Rick Kahler: Do rent controls really help tenants?
Given that I’ve been a landlord since I bought my first rental house at age 19, I was surprised to realize recently that I’ve never written about rent controls.
Here’s the quick primer: rent controls are laws established by government, typically a municipality, that freeze or control the increase of rents. The three types of price controls are rent freezes, vacancy control, and vacancy decontrol.
Rent freezes, the most drastic, do not allow rents to increase at all. Vacancy control allows a small increase in the rent when the unit becomes vacant. Vacancy decontrol freezes rent as long as the current tenant occupies the property, then allows the landlord to raise rents to the market rate when there is a vacancy.
Modern rent controls were initially adopted during World War II. They have always been state or local measures and are banned in some 37 states.
The Biden administration, however, wants to change that. The president is considering a series of executive orders that would limit rent increases on all rental properties in the US financed by Freddie Mac or Fannie Mae. This can be a very popular idea with tenants, who saw their rents skyrocket by 17% or more during 2021.
My research suggests that roughly half of the nation’s housing stock is held by “mom and pop” landlords who own one or two units. Are Mom and Pop just attempting to take advantage of their tenants by price gouging?
I would suggest not. First, inflation is up 13% since 2021. That means a proportionate increase in all the costs of owning a rental property, including repairs and maintenance. It also means that any profit the landlord receives has declined in purchasing power by 13%. So just to stay even, landlords would need to raise their rents around 13%. And the other 4%? Many landlords lost a lot of money during the pandemic eviction moratorium and may still be recovering financially. The biggest reason may be that there is also a national housing shortage, which puts upward pressure on rents.
Do rent controls work? Yes — if you are a tenant, but only in the short term. In the longer term, rent controls hurt both landlords and tenants.
In the long run, the inability to raise rents will erode and eventually eliminate the profit that a landlord needs to pay for necessary expenses and improvements. Typically, the first place to cut costs is by deferring maintenance. Rental units, especially those of typically underfunded mom and pop owners, will eventually fall into disrepair. The rising costs and unprofitability of owning real estate also puts pressure on landlords to sell their properties at a discount to potential owner occupants, which further reduces the rental housing stock, creating further shortages.
In the case of the Biden proposal, where only a portion of the nation’s rentals would be subject to rent controls, the shortages of well-maintained units would drive up the rents on those not subject to the freeze.
If you want to learn more, “What does economic evidence tell us about the effects of rent control?” is an October 2018 report from the Brookings Institution that summarizes the results of research on the topic. The author, Rebecca Diamond, is an associate professor of economics at Stanford Graduate School of Business.
Rent controls, like many other ideas intended to be helpful, are far more complex than they might first appear. They appeal to a broad swathe of the population that tends to accept an idea on its surface, rather than critically considering possible drawbacks or unintended consequences. National rent controls are much more a political ”feel good” measure than they are a reasonable economic strategy.
Rick Kahler is president and owner of Kahler Financial of Rapid City.