Rent control drives out affordable housing.
Classified ads in rent-controlled cities show that very few moderately priced apartments are actually available. Yet, in cities without controls, such units are universally on the market.Rent control has been in force in a number of major American cities for many decades. The best-known example is New York, which retains rent controls from the temporary wartime price regulations imposed during World War II.
In the 1970s, it appeared that rent control might be the wave of the future. Boston and several surrounding suburbs imposed it during the inflationary years of 1969-71. Pres. Richard Nixon placed wage and price controls on the entire country in 1971, freezing all rents in the process. Many cities kept rent controls, eventually making them permanent, after wage and price regulations expired. Washington, D.C., retains regulations from this period, as do about 125 municipalities in New Jersey, including Newark, Jersey City, and Elizabeth.
During the Proposition 13 anti-tax campaign in 1978, activist Howard Jarvis promised California tenants that their rents would be reduced if the proposed state constitutional amendment lowered property taxes. In the midst of an inflationary period, though, this reduction failed to materialize, frustrating many tenants. Berkeley and Santa Monica, two smaller cities with radical political cultures, led California in imposing very strict rent ordinances. Political activists Tom Hayden and Jane Fonda, who lived in Santa Monica, then toured the state urging other cities to follow suit. Ten cities--including San Francisco, Los Angeles, San Jose, West Hollywood, and East Palo Alto--eventually adopted rent regulation, putting more than half the state's tenant population under rent ordinances. San Diego bucked the trend, rejecting rent control by a two-to-one vote in a 1985 referendum.
By the mid 1980s, more than 200 municipalities, encompassing about 20% of the nation's population, were living under rent control. However, this proved to be the high tide of the movement. As inflationary pressures eased, the agitation for rent control subsided.
Some cities have remained immune from the rent control temptation. Chicago, with one of the largest proportions of renters of any American city, never seriously has entertained proposals for it. Philadelphia, Baltimore, Cleveland, and other cities outside the Boston-New York-Washington axis never have experimented with this policy. In the major cities of the South and Southwest--Atlanta, New Orleans, Dallas, Houston, and Phoenix--rent control is not an issue. During the 1980s, 31 states as diverse as Idaho, Florida, Texas, and Vermont adopted laws and constitutional amendments forbidding it.
Once in place, though, rent control usually proves extremely difficult to undo. London and Paris still have controls that started as temporary measures during World War I. "Nelson's Third Law," the contention by economist Arthur Nelson that the worse a government regulation is, the harder it is to get rid of it, seems to apply here. Whatever distortions a regulation creates, some people will adjust to it and actually profit. These people then become a tightly focused interest group that fights tenaciously to retain the regulation. When this interest group is a tenant population that forms a near-majority of a municipality, the chances that rent control can be abolished through local political efforts are extremely small.
Nevertheless, it is proving vulnerable. On Jan. 1, 1997, Boston, Cambridge, and Brookline, Mass., became the first major American cities to abandon rent controls since 1950. The process was not altogether voluntary. The initiative came from a statewide campaign organized by Boston and Cambridge property owners, who put up a state ballot initiative banning rent control. The initiative that passed in 1994 required immediate removal of rent controls. Landlords, however, agreed to a two-year extension of controls for hardship cases.
The property owners argued that the costs of rent control were being borne by other taxpayers. When landlords start losing money because of low rents, they usually are able to get their property assessments lowered. This leads to a general decline in property values in a rent-controlled city and thus less revenue going to governments. In Massachusetts, property tax receipts are shared at the state level through a complicated formula that takes money from cities with high property tax bases and gives money to those with low ones. The owners of rental units argued that lower rents in Boston, Cambridge, and Brookline were being subsidized by higher property taxes elsewhere. Massachusetts voters found this argument persuasive and passed an initiative phasing out rent control by a 51-49 margin--even though it lost two-to-one in the state's three rent-controlled cities.
The aftermath has been encouraging to those who believe that rent control can be abolished without widespread disruption. Tenant activists had predicted huge rent increases, mass evictions, and a surge in the homeless population if the regulations were abandoned. None of this has occurred. Formerly regulated rents have risen, but construction of new apartments has begun for the first time in 25 years. Since the overwhelming majority of rental units were deregulated in 1995, and the rest by Jan. 1, 1997, the worst probably is over.
To be sure, there have been individual cases of hardship that tend to attract a great deal of media attention. Almost without exception, these incidents involve tenants who have suffered a loss of income, but still have been able to afford their apartments because of rent control. In one case, featured prominently in many newspapers, an elderly diabetic who had been unable to work for 10 years was losing his apartment in the Fenway district of Boston because the landlord was tripling the rent. Nevertheless, tenants frequently are forced to move when they suffer loss of income. Rent control merely delays the process, and its abolition can not be held responsible for every instance of tenant displacement. Boston property owners have alleviated the situation considerably by setting up a bank of 200 apartments around the city that are immediately available for such emergencies.
Rent control fell under attack in New York as well. In December, 1996, State Senate Republican Majority Leader Joseph Bruno announced that he intended to end "rent control as we know it" in New York City within the next few years. Bruno, a successful Rensselaer County businessman and free market advocate, said he is philosophically opposed to rent control and believes it is doing enormous harm to New York City.
Bruno's effort set off a firestorm among New York City's regulated tenant population, and Republican Gov. George Pataki found himself under political attack by pro-control forces led by Democratic State Assembly leader Sheldon Silver. The Republicans ultimately buckled under, accepting an extension of rent control in return for a handful of deregulatory items affecting just a small amount of apartments.
Although the battle over rent control routinely is portrayed as a contest of tenants vs. landlords, the situation is far more complex. In New York, for instance, which has some of the strictest rent control in the country, 1,100,000 of the city's 1,700,000 apartments--about 63%--are regulated. This produces a tenant population of about 2,000,000 individuals, one of the most formidable political constituencies in the city, with a direct interest in retaining rent control. Since New York City has 7,000,000 inhabitants, what are the interests of the other 5,000,000, and what are the effects of rent control on those among New York State's 18,000,000 inhabitants who do not live under it or on individuals in other parts of the country who want to move to New York?
It is useful to analyze this issue in terms of "shadow markets," a concept developed by Denton Marks in the Journal of Urban Economics in 1984. Standard supply-and-demand theory predicts that any price controls, including those on rent, will produce an excess demand over supply--an economic "shortage." Yet, as Marks pointed out, rent--or any other price--control rarely works in a straightforward fashion. It is virtually impossible for a government to control and regulate the entire supply of a commodity. Once a shortage appears, alternative markets and black markets arise.
More often than not, governments may tolerate these markets as a way of relieving shortages. In many instances, they deliberately will leave a portion of the market untouched by regulation in order to serve as a safety valve for excess demand. This unregulated portion of a regulated market becomes the shadow market.
In theory, prices in the unregulated portion of the market will be forced higher than their normal market value. This is because the limited supply in the shadow market must absorb the shortage--the excess of demand over supply--in the regulated part of the market. Because prices are pushed too low in the regulated sector, they are forced above what would otherwise be the market price in the unregulated sector. The result is that average prices are likely to end up about as high as their free-market level. They even could become higher because of maldistributions and diseconomies in the regulated sector of the market.
The concept of shadow markets offers a reasonable explanation of why the results of rent controls are so perverse and why they lead to a sense of helplessness and panic in a rent-controlled population. Although rent controls widely are believed to lower rents, data collected from 16 American cities show that the advertised rents of available apartments in rent-regulated cities are dramatically higher than they are in those without rent control. In cities without it, the available units are distributed almost evenly above and below the census median. In rent-controlled cities, most available units are priced well above the median. In other words, inhabitants in cities without rent control have a far easier time finding moderately priced rental units than do inhabitants in rent-controlled cities.
This is because tenants in the regulated sector tend to hoard their apartments, forcing everyone else to shop only in the shadow market. Thus, rent control is the cause of the widely perceived "housing crisis" in rent-controlled cities.
Housing is one of the most durable commodities. A well-constructed building can last more than 100 years. A tenant who holds a rent-controlled apartment has a strong incentive to stay there his or her entire life, even passing it on to descendents. Hoarding of housing not only is possible, it is the natural order of things.
Of course, if the laws allow a landlord to charge a higher rent to a new tenant, the landlord may want to evict a low-paying one. This invariably leads to strong anti-eviction laws, a staple in rent-controlled communities that soon makes it difficult or impossible to get rid of even the most destructive or delinquent tenants.
As a commodity, then, rental housing makes an ideal target for conveying certain benefits to a portion of the population. Because of durability of housing, rent control can go on bestowing benefits to the same minority--or even a majority of a municipality--for a very long period of time. It is the individuals who are forced into the shadow market--usually newcomers or people who want to change apartments--who suffer the consequences.
Rent control and vacancy rates. There can be no doubt that rent control creates housing shortages. For almost 20 years, national vacancy rates have been at or above seven percent--a figure generally considered normal. Cities such as Dallas, Houston, and Phoenix, where development is welcomed, often have had vacancy rates above 15%. In these areas of the country, there usually is a surplus of housing, rather than a shortage. Landlords commonly advertise "move-in specials," where rent is reduced for the first month or even where they pay moving expenses.
In rent-controlled cities, on the other hand, vacancy rates have been uniformly below normal. New York City has not had a vacancy rate above five percent since World War II. The state's rent control law, supposedly temporary, would expire automatically if it did. Before giving up rent control, Boston's vacancy rate was below four percent. In rent-controlled San Francisco, the vacancy rate generally is less than two percent, and in San Jose it is one percent, the nation's lowest. Meanwhile, comparable nonrent-controlled cities, such as Chicago, Philadelphia, San Diego, and Seattle, have normal vacancy rates at or above seven percent.
Rent-controlled cities absorb these shortages in a variety of ways. No doubt, higher rates of homelessness are a manifestation of rent control. Another is the traditional difficulty individuals have in finding a new apartment in these cities. A 1987 article in New York magazine entitled "Finding an Apartment (Seriously)" recommended such techniques as "joining a church or synagogue" as a useful technique in meeting people who might provide good leads on an apartment. Young people who migrate to New York or San Francisco usually must settle for paying $600 or more a month to share a two-bedroom apartment with several other people or commuting from a nearby city. Crowding is a manifestation of rent control.
Excluding outsiders. The exclusion of newcomers may emerge as the main purpose of rent control. Many of the small New Jersey municipalities with rent control are close-knit ethnic communities that do not particularly welcome newcomers. One of their major fears is apartment complexes that will bring in large numbers of outsiders and alter the character of the community. Rent control has proved an effective tool for making sure that small, exclusionary-minded communities do not have to undergo change.
Santa Monica is a beach community near Los Angeles that was discovered by urban professionals after the construction of the Santa Monica Freeway in 1972. These newcomers immediately set about trying to limit new construction, pulling up the ladder to keep out those that would follow them. In particular, they opposed a series of high-rise apartments proposed for the beachfront. The newcomers soon discovered that imposing rent control not only guaranteed themselves cheap apartments, but hampered further development as well. The result has been a virtually closed community. It is almost impossible for newcomers to find apartments in Santa Monica.
Generational subsidies. Berkeley, Calif., and Cambridge, Mass., have similar housing markets. As college communities, they originally adopted rent control with the help of large student-voter populations that felt a town-gown rivalry with their landlords. Rent control turned out to be a one-generation wonder, however. Students who were in place when rent control was adopted often remained in their apartments all through their professional lives. Ken Reeves, the mayor of Cambridge until 1994, still was living in the apartment he rented as a Harvard law student in 1973. He finally bought a home when rent control was abolished.
A 1994 study of Cambridge by housing consultant Rolfe Goetze showed that rent-controlled apartments were concentrated among highly educated professionals, while the poor, the elderly, and students generally were excluded. Michael St. John, a Berkeley sociologist, found similar results in California. "Rent control has actually accelerated gentrification in Berkeley and Santa Monica. Poor and working class people have been forced out of those communities faster than in surrounding municipalities."
In small cities such as Cambridge, Berkeley, and Santa Monica, the housing shortages created by rent control can be pushed onto neighboring communities. Most Berkeley students now search for housing in Oakland and Richmond, significantly increasing their commuting time.
Shadow-market housing. In large metropolises, a housing shortage severely can damage the city's economy. Experience shows that when such cities adopt rent control, they usually try to avoid outright housing shortages by leaving segments of the market unregulated. Because of the shadow-market effect, people in this sector pay higher-than-market prices. Still, they rarely are conscious of the cause. Instead, they simply regard the city as "an expensive place to live" and often become a constituency for extending rent control to their own apartments.
It should be recognized that not all cities enforce rent control with the same enthusiasm. Both the city and county of Los Angeles adopted rent control in 1979, but the county dropped it shortly thereafter. The city government exempted new construction and allowed sizable rent increases. It also adopted a form of vacancy decontrol that allows rents to rise to market value each time a new tenant moves in. A 1990 study by the Rand Corporation found rent control saving tenants a mere $8 a month. Since then, the city has depopulated and vacancies rose close to 10%. As a result, there is little shadow-market effect. Washington, D.C., also is depopulating, and its rent control ordinance has little impact.
New York City split its housing market at the outset in 1947 by exempting all future construction and San Francisco did the same. Thus, while Santa Monica and New Jersey communities used rent control intentionally to prevent new housing construction, these other cities worried that no new housing ever would be built.
However, the strategy of exempting new units often backfires. Sooner or later, tenants in the new buildings will realize their position relative to rent-controlled neighbors and seek controls on the rents of their own dwellings. This happened in New York in 1969, when Mayor John Lindsay was forced to adopt "rent stabilization" to cope with the excessive rent in housing built after 1947 that originally was exempt from regulation. He promised that all post-1969 housing would remain outside rent stabilization, but inflationary pressures forced the New York State Legislature to break this pledge within five years with the Emergency Tenant Protection Act of 1974. Since then, builders have learned that, sooner or later, any new housing in New York risks being "recaptured" (brought under regulations). Consequently, little new rental housing ever is built.
San Francisco continues to exempt new housing, but does so much to discourage construction through zoning and no-growth ordinances that, with a one percent vacancy rate, the city adds just 500 residential units a year.
New housing thus makes up a stable--if somewhat uncertain--segment of the shadow market. Another common sector is smaller buildings, particularly those that are owner-occupied. Cambridge exempted two- and three-unit owner-occupied buildings. San Jose exempts duplexes and single-family homes, but regulates the 10,000 mobile homes in its jurisdiction. Berkeley does not regulate duplex apartments when the owner occupies one unit. San Francisco originally had exempted buildings with four units or fewer, but this was overturned in a referendum in 1994. Now, the city even regulates rented single-family homes. New York's rent stabilization does not apply to buildings with fewer than six units, although the old rent-control regulations from 1947 still can govern smaller units.
Rented condominiums and cooperative apartments commonly are exempted, although this is an extremely controversial policy in most rent-controlled cities. The problem is that once apartment houses fall under rent control, many owners will attempt to escape the regulation by selling off the apartments to individual owners. This frustrates rent-control officials because it diminishes the supply of rental housing. In New York, condominiums and cooperatives are treated as single units and thus exempted under the small-owner rule. In Washington, however, an apartment building under cooperative or condominium ownership is regulated as multi-family housing, even though it has multiple owners.
Discouraging condos
Most cities with rent control usually end up adopting strong laws to discourage conversion to condominium and cooperative ownership, in order to close an escape hatch from the regulated market. In 1989, Cambridge adopted a law making it illegal for owners of converted condominiums to live in their own apartments. Instead, owners were to be forced to rent out their apartments as rent-controlled units, in order not to "diminish the supply of rental housing." Active enforcement of this law that would evict individuals from their own property was begun in earnest in 1992. The prosecution of these "condo criminals" swelled the ranks of rent-control opponents and played a large role in passage of the statewide referendum that ended this regulation in 1994.
In major cities, then, these three exempted sectors--new construction, smaller buildings, and rented condominiums--generally form the shadow market. Even in the strictest rent-controlled environment, this shadow market may grow to considerable size. In New York, the unregulated sector makes up 36% of the rental market. In San Francisco and San Jose, it is about 50%. Only in Berkeley and Santa Monica does the shadow market amount to less than 20% of all rental housing.
San Jose rents peak at $1,500, with most pushed more toward the expensive end. Los Angeles, Washington, and Toronto--all of which practice milder forms of rent control than New York and San Francisco--show little or no signs of the rent control effect.
What is going on in these markets? The explanation seems fairly straightforward. Rent control splits the housing market into two sectors--the regulated segment and the shadow market. As prices in the regulated sector are forced lower, prices in the shadow market go higher. At a certain point, the differential between the two markets becomes so stark that tenants in the regulated sector begin hoarding their apartments and hardly ever move. In New York, 88% of tenants living in pre-war, rent-controlled apartments have not moved in more than 25 years.
One poor way to deregulate is "vacancy decontrol." This solution, now in effect in California and, in a limited way, part of the compromise in New York, simply extends the adjustment period while delaying the benefits of deregulation. Under vacancy decontrol, apartments are deregulated only when the current tenant leaves or dies. However, tenants in regulated apartments almost never move, since that means being thrown into the shadow market. It may take 20 to 50 years before the market resumes its normal shape.
Worse yet, under vacancy decontrol, individual landlords have every incentive to evict their regulated tenants since vacancy means deregulation of the apartment. The result often is a series of horror stories, with landlords doing everything from hiring thugs to setting fire to their buildings to get rid of low-rent tenants. Meanwhile, because of general uncertainty, builders and renovators will not invest much in new housing. As a result, there always is pressure to repeal vacancy decontrol. New York tried such decontrol in 1972, but repealed it after two years.
Instead, rent control best is abolished quickly and cleanly, with ample effort to protect the most vulnerable tenants, as Massachusetts did after winning the 1994 referendum. Property owners were faced with a series of court challenges that could have delayed implementation indefinitely. At the same time, Gov. William Weld had vowed to veto any state legislation to revive rent control in Boston, Cambridge, and Brookline. The result was a compromise. Rent control was lifted immediately in the three cities, but a two-year extension was allowed for tenants qualifying for the Federal definition of "low-income"--less than 60% of the median for the region or 80% for the elderly and handicapped. In the end, four percent of the tenants in Boston and 10% in Cambridge and Brookline qualified for this extension. These groups finally were deregulated in January, 1997.
Such a program could work in New York and San Francisco, perhaps with a slightly longer time scale. A three- to five-year phase-out would seem reasonable. The effort could be helped enormously if builders and developers would pledge publicly to step up housing construction during the interim. Unfortunately for such a plan, landlords and developers in both cities have become such pariahs that they rarely speak openly or work in concert. Boston landlords helped their cause enormously by setting up a reserve bank of 200 apartments for emergency relocations. Owners' groups in New York and San Francisco have done nothing comparable. Such an effort would go a long way toward allaying fears about deregulation.
Providing housing is perceived by some as an illegitimate enterprise. "Greedy landlords" become public enemies in rent-controlled cities, and the entire political apparatus is geared up to subdue them. The hate campaign against landlords feeds on itself, becoming a self-fulfilling prophecy, since owners in the shadow market can charge exorbitant prices, while those in the regulated sector do best by making life uncomfortable for their low-rent tenants. Yet, all that is really at stake is public willingness to accept the idea that some people make their living by providing housing.
Rent control is a disease of the mind that soon becomes a disease of the market. Those cities that resist infection by having a healthy tolerance for the rights of others are rewarded with a normal competitive market in which housing is available at every price level. Those cities that succumb to the disease of rent control are doomed to never-ending, house-to-house warfare over an ever-diminishing supply of unaffordable housing.
Mr. Tucker is the author of The Excluded Americans: Homelessness and Housing Policies and Zoning, Rent Control, and Affordable Housing. This article is based on a Cato Institute Policy Analysis.
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| Author: | Tucker, William |
|---|---|
| Publication: | USA Today (Magazine) |
| Date: | Jul 1, 1998 |
| Words: | 4095 |
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