With many cities in the grip of an affordable housing crisis, it’s not surprising that states and local governments are desperate for answers — and some have turned to rent control.
California’s Legislature recently passed AB 1482, a statewide rent control bill that will cap rent increases to about 7% (5% plus annual inflation) a year for all buildings more than 15 years old. New York and Oregon have approved their own rent control laws recently.
Rent control is a controversial topic — championed by affordable housing advocates and often maligned by economists. Economists have traditionally emphasized the downsides of rent control: reduced incentives for landlords to maintain housing and for developers to build new housing; misallocation of rent control benefits to those who don’t need it; distortions in the choice of housing size or location for people who have rent-controlled units; and a reduction in their labor supply.
Even accounting for these downsides, our new research has found that rent control can be a net positive for the general welfare. It can lessen housing inequality by benefiting low-income households and act as an insurance policy against sharp drops in income. When struggling households fall on hard times, affordable housing units provide a form of stability.
But rent control is no panacea for the housing crisis because it does not create new units. It should be considered along with other policies such as housing vouchers, relaxation of zoning laws to spur construction and better public transportation infrastructure. Mandatory inclusionary housing, a policy that requires developers to set aside a fraction of new units for lower-income tenants, is another strategy worth exploring.
These policies all differ in cost and in whom they help most. For example, a relaxation of zoning that allows for more density near employment centers like downtown L.A. leads to a larger housing supply. More housing can push down rents, but the benefits would be spread across the board to virtually everyone and would be small for the individual household. By contrast, housing vouchers and rent control could provide larger benefits to a smaller slice of society.
One significant problem with many rent control policies is that they are not targeted enough toward the needy. For example, New York’s new rent control law would allow New York City apartments with rents exceeding $2,700 a month and occupied by people earning more than $200,000 a year to remain rent-controlled. This change may well be the byproduct of the New York state Legislature’s desire to stop the loss of affordable housing units. But for every high-income tenant allowed to stay, a needier tenant is denied affordable housing. Our research shows that curbing this kind of misallocation in the rent control system could lead to large benefits without additional costs. Better targeting can be achieved by admitting only low-income applicants and by regularly means testing the existing tenants.
California’s new rent law is unlikely to fall into this trap. It is actually more like insurance against extreme rent hikes than traditional rent control. Even in recent years, rents have not exceeded the 5%-plus-inflation cap in most areas of the state.
Los Angeles County, according to the Zillow Rent Index, had average rent growth of 1.8% per year between November 2011 and August 2019; 2015 was the only year when rent growth at 6.9% exceeded 5% plus inflation. Even in Santa Clara County, the heart of Silicon Valley, the threshold was exceeded only in three of the last nine years, with the last time being 2015.
While rent growth averaged over an entire county may mask much faster rent growth in some neighborhoods, the data still suggest that the new cap is unlikely to have much bite. Moreover, landlords will still be able to raise rents when a tenant leaves.
The law is unlikely to affect most renters. It might help prevent long-term residents from being quickly forced out of a booming neighborhood. But it won’t help lower-income renters who are struggling to find an affordable housing unit within reasonable commuting distance from work.
At the same time, it’s unlikely to be a disincentive for developers to build more housing given its high rent growth cap and exemption for newer buildings. Vancouver, British Columbia, has had a more stringent cap in place of about 3.3% annual rent growth. Nevertheless, Vancouver’s new housing construction per capita has been three times higher than that of Los Angeles between 2009 and today.
Of course, policymakers must tread carefully and be transparent about future plans. If landlords in California worry that more restrictions might follow, they may well respond to the uncertainty by raising rents by 7%, the maximum allowed, even if the market doesn’t warrant such an increase.
While better than nothing, AB 1482 alone will not solve California’s housing affordability crisis. To make significant headway in increasing the housing supply, cities will need to change zoning laws and develop more policies that focus on the neediest households.
Jack Favilukis is an associate professor of finance at the University of British Columbia Sauder School of Business and Stijn Van Nieuwerburgh is a professor of real estate and finance at the Columbia University Graduate School of Business.