Is Rent Control a Good Idea to Help Solve the Current Housing Crisis?

We are in the throes of a housing crisis.  Far too many people can no longer afford to keep living in the cities or neighborhoods that they grew up in.  And if we as landlords don’t participate in the crisis of affordability by acting to find solutions, the government may try and create a solution for us.  Some say that rent control is the answer in helping to provide affordable housing to those who need it.  But is that really how rent control shakes down in the long run?  The simple answer is no. 

Let’s look at this example: an apartment in the heart of greater Manhattan, where rent control combined with a small geography and large population dictate the ebb and flow of the housing market.  Two people apply to lease the same rent-controlled unit.  The first applicant is a family of five who earn a decent income and can afford to live there.  The next applicant is a doctor who lives a couple of hours away and wants a place to crash two nights per week while in the city.  The doctor makes $500k per year.  Who gets the unit?  Millionaires all over Manhattan are living in apartments paying incredibly low rent while many others have created a sub-market in illegally subletting to others at a profit.  The family of five?  Out of luck.  In fact, there are NO places in rent control rules that assure that the ones who actually NEED the affordable unit will get them. One study in 2002 found that over a quarter of the occupants in San Francisco’s rent-controlled units were earning an income of over $100,000 per year.  Fast forward seventeen years, and surely that number is much higher.

Supply and Demand

Let’s next factor in supply and demand, which is a large part of where our issues currently fall. Rent control does not guarantee more units, which are desperately needed at this time.  The only people who benefit from it are those who are already living in the building, as rent control prevents that unit from going to a market[NC1]  rent rate.  Meanwhile developers, seeing little or no profits in rent-controlled areas, will not build new housing units, and instead, switch to other investments or other areas providing a the necessary return for the investment and risk.

With higher interest rates for home purchases, there’s an increased number of people interested in renting, but there are fewer vacancies.  In areas that have tried a rent control program, a few lucky first-in-line folks may get a deal, but most will soon find NO available units. Who benefits from that?  Not the landlord with tenants paying below market value and not most renters either, because there are so few units available at any price.

Many of our challenges stem from the debt to income ratio.  We need wages to match rent growth as so many of our society’s challenges are directly linked to employment and wages.

Effects Over Time

We must look at the long-term effects. A properly planned unregulated market offers greater returns than a controlled one.  Developers will switch to other fields than residential housing under controls. According to the New York Times, there was “more residential development taking place in New York during the Great Depression, than in 1997, “ which is the year when the city’s rent control rules went into effect. 

Over time, rent control also leads to substandard units.  With regulated rent, landlords who are no longer making a profit will tend to let their buildings fall into disrepair. Therefore, new affordable housing isn’t being built and existing housing goes downhill in quality. No remodeling or basic upkeep will take place and eventually neighborhoods become slums and abandoned units are trashed. As these property values decrease, so does the base for taxes, which ultimately supply the necessary services.

With such pent-up demand for housing, the developer/investor should be able to forecast a fixed return linked to incomes of their captive markets. Some will suggest gigantic government housing programs are the answer.  But, in those circumstances, the tenants become subsidized by the rest of the population, through taxes.  When the government becomes the regulator of rents and watchdogs of landlords, the rules become very stringent and there’s little or no consideration to support economic or cultural changes from neighborhood to neighborhood or county to county.  Unfortunately, some politicians feel that there are more votes from tenants than from landlords, and they ignore the long-term effects of such destructive rent controls on the population as a whole.

The Bottom Line

Bottom line: Rent control does not guarantee that those in need are able to find housing at reasonable rates. However, some solution to current problems must be found, and ceasing to build new units is not one of them. One program now used in some communities, has been a partial percentage of new units relegated to affordable housing.  So, for example, with every 100 new units built, 5 are offered at a more affordable rate. If properly enforced by local building codes for local markets, it just might work.