Why Rent Control Won’t Make Housing More Affordable

Photo (cc) by The All-Nite Images

Rent prices are insane. A quarter of Americans are spending more than half of their income on rent, The Atlantic reported recently.

Personal finance experts like Money Talks News founder Stacy Johnson typically advise spending no more than about 30 percent of your income on housing.

The wage-rent gap

But renters in many cities are finding that guidance impossible to follow. Inflation is rising, and the single biggest factor is rent increases, Bloomberg says.

Housing expert Peter Dreier at Occidental College in Los Angeles, tells USA Today:

Rents are higher than they’ve ever been. Wages are declining. There’s a huge, huge gap between wages and housing costs.

In 13 states and the District of Columbia, for one example, a renter must earn more than $20 an hour to afford rent on a two-bedroom apartment. The federal minimum wage, however, is $7.25 an hour. (See the states with the highest and lowest rents.)

Calls for a solution

Some city governments are feeling the heat as strapped renters demand that elected officials do something. In Richmond, California, recently, the city council approved a plan to limit out-of-control rent increases. There, rental prices have risen roughly 30 percent in four years, according to USA Today.

Rent controls, a term for local laws limiting how much landlords can raise rents on existing tenants, are in place in various forms in a number of cities in four states: California, Maryland, New Jersey and New York, according to Landlord.com’s state-by-state rent control guide.

New rules in Richmond

San Francisco Business Times describes Richmond’s new rules. They kick in Dec. 1, covering about 9,900 of the city’s nearly 34,000 rental units:

The Richmond City Council approved a measure that will limit landlords to an annual rent increase equal to the rise in the Consumer Price Index for the San Francisco-Oakland-San Jose region. The CPI for the area rose 2.3 percent in the last year, according to the Bureau of Labor Statistics. So if a renter paid $1,000 per month last year, under the new ordinance, the landlord could charge up to $1,023 this year, for example.

Richmond’s plan will be funded by a fee of $55 to $100 per rental unit, to be paid by landlords.

History

Rent control harkens back to at least the World War I era. It was used to control fast-rising rents during a postwar housing shortage when some landlords doubled rent prices, USA Today says. Another shortage, after World War II, prompted New York’s current rent-control system, described in this fact sheet from the state’s office of Homes and Community Renewal.

Predictably, landlords and tenants disagree on how well rent controls work to keep prices low. But economists, even those typically at opposite poles of the political spectrum, mostly agree that rent controls are a dead-end street.

Economists in agreement

In fact, rent controls can make a shortage worse, discouraging landlords from buying or building more rental housing. On this point, liberal Paul Krugman, Nobel Prize-winning economist and New York Times columnist, and Mark A. Calabria, director of financial regulation studies at the libertarian Cato Institute see eye to eye.

“There’s probably no topic that economists agree more on than rent control,” Calabria said, in an email interview.

Rent control can offer some individual renters a degree of security, says economist Dean Baker, co-director of the Center for Economic and Policy Research. “It is not an effective way in the long run to preserve affordable housing in an area in which demand is rapidly rising,” however, he wrote in an email.

Housing shortage

Behind the crisis is a housing shortage. At least in much of the country, too few homes are available for rent. The competition pushes up prices.

Renters can’t solve their problems by purchasing a home because too few are up for sale. The National Association of Realtors reports a five-month supply of homes for sale in June. A six- or seven-month supply is considered balanced, meaning homes sell well but prices aren’t pushed too high by buyers bidding against each other.

Villain: Negative equity

The bad guy in all this — or one of them, at least — is that relic of the housing crash, negative home equity. Growing numbers of homeowners enjoy improved equity from rising home values but negative equity is still a force. Also blamed: rising interest rates, too-conservative lenders and a lack of new construction at affordable price points.

“One in three homeowners either has negative equity or very little equity in their homes,” Zillow’s chief economist, Stan Humphries told The Wall Street Journal. That puts a crimp in the housing supply, economists recently told the Journal, because it prevents homeowners from selling their homes.

“In the long run, it really is best just to build more affordable housing,” says Baker.

“We need to reduce the barriers to increasing supply,” Calabria says. “Sure that’s hard, but anything else is at best a distraction.
What’s going on with rental prices and homeownership in your area? Share with us in comments below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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