
💼 Out Of Rent Control
briefcase | invest smarter | Issue #133
What does the future of real estate investing look like? Hear from experienced home construction operators, seasoned investors, and tech entrepreneurs about what to expect in the years to come. Learn about new, emerging technologies that are currently being leveraged to solve the housing crisis—and how you can benefit.
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🏡 Housing Snake Oil
We’ve spoken at length about the intentions and outcomes of rent control measures across North America. It’s actually very difficult to find something economists agree on more than the ineffectiveness of rent control.
Rising home prices and falling home-ownership rates mean that a functional rental market is more important now than ever.
Rent control, however, only makes matters worse. At best, peddlers of rent control laws have good intentions but ignore actual outcomes. But, at worse, they are modern-day snake oil salespeople.
We should reject most forms of rent control, which is exactly what the real estate industry is currently trying to do.
Last month, the National Association of Realtors (NAR), the National Apartment Association (NAA), the National Association of Homebuilders (NAHB), and the Mortgage Bankers Association (MBA) filed an amicus brief in two Supreme Court cases related to New York's rent stabilization laws.
Rent control is not just a New York issue; Oregon, Illinois, Washington, DC, among others, are all jumping on the snake oil bandwagon.
According to legal experts, if these industry groups succeed in the Supreme Court (which has a 6-3 conservative business-friendly majority), the cases could end most rent control laws across the U.S.
Let’s take another look at rent control, and what the data says about its merits.
😒 TLDR: Rent Control Just Doesn’t Work
1. Upkeep: Numerous studies have found that rent control discourages building upkeep and upgrades. One study found that 28% of rent-controlled apartments across the U.S. are in a state of disrepair, whereas only 8% of non-rent-controlled apartments were in similar states.
Consider New York, which has one of the most stringent rent controls. Let’s take a look at the difference between rents and expense increases over the years.
The average New York landlord is actually losing money due to rising expenses and artificially low rents.
TLDR: It’s not a profitable business being a landlord, which reduces the rental supply. Speaking of which…
2. Supply: Rent control actually decreases supply because developers and builders avoid rent-controlled areas (big surprise!). Less supply = upward pressure on rents.
Also, landlords under rent control are encouraged to convert their assets to avoid the downward pressure on revenues. One study found that rent control actually reduced rental housing by 15% in San Francisco by encouraging landlords to sell to owner-occupiers rather than keep it as rentals.
3. Prices: A recent Economist article highlights that rent control actually puts downward pressure on housing prices. A working paper found that:
Using a sample of 150,000 transactions made between January 2018 and January 2022, Messrs Ahern and Giacoletti estimate that the [rent control] ordinance, which was passed by St Paul voters in November, caused property values in the city to fall by 6-7%. What is more, though the law was intended to help lower-income renters, the benefits went mainly to the rich.
4. Conversions: Guess what apartment owners do when they get saddled with rent control? They increasingly look to convert units to condos. How does that help improve rent affordability?
5. Middle Income: Several studies have found that rent control helps more middle-income earners, not lower-income ones. Rebecca Diamond, one study author, found that rent-controlled tenants in San Francisco actually had higher incomes than tenants living in unregulated properties.
6. Movement: Rent control discourages mobility, as people refuse to move around due to artificially low rents. This reduces apartment availability and affects local job markets.
7. Economists No Likey: In a poll, 93% of economists agreed that “a ceiling on rents reduces the quantity and quality of housing available.” Canadian economists felt the same. It’s rare that professionals almost unanimously agree on such a controversial topic.
8. Costs are Rising: Affordability is indeed an issue in North America. Home prices and mortgages are all getting more expensive, pushing more folks to rentals.
With increased construction costs and debt, implementing more rent control will serve only to keep builders and rental home providers (aka landlords) on the sidelines.
So What? In short, rent control doesn’t work for a myriad of reasons. Affordability is indeed a noble cause and a primary economic headwind facing many of us. But, rent control has gotten out of control and must be opposed in its current iterations.