Rent control

Rent Control Cannot Escape the Law of Supply and Demand

Oregon's new rent control law won't deliver on its promises.

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Last week, Oregon became the first state in the nation to adopt a mandatory statewide rent control policy. Yet, rent control never delivers on the promise that it will multiply the affordable housing in high-value markets to serve middle- and lower-class families. It also always has negative consequences, and this time will be no different.

The new statewide law applies to landlords who have at least four units, one of which is at least 15 years old. It prohibits them from increasing rent more than 7 percent over inflation annually. The bill also prohibits no-cause evictions after the first year of residency, in addition to the protections against eviction already on the books.

The change comes after the median rent in the state increased by 14 percent over three years during the population boom. The largest hike took place in Portland, Oregon, where, according to The New York Times, rents have grown by 30 percent since 2011.

The Beaver State's new law is quite a stunning move, as 37 other states actually prohibit cities from implementing rent control. There's a reason for that: It doesn't work. Rent control didn't provide more affordable housing when it was implemented in various regions back during the '70s, and it hasn't worked since. It didn't work when they tried it in Paris, and it isn't working now in New York City, Washington, Los Angeles, or San Francisco, where rent controls are currently in place. It won't work in Portland, either.

Brookings Institute associate professor of economics Rebecca Diamond did a recent review of the literature on rent control, finding that "Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood." The reason is simple and boils down to the law of supply and demand. While some of the people renting may benefit from rent control by removing some of their risk, it also gives landlords an incentive to alter their supply of rental property.

They have several options based on the circumstances. First, they may withdraw their properties from the rental market to sell them as condos. Former George Mason University Chairman of the Department of Economics Donald Boudreaux summed it up nicely in a 2006 letter to the editor of The New York Times: "By decreasing the profitability of supplying units occupied by renters, these controls spawn condo conversions and prompt builders to construct fewer rental units and more units for sale to owner-occupiers. People who can't afford to buy housing are unnecessarily disadvantaged." Landlords may also stop investing in maintenance, which, over time, may lead to neighborhoods with many run-down properties. The bottom line is that rent control never increases the supply of affordable rented housing.

The good news is that the rent control legislation in Oregon may not be as punishing as we fear. Looking at Zillow's data on neighborhood rents from 2010 to 2017, my colleague Emily Hamilton only found seven neighborhoods out of 98—all of them in Salem and Bend—where the median rent increased by more than 7 percent annually. It means that a small number of neighborhoods will be affected and the negative impact of the law will be limited. That is, of course, until legislators get pressured into lowering the threshold to the point where it does take a bite out of the rental market and prevents growth.

Now, there is something that legislators in Oregon can do if they truly want to slow down the growth of rents, Hamilton tells me. First, they could eliminate—or, at the very least, reform—the zoning laws that restrain development in the state. There's a bill going through the state legislature that would take a stab at terminating zoning restrictions that allow only single-family homes in many neighborhoods. Second, they must reform the state growth boundary requirement, which creates boundaries around urban regions outside of which no development can take place. That reduces the supply of development and, in turn, jacks up the rents. Making matters worse, the regulation has formulas that allow the boundaries to grow only slowly.

Slow development opportunities and high rents go hand in hand. Time for a new approach.

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  1. “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” — Thomas Sowell

    1. I wonder how long this policy will last before it becomes abundantly clear it was an utter failure.

      Of course, the response won’t be, “We shouldn’t have been economically illiterate”. It will be, “The evil capitalists didn’t allow it to work”.

      1. New York City has had rent control for 75 years and they still think rent controlling a little harder is the solution to their housing problems.

        1. Always double down. That way you never have to admit you were wrong.

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        2. Do they? I thought New York had stopped adding new rent controls. Maybe I’m thinking of something else. Or DeBlasio has started it up again.

          1. Unregulated housing (as in not under rent control or rent stabilization) has increased as rent controlled and stabilized has decreased a little. Unless the landlord agrees in exchange for tax benefits, rent controlled properties get decontrolled if not passed to a family member. People understand the value of having a rent control unit, so most families keep the rent controlled units in their name, pass them down, and pay for the units. In general, new units are not under rent control unless the developer/landlord agrees to it in exchange for tax credits.

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      2. “I wonder how long this policy will last before it becomes abundantly clear it was an utter failure.”

        It’s already abundantly clear to anyone with any economics knowledge that the law won’t work as intended. And you are never going to make an effective economic argument to those that don’t have any economics knowledge. So, I’m going with Never.

        1. It prohibits them from increasing rent more than 7 percent over inflation annually.

          Very few places will be increasing this fast without government interference driving up the price.

      3. Well socialism will work even though it has failed every time it is tried.

        The problem is that it was not implemented correctly. Someday it will be implemented correctly and it will work. Sure, millions of people will be left destitute or die an early death, but it will be worth it to have people who know more than I know running my life.

    2. Give the people what they want when they want
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    3. “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” — Thomas Sowell

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  4. It’s a good thing AOC has an economics degree so she knows how to fight against this sort of nonsense.

    1. To bad she appears to have had a lobotomy, and installed a recording of failed Socialist stupidity.

      1. She’s just a parrot.

        1. Parrots are smarter than most politicians, and definitely AOC.

          1. She needs some rough sex to straighten out her bullshit. Her faggoty beta male fianc? sure isn’t providing that kind of fucking

            She also has no business in congress.

    2. “The law of supply and demand is racist. I’ll just repeal it because I’m the boss.”

      1. It’s more important to be morally right (I am the final arbiter or all morality) than factually correct.

      2. YOU TRY! Until You can repeal the law of Supply and Demand, she is the boss

    3. She has an econ degree, so it proves she is evil, not stupid.

      1. Why can’t she be both?

      2. From someone with an Econ degree from a State University, you spend most of your time learning Neo-Keynesian crap.

        It’s possible you learn some useful stuff. It’s also very possible you learn mostly incorrect stuff (government worship).

        I learned more reading Mises’ “Human Action” and reading articles at mises.org in 2 years (about 30 mins a day, 5 days a week) than I did at 4 years at the University.

        Summa Cum Laude, BTW. No-one got that “honor” and did Econ at that place!

        1. That’s my experience, too: University teaches Keynesian crapola as unquestioned gospel. Then I wandered into the interwebs and discovered Mises.org, dailyreckoning, financialsenseonline and a few other places, and from there started raiding the library for books by Friedman, Hayek, Mises, et al.

    4. The school made a mistake. That was supposed to be an Ergonomics Degree.

      1. The school is a mistake because it is “socialized” in this nation.

  5. The argument that rent control doesn’t work as planned is still arguing with a band of thieves over whether or not your stereo is really worth stealing. Rent control is stealing the value of the owner’s property and – despite Elizabeth Warren’s argument that stealing other people’s shit is good and noble and the morally righteous thing to do – stealing ought to be condemned on principle. Bernie Sanders, of course, wants to “fundamentally transform” America through a “political revolution” which will abandon the principles on which this country was founded and explicitly make it a nation of thieves, for which the answer isn’t arguments over whether or not socialism works but a more direct argumentum ad baculum involving piano wire and a bridge.

  6. You are wrong, wrong, wrong, wrong. Rent control works just as intended.

    Their goal is to reward current renters (almost all of whom are voters) with (soon to be) lower than market rents on the apartments they currently live in.

    Their goal isn’t to increase the number of units, they’re not stupid (in one sense of the word), they’re responding to the political incentives – keep my rent down and (indirectly) keep my neighborhood free of additional development, I’ll vote for your re-election. And if some small number of these renters get pushed out due to condo conversions, so be it, the politician is still net votes ahead.

    So we can harp all we want about the laws of supply and demand but it’s not going to matter… you’re talking apples, they’re passing oranges… or something like that.

    1. They are passing kidney stones.

    2. +1, insightful or maybe inciteful

    3. I lived in Portland, Oregon for over a decade, and I can tell you that Steve is exactly correct: nobody is interested in development; quite the contrary, most of the politically active voices in the state would much prefer to put up roadblocks and discouragements to growth, and rent control is one such. With rents artificially maintained below marketplace, their attitude will mostly be: I’ve got mine, the rest of you can stay in California and Washington, and leave us to enjoy our craft brews and artisanal weed in peace. Of course, with stagnant growth, it’ll be even more challenging to attract those $15 an hour jobs that they demand. Oh, well….

  7. The law also allows landlords to raise the rent by any amount when a tenant moves out, so they will raise it to above market rates because they don’t know when they will be able to freely raise it again

  8. Rent Control Cannot Escape the Law of Supply and Demand?

    Maybe it should take a lesson from illegal immigration–because THAT sure can.

    1. Yep, It’s amazing how many people that profess to have an understanding of economics immediately start ignoring the basics as soon as their own ideology gets in the way.

      Large amounts of low skilled immigration increases the supply of low skilled labor which puts downward pressure on demand (wages). That’s basic economics. But sure Cato or somebody can gin up a study where they pinky swear that the laws of supply and demand don’t work in this one case.

      1. Well, you see, the amount that I save on the cost of getting my lawn mowed and my driveway paved is greater than the amount that Joe Green on the other side of the tracks loses when cheap immigrant labor pushes down what he can earn. So it’s a net good. “We” are “all” better off.

        1. /sarc

      2. But sure Cato or somebody can gin up a study where they pinky swear that the laws of supply and demand don’t work in this one case [cite?]

        Of course, newspaper journalists will write such articles, but they aren’t constrained by the laws of reality or factuality, and will surely be first up against the wall when the revolution comes. But Cato?

        We all know, when there is massive amounts of low skilled immigration, it leads to a downward pressure on wages. Which sucks, if you are in a low-wage job, and can’t figure out a way to trade on your meager innate advantages (ever notice how the mexican yardwork crews usually have a supervisor who speaks english goodly?)

        What real economists argue, though, is bugger downward pressure on wages; in these places, now low-wage workers can get their own yardwork done reasonably, or hair cut, or automobiles repaired in small fast shops that don’t gouge you like the dealerships, you can get plumbing done for non-union wages, house painting, everything else.

        Downward pressure on wages is no worse than upward pressure on wages, once you strip away all of the crushing burden of licensing and regulation.

      3. I don’t know of anybody who claims that there aren’t any losers in free markets.

        If I put up a pizza place next to yours and drive you out of business with lower prices, better service, and better pizza, I might be better off. My customers will be better off. The economy will be better off. But, no, you will not be better off.

        You will have been driven out of business. You may lose your home if you used it for equity in your business. Your wife may leave you. She may take the kids–and the dog! And this is all as it should be.

        Yes, some people are better off getting paid $60 an hour to screw in lug nuts all day, and when competition comes in and drives them out of work, the economy is better off as a whole. But, no, not everyone is better off. The guy who was getting overpaid to screw in lug nuts all day will probably never be so overpaid to be so unproductive ever again.

        It’s the same thing with illegal immigration. The economy is better off when the cost of labor falls–just like the economy is better off when oil prices fall. Falling oil prices isn’t necessarily good for oil companies and falling labor prices isn’t necessarily good for gardeners. But just because the cost of hiring gardeners and others falls doesn’t mean that’s bad for the economy generally either.

        1. There’s also the question of liberty. Liberty is a good. Am I free to hire a cheaper gardner? Why not? Who is using force to stop me?

        2. She may even leave the kids with you and start shacking up with Ken. Ponder that on the tree of woe!

      4. it’s amazing that you make that comment without considering both supply and demand, you know, the basics. New immigrants increase the supply of labor, but they are also consumers, so they also increase demand for local goods and services, which in turn, increases demand for labor. The net effect is ambiguous. We’ve known this at least since Ricardo.

        I recommend Principles of Micro and Macro by Greg Mankiw for an introductory primer on the subject.

        1. Is this why Mumbai, Kinshasa, and Lagos have the most vibrant job markets, extra people raising that demand?

  9. As far as Rent Control laws goes, this isn’t that bad. IE it’s mostly uneffective, feel good legislation.

    “It prohibits them from increasing rent more than 7 percent over inflation annually. The bill also prohibits no-cause evictions after the first year of residency, in addition to the protections against eviction already on the books.

    rents have grown by 30 percent since 2011.

    Sure it would have capped rent in Portland, but Portland was a rare case. So while I think this kind of law is bad, I wouldn’t start predicting a disaster because of it.

    1. Why assume that it will stay as it is–especially during the next recession?

      Unemployment is now at about 3% in Portland. Ten years ago it was up near 11%.

      They probably will cut rent increases when the economy slows, and that river only likes to flow one way. When the economy comes back, they aren’t suddenly about to let landlords crank up the rent. Cranking up the rent will never be popular with renters in place–no matter how well the economy grows in the future.

  10. Of course, if your end goal is to promote gentrification, then this is a great first step.

  11. “It prohibits them from increasing rent more than 7 percent over inflation annually.”

    “Looking at Zillow’s data on neighborhood rents from 2010 to 2017, my colleague Emily Hamilton only found seven neighborhoods out of 98?all of them in Salem and Bend?where the median rent increased by more than 7 percent annually.”

    Did you factor inflation into this calculation? It might be less than 7 neighborhoods experienced rental increases greater than inflation + 7%.

    I agree with your point on “…until legislators get pressured into lowering the threshold…” though. They may decide that real estate investors don’t deserve to earn even this much.

  12. “It means that a small number of neighborhoods will be affected and the negative impact of the law will be limited. That is, of course, until legislators get pressured into lowering the threshold to the point where it does take a bite out of the rental market and prevents growth.”

    Exactly.

    If the mechanism is in place now and it isn’t achieving the desired results, the presumptive solution will be to lean forward.

    Tribal societies that feature little in the way of social stratification are an artifact of primitive minds. There’s something to be said for cultural adaptations like religion that advance taboos against egalitarian socialism, too–taboos like, “Thou shalt not covet”. Oh, if only I could use my landlord’s property and pay less rent! He has more than me so stealing from him is okay because equality!

    It’s also interesting how the cities that pursue rent control seem to imagine themselves as somehow more sophisticated than the rest of us (Paris, New York City, Washington, Los Angeles, San Francisco, Portland), and yet they’re actually indulging primitive impulses. Rent control is barbaric in the technical sense.

  13. This is a classic example of politicians ignoring the “what is seen and not seen” concept of economics. We can see the renters benefiting. But we can’t see what else is going to be worse.

    Just like the minimum wage increase. You can point and say, “look, those workers got raises” but you dont’ see the jobs that weren’t created because of it, the projects that weren’t started, etc.

    1. Yet you do see, and clearly, the workers getting lower hours, the workers laid off / fired, and the businesses going under.
      And somehow, none of that matters.

      1. More people on Welfare. Fewer evil business owners. More Democratic voters. Win-win-win.

  14. Sounds like Oregon’s housing market must have TOO MANY CHOICES (far too much supply) and its confusing renters. Big Gov must step in and limit those choices to only the ones renting at 7% inflation.

    I guess those landlords wishing to “better” (invest/upgrade) their units are just flat out of luck and ONLY the ‘slums’ are allowed on the rental market. I think the “poor” sometimes enjoys digging their own graves no matter how much complaining they do about it.

  15. Laws of Supply and Demand, plural. There is a Law of Supply and a Law of Demand.

  16. Well, it’s called The Beaver State, but this is antiquated. It should be renamed The Feel Good State.

    Oregon has more than its share of progressives and the number one goal of a progressive is make a difference by feeling good which of course means feeling good and not making a difference.

  17. No rent control has never fulfilled its promise more quality rental property. When the cost of renting is controlled but the cost of repair is not nor is the taxes on the property the only things for the property owner property owner to do to not make repairs other than the most critical. So as time passes the rental properties gets worse and worse. So the better way to keep rent prices in the affordable range is to have more units in all price ranges. That would control the price more effectively. The other ways is if the cost of living in your paradise where the people cannot afford to stay there so they head to a place that is more reasonable and that they can affaord.

  18. Economists are virtually unanimous in concluding that rent controls are destructive. The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the “right” to their fellow Nobel laureate Gunnar Myrdal, an important architect of the Swedish Labor Party’s welfare state, on the “left.”

    Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”

    His fellow Swedish economist (and socialist) Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city?except for bombing.”

  19. One note: Allowing multi-family housing into neighborhoods which are currently single family is a terrible solution. Redmond, WA has been doing that for the last ten or 15 years and the result is no housing. There used to be blocks and blocks of nice little homes downtown. The first major change was to re-zone many of those homes as commercial. It’s a little weird, really, because there are still a few square blocks of what were very clearly built as single family homes but they cannot be used as residences. They’re barbers and daycares and consulting offices for decorators. It’s not an ideal utilization of the properties. The other thing that happened is that a lot of them were zoned to allow first story commercial and residences above. Most of the blocks that were zoned that way have had the houses demolished and replaced with apartments. The result? Where there used to be blocks and blocks of housing in downtown Redmond, mostly expensive because of Microsoft, there is now no housing available at any price, because the houses are just all gone.

  20. Why does everyone, governments and renters, believe the landlord is some kind of charity organization? They are expected to care for their renters as if they were family members. Owning property and renting it out is a business and if your make it too expensive then people will find something else to do with their money.
    Certain segments of our population believe some of us should work for free. Landlords, doctors, nurses etc…

  21. I mentioned that at 7% it would have little/no effect anyway when you wrote the first article about this… That is still true. That part will make ZERO real difference if they don’t lower it.

    The no no fault evictions after the first year sounds awful though. That will be an actual problem.

    As far as multifamily… I live in Seattle. Seattle is a PERFECT example of zoning gone wrong. Tons of idiots pouring in, NOBODY wants their neighborhood upzoned for obvious reasons… So the city only upzones a COUPLE small areas.

    Result: 100% of the newly upzoned stuff gets completely obliterated in a couple years to fill the demand.

    Had they simply said “There is no such thing as single family only anymore, and any street more than 2 lanes wide can have an apartment building as high as 6 stories.” then:

    1. 1. Costs wouldn’t have gone up so much, because OF COURSE they upzoned mostly only in the coolest areas of town, and other cheaper places to develop were not built up.

      2. No particular place would have been as hard hit. My neighborhood is unrecognizable compared to even 5 years ago. If town houses were allowed everywhere, we’d probably have more of them overall (pushing prices down), but no single neighborhood would have ended up with enough of them to actually change the character.

      In other words, the randomness of the market would have spared us all the worst parts that are inevitable in a rapidly growing city. I’d prefer if the city HADN’T grown at all… But if it’s going to, letting it sort itself out is the only way to fly. You just gotta take your knocks as they come, and with the number of people coming here things needed to get denser… Super concentrating the dense spots via zoning is what made it a real problem.

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