Rent control in the United States

Rent control in the United States refers to laws or ordinances that set price controls on the renting of American residential housing. They function as a price ceiling.^[1]

History

In the United States during World War I, rents were "controlled" through a combination of public pressure and the efforts of local anti-rent-profiteering committees. Between 1919 and 1924, a number of cities and states adopted rent- and eviction-control laws. Modern rent controls were first adopted in response to WWII-era shortages, or following Richard Nixon's 1971 wage and price controls. They remain in effect or have been reintroduced in some cities with large tenant populations, such as New York City, San Francisco, Los Angeles, Washington, D.C., and Oakland, California. Many smaller communities also have rent control — notably the California cities of Santa Monica, Berkeley, and West Hollywood^[2] — along with many small towns in New Jersey. In recent years, rent control in some cities, such as Boston and Cambridge, Massachusetts, has been ended by state referenda.^[3]

New York State has had the longest history of rent controls, since 1943. (Although only 51 communities currently participate in the state's program, New York City is one of them, and contains the vast majority of units covered by that program.) The period has been marked by the lack of an "adequate supply of decent... housing".^[4] The worsening in the rental market led to the enactment of the Rent Stabilization Law of 1969, which aimed to help increase the number of places put up for rent. The current system is very complicated, which is especially troublesome as most of the protected renters are elderly.^[5]

In California, municipal enactment of rent controls followed the statewide Proposition 13, which capped property tax increases; however, a principal author of Prop 13, Howard Jarvis, reportedly:

"was at the time employed by the Los Angeles Apartment Owners Association as a lobbyist. In a fundraising letter to the landlords that employed him, he claimed, 'We are the biggest losers' if Prop. 13 fails. (Not to mention: The Yes on 13 headquarters were located in a Los Angeles Apartment Owners Association office.) He tried to persuade renters to vote for Prop. 13 by saying it would drive down rents, by decreasing the property taxes that landlords paid. Post-13 news reports found rents weren’t going down, despite Jarvis’s promises – apparently landlords were just pocketing their property tax savings. That revelation prompted many of the rent controls still in effect around California."^[6]

San Francisco community activist Calvin Welch has stated “Jarvis was the father of rent control."^[7]

California adopted the Ellis Act (Cal. Gov. Code §7060 et seq) removing municipalities' ability to prohibit the removal of properties from rental activities after the California Supreme Court in Nash v. City of Santa Monica (1984) 37 C3d 97 ruled that municipalities could prevent landlords from "going out of business" and withdrawing their properties from the rental market.

In some regions, rent control laws are more commonly adopted for mobile home parks. Reasons given for these laws include residents owning their homes (and renting the land), the high cost of moving mobile homes, and the loss of home value when they are moved. California, for example, has only 13 local apartment rent control laws but over 100 local mobile home rent control laws. No new mobile home parks have been built in California since 1991.

Law

Although the political debate over rent control is far-reaching, as described below, the purposes and provisions of such laws are intended to be limited in scope. They define which rental units are affected, and may have only larger or older rental complexes covered by the law. The frequency and degree of rent increases are limited, usually to the rate of inflation defined by the Consumer Price Index or to a fraction thereof. San Francisco, for example, allows annual rent increases of 60% of the CPI, up to a maximum 7%.^[8]

Unregulated rent increases may be allowed when a tenant moves ("vacancy decontrol"). Rent-control laws that don't include vacancy decontrol are called strong rent-control laws. Such laws were in effect in five California cities (West Hollywood, Santa Monica, Berkeley, East Palo Alto and Cotati) in 1996, when AB 1164 (known as the Costa-Hawkins Rental Housing Act) made strong rent-control unenforceable in California (except in special cases like mobile home parks).^[9][10][11] San Francisco property owners have increasingly used Costa Hawkins to try to remove long-term renters, by petitioning the San Francisco Rent Board to approve rent increases at market value.

Federal law

Rent regulation in the United States is an issue for each state. In 1921, the US Supreme Court case of Block v. Hirsh^[12] held by a majority that regulation of rents in the District of Columbia was constitutional, but shortly afterwards in 1924 in Chastleton Corp v. Sinclair^[13] the same law was struck down by the Supreme Court. After the New Deal, the Supreme Court ceased to interfere with social and economic legislation, and a growing number of states adopted rules. The application was often inconsistent. For example, in New York only some properties continue to have the protection of rent regulation, while others on the private market are left to be priced according to what the market will bear. Fisher v. City of Berkeley, 475 U.S. 260 (1986) held there was no incompatibility with rent control and the Sherman Act.

Arguments for

Economic

The rental-accommodation market suffers from information asymmetries and high transaction costs. Typically, a landlord has more information about a home than a prospective tenant can reasonably detect. Moreover, once the tenant has moved in, the costs of moving again are very high. Unscrupulous landlords could conceal defects and, if the tenant complains, threaten to raise the rent at the end of the lease. With rent control, tenants can request that hidden defects, if they exist, be repaired to comply with building code requirements, without fearing retaliatory rent increases. Rent control could thus compensate somewhat for inefficiencies of the housing market.^[14][15]

Income tax codes often provide benefits for houses, and rent control allows tenants to share in some of those benefits. In the United States, the Internal Revenue Code allows landlords to claim depreciation deductions for rental property even while increasing rents.^[16] Homeowners may also deduct property taxes and mortgage interest, and exclude capital gains, from their taxable income. Tenants pay income tax but get none of these housing-related deductions or exclusions. (Within the United States, some state and local income tax codes may provide comparatively modest credits, subject to income limits and other restrictions,^{[17][18][19][20][21]} but income tax in the U.S. is primarily federal.) By limiting the extent to which landlords can raise rent on purportedly depreciated property, rent control restores balance to tax benefits that would otherwise become concentrated primarily in the hands of landlords.

To promote investment in new housing stock, rent control laws often exempt new construction. For example, San Francisco's Rent Stabilization Ordinance exempts all units built after 1979.^[22] New York State generally exempts units built after 1974 anywhere in the state (although owners can agree to rent stabilization in exchange for tax benefits).^[23] In jurisdictions where rent stabilization has exempted new construction for so long, construction trends in more recent decades must be related to other factors (for example zoning and other regulations related to urban planning).^[24]

In older buildings, rent control may actually broaden incentives to renovate individual units: tenants may invest sweat equity and their own money to improve their homes if they are protected from landlords trying to capture the added value,^[25][26] while vacancy decontrol preserves landlords' financial incentive to renovate vacant units because it allows them to re-rent at market value.

By allowing tenants who are meeting their obligations (including paying the legal rent) to remain in their homes instead of moving, rent control may reduce instability and associated external costs. For example, in times of economic crisis, bank foreclosures have produced uneconomic vacancies including lost rental income, attractive nuisances, vandalism, and increased crime adversely affecting local property values.^[27]

The economic arguments against rent control are often based on its oldest versions, i.e. strong rent control applied to virtually the entire rental housing supply; in many jurisdictions, rent control has since been reformed, for example adding vacancy decontrol and exempting new construction. One economist's opinion is that "second-generation rent controls are typically mild and so can be expected to have only modest effects on the housing market... As a result, expert opinion on the effects of modern rent control policies has become increasingly agnostic."^[28]

Rent control may influence housing investment either positively or negatively, depending on how it affects the local economy and public services (both of which may benefit from retaining key workers), and tax burden (which can increase if rent instability increases turnover among municipal employees), in addition to myriad other voter-driven regulations. If regulation were the only factor driving investment in housing, and if regulation were a purely negative factor, then investment would be highest in the areas with the least regulation, for example desolate rural areas; in fact, the opposite is true, as the largest and most prosperous municipalities tend to have more regulation, including rent control.^[2]

Social

Rent control is considered necessary by the state of New York^[29] to protect the public and to prevent landlords from imposing rent increases that cause key workers or vulnerable people to leave an area. Maintaining a supply of affordable housing is believed to be essential to sustaining the local society.^[30] Homeowners who support rent control point to the neighborhood instability caused by high or frequent rent increases and the effect on schools,^[31] youth groups, and community organizations when tenants move more frequently.

In certain instances the term "rent stabilization" is used instead of rent "control," for example, in some cities in California, such as San Francisco. With rent stabilization and vacancy de-control landlords are free to set prices of vacant units at market prices, but once rented to a tenant, subsequent increases are capped based on the rate of inflation or a regulated percentage. This is considered a basic form of consumer protection: once tenants move into a vacant unit at market rents they can afford and establish lives in these homes, they won't have to renegotiate. Without rent regulation, landlords can demand any amount and tenants must either pay or move. Thus, tenants can become vulnerable to arbitrary and extortionate increases above market value. For example, elderly or disabled tenants may be unable to move, and families risk disrupting children's educations by moving in the middle of a school year. Advocates insist that finding a new home is not a trivial matter, and tenants should have some assurance that they can maintain some stability in their housing situation.^[32]

Some property tax measures also promote the societal goals of community stability and allowing people to remain in their homes even in times of inflation. In California, Proposition 13 generally caps real estate tax increases at 2% per year. Leading the campaign to enact Proposition 13, California politician Howard Jarvis claimed that landlords would pass tax savings along to tenants; when most failed to do so, it became an argument for rent control, to allow tenants to share in the benefit of the property tax control.^[33]

Moral

The Socialist International argues that housing is a positive human right^[34] that equals or exceeds the property rights of landlords. This can be viewed as a partial expropriation of private property.^[35]

Without rent control, even tenants paying full rent can be forced unexpectedly from their homes through no fault of their own. For example, if their landlord is mortgaged excessively and the property goes into foreclosure, tenants may be evicted even in the middle of a lease.^[36] In the U.S., federal legislation enacted in 2008 and 2009 may protect some tenants from foreclosure evictions, e.g. if the loan is owned by the Federal National Mortgage Association, but others still face eviction.^[37][38]

Arguments against

Writing in 1946, economists Milton Friedman and George J. Stigler said: "Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building."^[39] Although those paying lower than market rent are "protected," most economists argue that newer residents actually pay higher rent due to reduced supply.

In a 1992 stratified, random survey of 464 economists and economics graduate students in the US, 92.9% generally agreed or agreed with provisions that "[a] ceiling on rents reduces the quantity and quality of housing available."^[40]

Economic

In a 1992 survey,^[40] 93.5% of economists agreed with the statement that "a ceiling on rents reduces the quantity and quality of housing available". A more recent survey^[41] of the economic literature found that "the literature points to a conclusion against rent control". This view is based on analysis of empirical evidence as well as the understanding generated by theoretical models.^[42] Economists from differing sides of the political spectrum, such as Paul Krugman^[43] and Thomas Sowell,^[44] have criticized rent regulation as poor economics which, despite its good intentions, leads to the creation of less housing, raises prices, and increases urban blight. A survey of articles on EconLit regarding rent control finds that economists consistently and predominantly agree that rent control does more harm than good. The survey encompasses particular issues, such as housing availability, maintenance and housing quality, rental rates, political and administrative costs, and redistribution.^[41]

Price ceilings can create shortages and reduce quality when they are less than the equilibrium price. By capping the price of housing, rent control can increase demand and reduce available supply, causing a shortage.^[42] It is argued that rent control also reduces the quality of available housing, deters investment, and raises rents on tenants who are excluded from its protections (for example, in jurisdictions with vacancy decontrol, tenants who move or arrive later). When property owners are restricted in the rents they charge, they are less willing to construct more housing (a form of capital strike). Since supply is low, landlords worry less about tenants leaving and have little incentive to maintain the property. For example, unless owners can reasonably expect that punitive action will be taken against them, they might let building maintenance deteriorate in order to mitigate the lower rental income. People moving into the city have difficulty finding housing because of the shortage created by rent control.^[43]

When housing is limited, it must be rationed in some way. After the San Francisco earthquake of 1906, the number of houses relative to the amount of people who needed housing fell by 40%, but a shortage was avoided because the market price mechanism effectively rationed housing and provided an incentive for new housing to be built. In 1946, however, a far less extreme situation was dealt with via chance and favoritehood.^[39]

Social

Some, such as William Tucker of the Cato Institute, a leading libertarian thinktank,^[45] have argued that rent control laws are a textbook example of the problems that arise in trying to artificially reduce prices. The natural consequence in a free-market economy is a reduction in supply and consequent shortages. Tucker has argued that rent control has the perverse effect of creating less affordable housing.^[45]

Areas with rent-controlled housing are blamed for difficulty of finding vacant housing and the resulting power imbalance between landlords and tenants as tenants may "game the system" to impose onerous conditions on the landlord, forcing long cycles of judicial action, leading to considerable economic hardship for the landlord. Likewise, new tenants have serious difficulty finding housing, so they are seriously disadvantaged if they must move. As a result, landlords can impose numerous conditions and requirements.^[43]

Property rights

Rent control restricts the property rights of property owners,^[39] as it limits what they may do with their property, requiring petitioning and other processes by law, prior to taking action against a renter. Rent control is typically enacted in geo-regions characterized by very limited and competitive, high-cost housing constraints. While rent control recognizes property owners and the right to private property, it also recognizes that the landlord's property is the renter's home. This tension between property rights and renter's rights are foci of political and legislative debates. Ultimately the property owner, by right of title and taxation, possesses property rights into perpetuity and is the beneficiary of increased property value, or conversely, is liable for taxes and fees associated with the property even if the property's value is lost.

See also

• Affordable housing
• Price ceiling
• Just cause eviction controls
• Subsidized housing
• Rent control in New York

People

• Don A. Allen, member of the California State Assembly and of the Los Angeles City Council in the 1940s and 1950s, urged lifting of wartime rent controls in Los Angeles

Notes

References

• Baar, Kenneth K. (1983). "Guidelines for Drafting Rent Control Laws: Lessons of a Decade." Rutgers Law Review, Vol. 35 No. 4 (Summer 1983).
• Baar, Kenneth K. (1992). "The Right to Sell the “Im”mobile Manufactured Home in Its Rent Controlled Space in the “Im”mobile Home Park: Valid Regulation or Unconstitutional Taking?" The Urban Lawyer, Vol. 24 pp. 157–221.
• Block, Walter (2008). "Rent Control". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267. 
• Downs, Anthony (1996). A Reevaluation of Residential Rent Controls. Washington, D.C. : Urban Land Institute, ISBN 0-87420-801-7.
• Friedman, Milton, and George J. Stigler (1946). Roofs or Ceilings? The Current Housing Problem. Irvington-on-Hudson, N.Y.: Foundation for Economic Education.
• Gilderbloom, John I., editor (1981). Rent Control: A Source Book. Center for Policy Alternatives; 3rd edition, June 1, 1981. ISBN 0-938806-01-7.
• Keating, Dennis, editor (1998). Rent Control: Regulation and the Housing Market. Center for Urban Policy Research, ISBN 0-88285-159-4.
• McDonough, Cristina (2007). "Rent Control and Rent Stabilization as Forms of Regulatory and Physical Taking." Boston College Environmental Affairs Law Review, Vol. 34 pp. 361–85.
• Niebanck, Paul L., editor (1986). The Rent Control Debate. University of North Carolina Press, ISBN 0-8078-1670-1.
• Tucker, William (1991). Zoning, Rent Control and Affordable Housing. ISBN 0-932790-78-X.
• Turner, Margery Austin (1990). Housing Market Impacts of Rent Control. Washington, D.C.: Urban Institute Press, ISBN 0-87766-443-9.

External links

• Rent Control Around the World: Pros and Cons
• California cities with rent control
• additional California cities with rent regulation
• New York communities with rent control
• Pro-rent control article from tenant.net
• New York Magazine article on Rent Control including interviews with tenants
• Rent Control in the New Millennium by Dennis Keating
• Almanac of Policy Issues – Rent Controls
• Rent Controls and Housing Investment
• Pro-rent control article from Dollars & Sense magazine
• Four Thousand Years of Price Control – Mises Institute
• Rent Stabilized Apartments Go Up Again! – Best Rents NYC