in San Francisco remains 23 percent more expensive than New York City (Rent Control and Its Damage). As cities across the United States must consider policies to address the pressures that population influxes impose upon the housing market, the disadvantages of New York City and San Francisco rent control policies are important to consider.

California State University economist Blair Jenkins evaluates the development of the rent control policies that have been the cause of controversy in many large cities. As Jenkins notes, rent control policies, including the current policy in New York City, were established during World War II when the return of soldiers led to unmanageable demand in the housing market (Jenkins 74). Though rent controls were largely a temporary measure following the war, New York City continued to renew its rent control policies, and several cities, including Chicago, Baltimore, and Seattle, re-enacted rent control policies during the 1960 and 1970s in order to respond to inflationary pressures on rental prices (74). However, during the 1980s, political sentiments that favored de-regulation led to the decline of rent control policies across the United States (75). The trend of abandoning rent controls was also supported by growing economic evidence that suggested the undesirability of rent control policies.

Jenkins further evaluated rent control policy from and economic standpoint. As Jenkins establishes, rent control policies are government-enacted price ceilings that prevent rental prices from surpassing a set level (75). Though post-World War II controls set a single rate, modern rent control structures have allowed for inflation-based adjustments to rent prices (76). Because rent controls often force landlords to rent properties at prices below the market equilibrium, this creates loss for landlords that are asserted to outweigh the benefits to tenants, which results in dead weight loss and market inefficiencies (75). One form of inefficiency that is believed to result from the policies is the misallocation of housing resources (77). For example, artificially reduced rents may attract retirees and other fixed-income residents who could otherwise choose to live in another city. While individuals who need to live closer to their jobs might find the trade-off of higher rent prices acceptable, they may still be displaced by residents who are able to take advantage of the artificially deflated rent prices.

Yet, not all of the disadvantages of rent control policies are clear to economists. For example, many economists posit that rent control policies reduce the incentives for landlords to maintain their properties. Offering an illustration of this point, Jenkins notes that it would be illogical for a landlord to make $1000K in repairs to a property if he or she can only collect $750 (80). Supporting these assertions, analysts Choon-Geol Moon and Janet G. Stosky established through a longitudinal study of the rental market in New York City that the suppression of rent below the market level resulted in the under maintenance of housing units as the marginal benefit of improving rental accommodations decreases (Moon and Stosky 1125). Yet, the prevalence of maintenance performed by the landlord is not necessarily a satisfactory metric for assessing housing quality.

As both Jenkins and Stotsky express that there are conflicting views on whether disincentives to landlord-initiated repairs in rent-controlled jurisdictions actually result in dilapidated living conditions for the tenant. As Moon and Stosky note rent controls create an incentive for renters to remain in the same property for an extended period of time so that they can benefit from the artificially reduced prices (1125). Rather than moving to another apartment after one or two years, tenants under rent control are likely to maintain their current dwellings rather than seek upgraded accommodations. While this action results in market inefficiency, it also may cause tenants to take better care of the rental unit, pay their rent on time, and avoid eviction (1125). Thus, an increase in maintenance activities conducted by the tenant may outweigh the decrease in maintenance services performed by the landlord.

A study on the connection between rent control policies and homelessness further assesses the ambiguities of establishing causality in economic research. As economists Dirk W. Early and Edgar O. Olson determine, rates of homelessness are higher in controlled rental markets when compared to uncontrolled rental markets (Early and Olson 814). As the researchers determined, the low vacancy rates of rentals in municipalities that practiced rental control corresponded with higher incidents of homelessness (814). Thus, the research appears to confirm the assertions that rent control induces housing shortages that adversely impact the poor. However, the researchers also note that when they controlled for variable that might also increase one’s tendency to be homeless, such as alcoholism or depression, they were unable to establish that rent control policies were the primary cause of the higher rates of homelessness in rent-controlled cities (813). The significance of this research is that demonstrates how economic models may overlook other factors that contribute to the housing inefficiencies that are often observed in rent-controlled cities.

Finally, while an examination of the research questions the consequences that are traditionally associated with rent control policies, other economist assert that rent control policies can offer benefits that counter the expectations of economists. As economist George A. Kondor asserts, housing shortages, caused by a decline in output when price ceilings are set below the equilibrium price, can be remedied through price discrimination (Kondor 245). As Kondor notes, if a landlord sets his or her prices to accommodate both a percentage of low-income residents and high-income residents, the demand for the units will become stable (246). The reason that enacting two-tiered pricing that accommodates the poor shifts demand is because the demand of the poor is elastic, meaning that they are inflexible to increased rental prices (246). Yet, by enacting price discrimination requirements, in combination with rent control, that accommodates poorer residents, producers’ surplus will increase over the long run and their output will increase as they receive consistent demand that compensates for the reduced prices (249-250). As Kondor establishes, rent control policies do not have to be uniformly implemented. Rather, alterations can be made to the policies that benefit both tenants and landlords by creating incentives for landlords to increase their output of rental properties.

Adopted in response to the positive demand shocks in the housing market caused by soldiers returning home from World War II, rent control policies have fallen in and out of favor in American cities. Though many municipalities only temporarily utilized price ceilings to address short-term conditions, cities such as New York City and San Francisco have drawn scrutiny for adopting rental control measures as a long-term policy. While supporters believe that rent control policies make housing prices in high-demand markets reasonable to consumers by holding them below the equilibrium price, opponents assert that the dead weight loss is detrimental to consumers and producers alike. However, while economists establish that rent control policies create market inefficiencies that result in housing shortages and decreased quality in housing, economic research presence a varied picture. As the research suggests, causation between rent control and these detrimental consequences need to be established by future research. Further, well-crafted rent control policies can result in producers’ surplus, benefiting both landlords and tenants in the housing market.

Works Cited

Choon-Geol, Moon, and Janet G. Stotsky. “The Effect of Rent Control on Housing Quality Change: A Longitudinal Analysis.” Journal of Political Economy 101.6 (1993): 1114-1147. ProQuest. 17 Oct. 2013.

Early, Dirk W., and Edgar O. Olsen. “Rent Control and Homelessness.” Regional Science and Urban Economics 28.6 (1998): 797-816. ProQuest. 17 Oct. 2013.

Jenkins, Blair. “Rent Control: Do Economists Agree?” Econ Journal Watch 6.1 (2009): 73- 112. ProQuest. 17 Oct. 2013.

Kendall, Brent. “Justices Reject Challenges to New York Rent Control.” The Wall Street Journal. The Wall Street Journal, n.p. 23 Apr. 2012. Web. 17 Oct. 2013.

Kondor, George A. “Rent Control with Rent Discrimination in Competitive Markets: Surprises in Elementary Microeconomic Theory.” The Journal of Economic Education 26.3 (1995): 245-251. ProQuest. 17 Oct. 2013.

“Rent Control and its Damage Isn’t Limited to New York.” The Wall Street Journal. The Wall Street Journal, n.p. 2 Aug. 2010. Web. 17 Oct. 2013.

Riley, Jason L. “Rent Control Consequences; This Week Mayor Michael Bloomberg Signed Off on a Three-Year Extension of New York’s Rent-Control Laws. The Irony is that these Laws Distort the Housing Market and thus Create More Problems Than They Solve.” The Wall Street Journal. The Wall Street Journal, n.p. 30 Mar. 2012. Web. 17 Oct. 2013