Rent Control Redux

 

https://www.bostonherald.com/2020/01/14/rent-control-debate-puts-tenants-landlords-at-odds/ 

"BOSTON, MA – JANUARY 14: Demonstrators attend a rent control rally on the State House steps on January 14, 2020 in Boston, Massachusetts. (Staff Photo By Angela Rowlings/MediaNews Group/Boston Herald)"

https://www.illinoisrealtors.org/blog/the-rent-control-threat-is-real/

We’ve all seen versions of these photos. and many of us have been in these meetings. Rent control is a contentious policy and it’s easy to find passionate voices on both sides of the debate.

There have been some cycles in the popularity of controls of one form or another. Controls are often put in place in wartime. During World War II the United States, most of Europe, in fact many countries around the world instituted emergency controls during the housing shortages that accompany a major mobilization of resources for such a war. 

After the war, over time, these were relaxed in many places and removed in others. The popularity of controls seemed to rebound about 40 years ago, partly because of the rapid inflation that many countries experienced. 

As LSE's Christine Whitehead and Peter Williams among others point out, as inflation subsided controls were relaxed in a number of countries, although certainly not all.  In recent years, given increasing concern with housing affordability, and very recently the COVID pandemic, we’ve seen a resurgence of interest in controls, in some parts of the United States, and around the world. 

In the late 1980s and early 1990s I directed a World Bank research project comparing costs and benefits of rent controls in a range of countries. A terrific team that included Steve Mayo, Peter Rydell, Ricardo Silveira, Vinod Tewari, Graham Tipple, Ken Willis, joined me in preparing a series of case studies, and a wider review of controls in about 50 countries. The best point of entry is a summary monograph that I wrote with the assistance of Gwen Ball; that paper also credits the much larger team that contributed research assistance, data, and country details.  Soon after, Bengt Turner brought his expertise on European controls and housing markets to the table, and in 2003 we collaborated on another survey paper.

The government of Scotland is planning to institute a new system of controls on private rental housing; details as of this writing can be found in their consultation paper, A New Deal for Tenants.  As part of the consultation process, the UK Collaborative Centre for Housing Evidence (CaCHE) organized an online conference to bring together researchers, policymakers, and market participants to discuss the details of rent controls, chaired by Duncan Maclennan.  Links to the sessions can be found here:

• Session 1, A Growing Mosaic
• Session 2, Supply Side Reactions
• Session 3, Proposals and Policy Implications
• Supporting Materials

I was privileged to be a participant in that conference.  The organizers asked me to prepare some brief remarks about research on rent controls, with an emphasis on supply.  You can find my recorded remarks here.

The PowerPoint slides from the presentation, along with references, can be downloaded here.  I do recommend a somewhat expanded version, which you can find here.

Mid-conference, as we discussed policy alternatives, I quickly drafted some additional thoughts, including some "big picture" thinking, e.g. about efficiency and fairness; a few more slides with some simple analytics and research results; and some quickly assembled thoughts about "mechanism design" for rent regulations.  (The Government of Scotland is committed to putting rent control legislation in place, so we're in an nth best world, n to be determined partly by specifics of the regime).  You can find that second deck here.  Comments on any of this material are welcome, but especially on my initial thoughts on mechanism design.

Among other readings, along with the Malpezzi and Ball, Turner and Malpezzi, and Whitehead and Williams papers above, I highly recommend:

• Ed Olsen's classic empirical analysis of controls in New York, "An Econometric Analysis of Rent Control."
• Richard Arnott's "Time for Revisionism on Rent Control?"
• Konstantin Kolodilin's "Rent Control Through the Lens of Empirical Research"

Late breaking news:  Ken Gibb, Adriana Mihaela Soaita and Alex Marsh have just completed their  excellent "Rent Control: A Review of the Evidence Base," which you can download here.

Faithful readers of my blogging (both of you?) might remember that I wrote a rent control post for Morris Davis' Rutgers Center for Real Estate several years ago, when Newark and several other tri-state municipalities were discussing new controls.  Most of the post stands up well as an elaboration of some of the ideas in the materials I've provided above, and you can read that post here. I think the bottom line from that earlier post, lightly edited, is worth repeating here:

The Bottom Line

Early models of rent control, the kind usually found in economics principles texts, suggest that regulating rents will lead to dramatically reduced supply from decreasing construction and accelerated depreciation. Simple evidence we presented here, and the preponderance of more detailed research, suggest these effects have been found.  But the kinds of rent control systems we have in the United States, which mainly limit rent increases (rather than set rent levels well below market, as sometimes found in other countries) are associated with decreases in supply but do not shut off development completely as feared by early analysts like Milton Friedman and George Stigler. Furthermore, rent control is often inefficient in the sense that the benefit delivered to tenants is often much less than the corresponding cost to landlords.

The distribution of benefits from controls, whether first or second generation, is rarely related to any measure we’d use to target housing assistance by income or other measure of need. The sparse evidence we have on landlord income suggest that while landlords are richer on average than tenants, landlord and tenant incomes often overlap. Small scale landlording is often an important point of entry for potential entrepreneurs.

The “bottom-bottom line” can be stated succinctly: Second-generation rent control rarely has the catastrophic effects some early economists suggested, but neither does it deliver effective and targeted relief to households that we would identify as having the strongest housing needs. It does create frictions and perverse incentives that have unintended consequences for housing quality and supply, and labor mobility.  Once installed, politically rent controls become very hard to modify or remove if they do begin to become even more binding on supply.

Other approaches like housing vouchers and changes in building codes land use and development regulations and the like are likely to have a much more positive impact on housing affordability issues.  You can read about some of those in a few related posts, which you can find here.