Freakonomics: Why Rent Control Doesn’t Work

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There’s no doubt that man communities in the United States, including here in the Piedmont Triad, are dealing with housing affordability challenges. There’s also no doubt that elected officials in cities, counties and states are looking for possible solutions to the affordability problem. Unfortunately some of the solutions that, on the surface, seem to make sense can actually make the problem worse.

One of the solutions that many elected leaders consider is rent control. Just this year Oregon became the first state to enact a statewide rent control law. Some cities, like New York, have long had rent control laws and yet their residents still have some of the highest rents in the country. So what gives?

That can be a complex question to answer, but thankfully the folks at Freakonomics have produced a show that does a great job of explaining why rent control actually makes the affordability challenge worse, not better. It’s well worth a listen so here’s a link to either listen to the podcast or read a transcript:

Freakonomics: Why Rent Control Doesn’t Work

And here’s just a small excerpt from the show:

DIAMOND: When you pass rent control, the landlords of the property suddenly getting covered by rent control are losing so much money, they no longer really want to rent their apartments out at the prevailing new prices, so they decrease their supply of rental housing to the market. And if there’s less supply, that’s going to drive up prices.

DUBNER: Okay, so, let me just make sure I have it pretty straight. You find evidence that rent control increases gentrification, one component of which is the displacement of low-income tenants. On the other hand, you also find evidence that low-income people, including minorities — at least those who are in rent-controlled units already — they’re likely to disproportionately benefit from rent control.

So, if I’m an affordable-housing advocate, I might say, “Oh, fine, fancy Stanford professor — who I’m sure has some kind of great income and/or housing subsidy and/or situation — I don’t care that some landlords are suffering. I don’t care that the policy is having some downstream effects that you don’t like. I need to make sure that low-income people aren’t going to get a rent increase of 50 percent overnight.” So, how do you respond to that argument?

DIAMOND: So, when you think about those initial tenants, that’s the best bet you’re going to get for the benefits of rent control to low-income tenants: the people that are already in the housing. But even though we find that those tenants are much more likely to stay in their apartment, when we look 10, 15 years later, the share of those 1994 residents that are still there is down to 10 percent or so. So 90 percent of them no longer live in that initial apartment.

And it’s that next low-income tenant that wants to live in the city, that low-income tenant is going to have a very hard time finding an affordable option, because now there’s going to be less rental housing, the prices that that low-income tenant are going to face when they want to initially move in are going to be higher than they would have been absent rent control.

DUBNER: I’m curious how generalizable you think your findings from San Francisco are for other cities.

DIAMOND: I would suspect that the actual quantitative loss of rental supply or benefits to the tenant will depend a little bit city to city, but I think the qualitative takeaway that landlords are savvy and are going to work hard to not lose money on their investments, I think is a very general point.