Close to Home: The real economics of rent control: basically, it’s bad
Affordable housing is one of the most important issues facing Sonoma County employers, workers, leaders and citizens. With our great weather, easy access to recreation and other quality lifestyle amenities, Sonoma County is a highly desirable place to live and has been for some time, yet it is not an easy place to afford to live.
Employees are having a harder and harder time living near to where they work, causing increased commute times. They also complain of flat wage growth. Employers cite the area’s high cost of living — especially for housing — as one of the key challenges to recruiting and retaining talented employees. Citizens and community leaders express concern over the effects of gentrification, segregation and discrimination in housing markets.
These concerns are supported by data on income and housing. From 2000 to 2015 in Sonoma County, the median wage has increased by 16 percent while the median home price has increased by 66.7 percent. Over the same period, rates for two-bedroom and four-bedroom rentals have increased by 55 percent and 63 percent respectively. Wages have started to increase a bit lately, but most of that increase is still concentrated in the upper-income groups. So, the pressures on the lower- and middle-income groups are clear: make do with less housing, longer commutes — or live somewhere else.
Local political leaders are not blind to the realities of rapidly rising housing costs. Santa Rosa recently passed a rent control policy, and recent Press Democrat articles show that this policy is having a key role in the current City Council election.
So I’d like to share a bit about what the economics profession has learned about rent control policies.
First, there is very little disagreement among economists regarding the effects of rent control. In 1992, a study was published in which the researchers conducted a survey of economists, asking whether they were for or against rent control policies. A staggering 93 percent of economists reported that they were against rent control. A 2012 IGM Forum survey of experts gets a nearly identical result. In fact, there are very few economic policies that have achieved the degree of consensus among economists as rent control has.
It is not surprising that an explanation of why rent control policies have a net negative impact is included in every major introductory microeconomics textbook. So whatever peoples’ feelings are, the economics of rent control are pretty much settled.
So what are the economic effects? Basically, it’s bad. The supply of property available for rent is reduced. Since landlords are forced to accept a lower price, they are less willing to rent and/or invest in additional rental units. Also, their propensity to maintain and upgrade existing rentals is reduced for the same reason, so quality as well as quantity falls.
Another effect is that, since there are generally a lot of renters who want to get into rent-controlled housing, landlords are incentivized to discriminate among the borrowers according to characteristics that often have little or nothing to do with the price. As you might guess, the beneficiaries of this kind of discrimination are often usually people with high incomes. This is a particularly nefarious effect. The few renters who benefit are the ones who have rent-controlled housing, while those who do not are forced to live elsewhere, making it nearly impossible for them to organize and give voice to the harm caused by the policy.
The bottom line is clear: Rent control fails to reduce housing costs except for a fortunate few, exacerbates the problem of unaffordable housing by reducing overall housing available and slows the growth of investment in housing.
It also drives people out of the community in order to find affordable housing elsewhere. The people forced to leave are disproportionately people of color and lower socio-economic status, precisely the people generally targeted by the rent control policy to begin with. Costs of rent control mostly fall on the poor, while benefits accrue mostly to those with higher incomes.
The suppression of rents also leads to reduced growth in the property tax base and, subsequently, reduced property tax collections, placing greater tax burdens on the rest of the community to provide public services.
To quote a recent Forbes article, “rent control treats the symptom, not the cause of rising housing costs.” The appropriate solutions to a shortfall in supply of housing include policies that will increase the supply of housing not policies that will reduce the efficiency and fairness of the allocation of the current supply of housing.
Michael S. Visser is a professor and chairman of the Department of Economics at Sonoma State University.