Rent Control and Misallocation

What stirs most people against rent control laws in the United States and elsewhere are stories of people who have held apartments for many years and now pay absurdly low rents for them. There are important reasons for removing rent controls, but the shock value of a low rent is not one of them. Basu and Emerson construct a model of second-generation rent control, describing a regime that does not permit rent increases for sitting tenants - or their eviction. When an apartment becomes vacant, however, the landlord is free to negotiate a new contract with a higher rent. They argue that this stylized system is a good (though polar) approximation of rent control regimes that exist in many cities in India, the United States, and elsewhere. Under such a regime, if inflation exists, landlords prefer to rent to tenants who plan to stay only a short time. The authors assume that there are different types of tenants (where type refers to the amount of time tenants stay in an apartment) and that landlords are unable to determine types before they rent to a tenant. Contracts contingent on departure date are forbidden, so a problem of adverse selection arises. Short stayers are harmed by rent control while long-term tenants benefit. In addition, the equilibrium is Pareto inefficient. Basu and Emerson show that when tenant types are determined endogenously (when a tenant decides how long to stay in one place based on market signals) in the presence of rent control, there may be multiple equilibria, with one equilibrium Pareto-dominated by another. In other words, many lifestyle choices are made based on conditions in the rental housing market. One thing rent control may do is decrease the mobility of the labor force, because tenants may choose to remain in a city where they occupy rent-controlled apartments rather than accept a higher-paying job in another city. Basu and Emerson show that abolishing the rent control regime can do two things: Shift the equilibrium to a better outcome and result in lower rents, across the board. A version of this paper - a product of the Office of the Senior Vice President and Chief Economist, Development Economics - was presented at an Applied Microeconomics Workshop at Cornell University.

Summary Advocates of rent control often argue that rent control aids the mixing of rich and poor, and perhaps of the races as well. Economic theory does not necessarily predict that rent control will reduce segregation. The best case for rent control as an aid to integration is that it creates pockets of low rent (and low quality) apartments in expensive cities. However, by creating an excess of demand over supply, rent control ensures that apartments will be allocated on the basis of landlord preferences, which may in fact be segregationist. Furthermore, when rent control induces poor renters to live in rich cities, those poor renters are generally older, long term renters, who are less likely to have young children living at home and are less likely to benefit most from integration. Empirically, rent control seems to have allowed some poorer (and older) tenants to live in expensive Manhattan, but rent control in the declining cities of New Jersey seems to have increased the isolation of the poor. Rent control is a very socially costly means of occasionally getting integration, and housing vouchers or supply-side policies seem likely to be much more effective.

Affordable housing is on the minds of voters and state and local officials across the country. One policy often proposed to temper high rents is rent control. In its most basic form rent control is a government-imposed cap on rent and using it as a means of keeping rents below the market rate is an old idea, dating to at least the 16th century. But while rent control may seem like an easy way to control housing prices, the bulk of the evidence shows that it’s an inefficient policy with several negative side effects. Rent control decreases the amount of rental housing, raises prices in the uncontrolled sector, reduces the quality of rental units, leads to a misallocation of units, and decreases tenant mobility. It also transfers wealth from landlords to tenants even though some landlords are poorer than their tenants, and this may foster hostility between the two groups. Instead of rent control, cities can make housing more affordable by allowing more building to enable the filtering process to work. They can also provide rent subsidies to alleviate any remaining affordability issues. By looking beyond rent control, cities can help create more affordable housing options for lower-income people.

Rent control and homelessness

Measuring the urban policy environment: An exploratory analysis using rent controls

Since the early 1970s over 200 cities in the United States of America have enacted rent control. Currently 10% of the nation's renters are covered by some form of rent regulation, yet little is known about the economic consequences of rent control. Most evidence suggests that modern rent controls have little or no impact on the amount of investment in rental housing. Such a finding is primarily because of the nonrestrictive nature of most current rent control ordinances, which typically exempt newly constructed housing, guarantee a fair and reasonable return on investment, and allow for annual rent adjustments to cover increases in operating costs. Although this relatively mild type of rent control succeeds in limiting extreme rent increases, it does not result in significant relief from high rents in most regulated cities. Only with strong rent control ordinances will rents be significantly impacted.

The paper analyzes the present rent control system in Sweden in order to assess the distributional and dynamic effects of a rent control lift. The study focuses on the shift in demand for dwellings of different sizes. Interaction with other sectors on the housing market is excluded. The study is limited to the Stockholm region, where clear effects are anticipated. The rent control debate Even if the introduction of the new rent control system ('bruksv~irdespr6vning' or fair rent system) has meant a move towards market rents, there is still an excess demand for older and centrally located dwellings. There is also a small surplus demand for newer dwellings, including those located in the suburbs. The reason is a general shortage of dwellings at the current controlled rent levels. The underlying problem is spatial imbalance, implying too low rents in central locations.

The private rented sector of the British housing market has been in decline since the beginning of the present century; that decline has continued apace since the end of the Second World War. A proposed solution for the stemming of this demise is the removal of present rent controls and the substitution of free market conditions so that rents find their own market levels. This, so it is argued, would enable landlords to obtain a proper return on their housing investments and lead therefore to an increase in supply and an ending to the present disinvestment from this housing sector.This article disputes this thesis. In the first place it is argued that “market rent” is a problematic concept and raises complex issues of distributive justice and social policy — which its advocates ignore. Secondly, it is argued that a free market solution is ahistorical in that it takes no account of the past failure in Britain of privately rented housing; and similarly it ignores the complex web of historical circumstances behind its decline — attributing the decline to the single causal factor of rent control. Thirdly, it is suggested that a market solution is sociologically misconceived because it ignores the characteristics and needs of those social groups dependent upon this sector. Finally, on grounds of practicability it is proposed that a free market in rented housing may be quite inappropriate for the rump of housing stock remaining in the private rented sector; and that, given the current social and economic constraints operating in the housing market as a whole, any revival of this sector is unlikely even with enhanced rental inducements.It is thus concluded that a free market solution is misconceived and would merely serve to impose an ideological straightjacket upon the provision of a basic human need.

An examination of the impact of rent control on mobile home prices in California

This study examines the impact of rent control of mobile home parks in seven counties of California between 1983 and 2003. We assembled an extensive and timely data set and, thus, were able to test more carefully specified econometric models than had been employed in prior studies of California mobile-home rent control. We find that the nature of the rent control regime differentially impacts mobile home prices: the imposition of rigid rent control, rent control without vacancy decontrol, leads to higher growth rates in resale prices. While a flexible regime, or rent control with vacancy decontrol, results in lower growth rates in resale prices. This is consistent with economic theory, suggesting that the imposition of rigid rent control will lead to the capitalization of future rent savings when a coach is sold. That is, the buyer will not only pay for the coach but also for the net present value of the expected savings associated with the future legally constrained pad rent obligations to the landlord.

CONTENTS I. Introduction II. Recent Developments III. The Takings Clause A. Fifth Amendment 1. Background Principles 2. Fractional Property B. Possessory Takings 1. General Rule 2. Rent Control C. Regulatory Takings 1. Economic Impact 2. Substantially Advancing Prong D. Unconstitutional Conditions 1. Discretionary Benefits and Relinquished Rights 2. Exactions 3. Individual Adjudicative Discretionary Actions E. Temporary vs Permanent Takings 1. Doctrinal Origins 2. Regulatory Delay IV. Due Process Clause A. The Theory of 1. Modern Standard for Confiscation 2. Particular Problems in Confiscation B. Preference for Takings Analysis V. Conclusion I. INTRODUCTION Housing is one of the necessities of life. (1) It also comprises a large share of most Americans' disposable income. Unlike other consumables, competition in supply and demand does not result in effective market restrictions on price. First, there is a limited supply of housing. The limit is both natural (there is a finite amount of land) and artificial (zoning restrictions limit housing supply). Second, consumers of rental housing do not have the same market power as do consumers of other goods. This is principally because substituting one product or brand for another, say at lease renewal time, exacts a high transaction cost--the considerable expense and inconvenience of relocating. Since rental housing is not fungible, each landlord is a demi-monopolist. (2) This is not meant as a pejorative, only to describe the owner's market power. The absence of a free market in rental housing (at least in an idealized sense) often leads to exploitation by housing providers. This is especially true in times of economic stress, when the nation's resources are devoted to more pressing needs (e.g., wartime), or during periods of high inflation and real estate speculation. It is during these times that government policy makers often consider restrictions on rent increases and other forms of tenant protection. (3) Of course, there are other means to overcome market inefficiencies in housing. Tax and cash subsidies can encourage housing production or assist with rent payments. Zoning incentives can do likewise. But federal and state governments are not as concerned with housing as they once were; the issue is currently perceived as one of local concern. As a result, municipalities are left holding the bag, so to speak, with a dwindling arsenal of regulatory means available to them in addressing housing shortages. Rent control is one of those still-remaining means. Rent controls were first enacted in the United States during World War I. Since then, the Supreme Court has considered the constitutionality of rent control at least a dozen times, upholding the challenged law on every occasion save one. (4) It is somewhat remarkable that even during periods of extraordinary judicial protection of property rights, rent control laws have nonetheless survived. This was true in the Lochner era, (5) as well as during the modern resurgence of property rights activism, at least at the Supreme Court. Despite long-standing judicial acceptance of rent regulation, the attack on rent control has been unrelenting. For some reason, rent control triggers greater emotional and ideological opposition than do most other forms of economic regulation. Virtually every constitutional theory has been tried. Most challenges are based on the takings and due process clauses, but the contracts clause (6) and even the first (7) and thirteenth amendments (8) and equal protection (9) have made their way into the opinions. Creative statutory claims have also been mounted, such as the argument that rent control is an illegal form of price fixing. …

In economic studies of the private rental sector of the housing market, and in political debates on housing policy, it is often assumed that private landlords are basically guided by rational economic motives. In this paper, which is based on a Danish study of housing rehabilitation activity among private landlords under rent control, it is shown that different groups of landlords exist who have many other motives for buying and maintaining rental property than those assumed in economic theory. It is concluded that private landlords do not behave as economic, rational and efficient actors as is often assumed, and that an understanding of these structures of landlordism is essential to an assessment of the role of private landlords in housing supply, and to an elaboration of public programmes for supporting housing rehabilitation in the private rental sector.

Rent Control, Rental Housing Supply, and the Distribution of Tenant Benefits

Rent controls, designed to lower the cost of housing for renters, may have the perverse effect of increasingrents for tenants in the unregulated sector. Although new construction is exempt from currentrent control laws, a reduction in supply of rental housing will occur if investors are wary of futurecontrols affecting their units. Also, if controls reduce landlord maintenance, total housing supply in amarket will fall. Using 1984 to 1996 data from the American Housing Survey, this study examines therole of rent controls in determining the variations in prices of uncontrolled rental housing acrossmetropolitan areas.The results suggest a positive and statistically significant relationship between the introduction ofrent control and price in the uncontrolled sector. However, the link between controls and prices declinesthrough time and may completely disappear after 20 to 30 years with no new construction subject tocontrols.

A ‘long lease’ for the purposes of the law of landlord and tenant is one which exceeds twenty-one years. The rent is typically much lower than that chargeable on lettings falling within the discussion in Chapter 11, so since leases subject to a ‘low rent’ — i.e. less than two-thirds the rateable value — are excluded from the protection of the Rent Act (s.5, 1977 Act) and of the Housing Act 1988, insofar as that Act provides security, long leases are almost invariably outside the scope of these two Acts. Nevertheless, some 500,000 households live in such premises and since 1954 they have been given a variety of protection both during and after the end of their leases. Landmark legislation was passed in 1967 although more recent is the Landlord & Tenant Act 1987 which implements the recommendations of the Nugee Committee on management of privately owned blocks of flats. Protection for long lessees varies from other private sector tenants in that there is no restriction on premiums (hardly surprising since these leases exchange hands for sums of money which reflect their market value). There is also no rent control, although with the low rents involved this would anyway be unnecessary. Instead, the legislation concentrates on: (a) protection against exorbitant service charges;