The general trend in the rental real estate world has been moving towards stricter rent regulations. While this might seem like a good idea to many, particularly to millennials, Lee & associates Principal Adam Frisch argues that it could be causing the decline of recently revitalized neighborhoods. According to Frisch, the economic education between millennials and those who lived through the 1960-1980s has changed. Now, he says, politicians from all state levels as well as members of housing authorities and advocacy groups prioritize tenant rights. Frisch argues this contributes to issues with the free market and may lead to regressing entire communities.
In the 1970s, the rent regulations were extremely strict. The growth of the civil rights movements and student movements, combined with inflation, created a push for rent control laws. Many investors abandoned neighborhoods due to low property values and high crime rates. However, by the end of the 1980s, rent control movements lost some momentum. Fortunately, this period of stringent control, followed by a cessation of regulation, has given us interesting data on the effects of rent control.
The Effects of Rent Control in Cambridge
One study conducted by the American Economic Association’s Papers and Proceedings took a look at sudden rent decontrol in Cambridge, Massachusetts. In the 1970s, Cambridge had imposed severe rent regulations on residential properties that were built prior to 1969. The city placed strict caps on rent price increases and implemented policies that made it difficult for property owners to remove their rent-controlled units from the rental market. Rental units that were built after 1968 and owner-occupied homes were exempt from the regulations. In total, more than one-third of the city’s total residential units were affected by the city’s rent control.
In 1994, opponents of rent control brought the issue to the Massachusetts general election ballot. Voters narrowly voted to eliminate rent control ordinances and laws throughout the state. Just prior to rent decontrol, Cambridge units under rent control were typically rented out at 25 to 40 percent below the prices of nearby uncontrolled units. Clearly the tenants of these units benefitted from lower rent, but the value of the rent control units was significantly lower than units without regulation. There was also evidence that ownership investments in the rent-controlled units were lower, including maintenance, upkeep, and capital improvements.
With rent decontrol in place, tenant turnover in rent-controlled units was high, as rent prices went up significantly. However, the values of the properties increased substantially, by about 18 to 25 percent. Property owners had more capital to invest in their properties and were able to attract more affluent residents. Surrounding properties that had never been affected by rent control also saw a significant increase in property value. Researchers estimated that the value of these never-regulated properties increased by approximately 12 percent on average between 1994 and 2004.
Interestingly, there was another positive result correlating with Cambridge’s reversal of rent control. From the time rent control was abolished between 1995 to 2005, the overall crime in the area decreased by approximately 16 percent.
Who Bears the Burden of Strict Rent Regulations?
Frisch argues that if states and cities continue to enact strict rent regulations, it may lead to unrest in inner cities. He warns investors will move their assets out of highly regulated areas in favor of those with less regulated ones. This has been evident with states like Oregon and New York. A study conducted by the American Economic Association (AEA) states that rent control leads to an overall decrease in the supply of rental housing. This was shown to be especially pronounced in properties managed by corporate landlords rather than individuals. Researchers at AEA stated that rent control appeared to be regressive since corporations can evade the tax burden of rent control more easily.
Who bears the burden of rent control? If the Cambridge study and similar studies are taken into account, the answer appears to be the community at large. Not only do landlords have less capital to invest in their properties, but nearby homeowners are affected by plunging property values. Additionally, rent-controlled units may attract higher levels of crime, leading to a less desirable living situation for the tenants in those areas.
With that in mind, there have been some positive effects of rent regulation in some highly populated urban areas, such as Los Angeles and San Francisco. Both cities have higher rent burdens than the majority of the country. In Los Angeles, for example, renters spend approximately 49 percent of their income on rent. Researchers note that the rate of homelessness jumps sharply as the rent burden exceeds 32 percent.The issue of rent control is complex, but clearly, more considerations need to be taken into account than solely focusing on tenant protections. Going too far in that direction affects not only the living standards of these tenants but also the living standards of the entire community.