Perspective: The Folly of Rent Control

Written by Apartment Management Magazine on . Posted in Blog

    By Natalie Davis, President, Colorado Association of Realtors

    [Editor’s Note: While this article was written about rent control regulations proposed in the State of Colorado, the arguments made in opposition to the failed policy are valid for any jurisdiction.]

    There is little argument when it comes to the issue of affordable housing — owned or rented — that Colorado is at a critical juncture to identify and implement much-needed solutions to protect the economic vitality and housing future of our state and its residents.

    For more than 40 years, Colorado law has prohibited local governments from enacting rent-control ordinances – a recognition of the damage rent control can do to available housing, and the negative impact that one local government’s housing policy can have on neighboring communities. As Coloradans, we know all too well that you can’t fix the costs for housing — you can’t fix the price, the property tax, the maintenance, the energy costs or anything else. The fiscal responsibility to maintain a property remains whether you’re living in that home or renting it out. Trying to fix one cost component of that equation only creates a negative ripple effect across the entire housing market.

    On the heels of last year’s failed effort by Colorado lawmakers to pass a repeal of the prohibition on local rent control, and standing now at the doorstep of the 2024 legislative session and what will certainly be a reignited conversation and effort to impose rent control, it is even more important that we step back and take a thoughtful look at the well-studied, well-documented failures of similar policies in communities across the country and not make the same mistakes.

    Rent-control measures not only fail to improve the financial situation of most renters but also shift the burden of economic difficulties, inflation and other costs onto the housing provider with no counterbalance. This drives housing providers out of communities, stalls new development, reduces the supply of rental units, lowers property values and, over time, harms that area’s economy. Rent control has failed everywhere it’s been tried. This fact cannot be argued.

    When evaluating public policy, we have to examine outcomes rather than intent. Both during and following World War II, between 1941 and 1964, the federal government-imposed rent control on roughly 80% of rental housing. Over time, the policy was abandoned after prominent economists unanimously argued against the policy and its ability to create housing solutions. That is a sentiment that continues today with recent surveys of the country’s top economists revealing that only 2% of those surveyed believe that rent control in large, high-density cities like New York and San Francisco was having a positive impact on affordable housing options. In fact, most economists argue that rent control deters developers from building more homes, worsening the housing supply crisis in cities across the United States.

    Heed the Data

    The evidence has piled up even more in the past decade as study after study reveals that rent control policies reduce housing options for the people who need it most, no matter the place or policy. Controlling rental pricing helps a select few at the expense of future generations. It’s effectively a policy void of equity across time.

    • A 2014 study in Cambridge, Massachusetts found that entire neighborhoods lost their desirability in areas where the rent control policy’s implementation was most intense, according to findings published in the National Bureau of Economic Research. In fact, removing rent control spurred economic gains for residents within and nearby rent-controlled structures.
    • In a 2018 study by the Brookings Institute, rent controlled units were converted to owner-occupied condominium housing because rental housing providers could not sustain continual losses due to rent control. While this might seem like it added to housing inventory, all it did was make the same units more expensive and accessible only to higher-income individuals, further gentrifying the neighborhood and widening the income inequality — both opposite of the intended goals. In fact, the study found high-end housing generated in response to rent control losses attracted residents with at least 18% higher income.
    • In 2022, St. Paul, Minn., enacted rent control and the “permitting data suggests Minneapolis is the beneficiary of St. Paul’s rent control folly,” according to The Wall Street Journal editorial page. Once again, rent control reduced housing opportunities for the people who need it most.

    Looking within our own state [of Colorado], the July 2022 “Affordable Housing” ordinance implemented by the City and County of Denver has already had a negative impact on our housing situation as it has significantly pushed the number of building permit applications down. Rent control, rent stabilization, or any other labeling to describe this harmful policy will create housing distress in communities across the state in multiple ways. Today’s tenants might gain advantages of controlled pricing, but families and workers looking for a place to live and call home will find themselves locked out of housing opportunities as current tenants are incentivized to stay in place.

    A rental cap typically leads landlords to sell their rental properties to owner-occupants so that landlords can still earn market price for their real estate. Rent control can also lead to the decay of the rental housing stock. In addition, landlords are more likely to skip property maintenance because they can’t recoup their investment by charging appropriate market-level rental rates.

    Moreover, some jurisdictions would adopt rent control while others would not. This would place an unfair housing burden on local jurisdictions adjacent to those who adopt rent control because people will look for available housing elsewhere. While rent control may provide some relief to current tenants, in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhoods. The ripple effect leads to transportation and workforce inefficiencies, areas where we are already in need of long-term solutions as well.

    A Smarter Way

    We can pursue better policy options available right now to address the common denominator of the housing shortage, which is clearly the lack of housing supply at multiple levels. We need to increase the supply of residences by removing regulatory barriers that only serve to limit how many structures are built and delay the units our communities need now. We must explore and implement programs that incentivize local jurisdictions to relax overly restrictive zoning codes and permitting so we can invite the necessary investment to build housing that meets the needs of our state’s entire residential spectrum.

    Despite the good intentions of bill supporters and several state lawmakers, the emotional, economically flawed passage of such a bill would result in a huge detriment to Colorado’s housing market, creating a patchwork of “rent stabilization” ordinances throughout the state. It would lead to adverse outcomes by capping the ability for housing providers to set rental rates. As studies have shown, rent-control policies would decrease development of new housing and reduce residential mobility, leaving even more, larger sectors of Coloradans out of potential housing.

    Put simply, rent control policies have been proven not to work and the result is always less available housing and higher prices. According to data collected and analyzed by the Colorado Association of Realtors, our statewide housing inventory sits near record lows since the association began tracking the data in 2010. At the same time, housing prices, driven by an insatiable demand, have hit and maintained record high levels in the past two years while housing affordability has tanked amid these factors, and more recently, higher mortgage interest rates.

    So, as we stand here at the doorstep of a new year and a new lawmaking session at our state Capitol, we know that rent control is not the answer, and we know that Colorado doesn’t have the housing to lose. We also know, through experience and the outcomes of similar rent-control efforts, that the answer to solving our affordability crisis is increasing the supply. It is the single greatest way to achieve more affordable housing for all Coloradans.

    Let’s create real solutions for housing affordability by focusing on the outcomes and tools, including ones like Proposition 123, to increase our state’s housing supply.

    Natalie Davis is the 2023 president of the Colorado Association of REALTORS®, the state’s largest real estate trade association with more than 28,000 members. In addition, Davis has served as the National Association of REALTORS® Member Services Liaison; has served on the Board of Directors for the local, state and national Association of REALTORS®, has been a cabinet member for state Sen. James Coleman and a federal political coordinator for the National Association of REALTORS®. This article is being reprinted with permission of its author, and was first published in The Colorado Springs Gazette.