Economists Are Right To Hate Rent Control

Progressives like to argue that rent control policies that exempt new construction don't impact the construction of new housing.

Progressives keep trying to rehabilitate the reputation of rent control, and often misuse existing research to make their case that it's an effective policy with few, if any downsides.

The most recent example comes in the form of an essay for The American Prospect from Rutgers University economics professor Mark Paul, who argues "the neoliberal convention" that rent control is counterproductive policy is dead wrong.

"As recent empirical work has shown, the neoclassical account's core assumptions—one, that rent control restricts the supply of new housing; and two, that it misallocates existing housing, thereby causing an irrecoverable collective loss—fail to hold when it comes to the real world," he writes.

Given the lack of ill effects, rent control is basically free money, says Paul. Housing could be made more affordable and overall welfare enhanced by adopting nationwide rent caps of 4 or 5 percent of inflation, a policy he says is indistinguishable from the "rent control" provided by a 30-year mortgage.

Set aside for the moment whether Paul is right in his provocative claim that rent controlling someone else's house is the same thing as borrowing money from the bank to buy your own. Instead, let's start by asking whether he's right in his core assertion: does the research show that rent control doesn't reduce the housing supply? Judging by the studies Paul cites, it would be more accurate to say rent control doesn't reduce the supply of housing exempt from rent control.

While he describes "abundant evidence" that rent control doesn't negatively impact supply, Paul is relying on two studies that look at the effects of local rent control policies in New Jersey. He also cites one study that looks at the effects of a state-level repeal of local rent control policies in Massachusetts to argue that the repeal of rent control doesn't increase the housing supply.

To take the latter first: Paul cites a 2007 paper by David Simms, who examined the effect of a 1994 Massachusetts ballot initiative that repealed local rent control laws in Boston, Cambridge, and Brookline. Simms did indeed find no statistically significant increase in new housing after controls were repealed. That could plausibly be explained by the fact that these cities' repealed rent control laws didn't apply to new construction. Developers always had the right (zoning code permitting) to put up a new block of rental housing and charge whatever the market would bear. It is not a surprise that the construction of uncontrolled units didn't increase after the repeal of a policy that never affected them.

It's much the same thing for the New Jersey studies that Paul relies on. The two studies from 2007 and 2015 compare municipalities with rent control to those without rent control. Both found that rent control had little effect on new housing supply.

Yet these studies credit the lack of impact on new housing supply to the fact that New Jersey's "moderate rent control" policies generally provide exemptions for new construction. "The construction of new residential buildings continues because builders are exempt and reluctant to leave a familiar community," reads the 2007 study by researchers John Gilderbloom and Lin Ye.

Their paper also concludes that New Jersey's rent control policies have largely been ineffective at suppressing rent increases, writing that "moderate rent control in New Jersey stands as symbolic rather than distributional reform. Our research suggests that the pressure of real estate groups, government, and the courts has made modern-day rent control laws toothless in terms of their impact on rents."

The 2015 paper on New Jersey rent control, on which Gilderbloom is also an author, came to the same conclusions.

In other words, New Jersey's rent control policies are flexible enough to effectively let landlords charge market rents for their units. Because they're not controlling rents, they don't have the negative impacts rent control critics predict.

The flip side is they don't have the benefits tenant advocates want.

Rent control proponents want more than "toothless" and "symbolic" policies. They want laws that bind rents and require landlords to charge below-market prices for their units. The more those policies suppress rents, the more we can expect to see the oft-predicted adverse effects of rent control.

Indeed, the research Paul cites does provide ample evidence that rent control reduces the stock of rental housing by encouraging owners to convert their units to condominiums.

"There is weak evidence that rent control affected the extensive quantity of housing units supplied in Boston, but much stronger evidence that rent control led owners to shift units away from renting," reads the 2007 Simms paper on rent control in Massachusetts.

That's consistent with a more recent 2019 paper by Stanford economists Rebecca Diamond, Tim McQuade, and Franklin Qian, finding that the expansion of rent control in San Francisco led the owners of affected buildings to convert their units to condominiums.

We also have the example of rent control killing off the housing supply in St. Paul, Minnesota. In 2021, city voters passed a ballot initiative that imposed a 3 percent annual cap on rent increases without exemptions for new construction or allowances for inflation.

The result? Developers fled town en masse, walking away from already in-progress projects and canceling permit applications. The city hurriedly worked to weaken the voter-passed law.

The episode does not get a mention in Paul's article.

Paul suggests that rent control policies could be amended to limit condo conversions. It's unclear why he'd want to do that, given that he positively describes mortgaged, owner-occupied housing as a form of rent control. Would condos also not fit the bill?

There are significant differences between owner-occupied housing and rental housing. That's a good thing! The separate arrangements provide a different set of benefits that fit the differing needs of consumers.

Rental housing is an excellent option for people without the means to cover the upfront costs of buying a house or who are at a stage of their life where they might be moving frequently.

So long as rent control binds rent growth below market levels, it will reduce the supply and/or quality of rental housing. If it's sufficiently strict, we can expect it to reduce the net housing supply by killing off new construction.

Rent control proponents think some loss of quality and/or new supply is worth the stability that rent control provides to incumbent tenants. They should at least be honest about the tradeoffs they're foisting on property owners and people looking for a place to live.