The What, Where and Why behind Rent Control
By Christopher Levarek
"In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing."
- Assar Lindbeck
With great progress in society and economy, there comes the need or perceived need to address fundamental imbalances of wealth or status. In an attempt to provide the same benefits or resources to all, regulations are put into place. Some of these are visible regarding healthcare or medicare however another such government regulation is rent control.
What is Rent Control?
Rent control is quite simply a government/state regulation put into place in a location that limits the rental amount a landlord or property owner can charge a tenant for an apartment or rented unit. The main reasoning for this government regulation is to provide affordable housing to those who need it. Setting rent increase limits is meant to allow those who can’t afford rising market rents in an economy to stay in their current rental.
Different regulations can be in effect per city or per state and vary in scope or design. Some rent control laws also put focus on limiting how or when a tenant can be evicted as well as terms of leases.
An example of rent control would be the SB 608 , passed in 2019 in Oregon, which among other things, caps rent hikes at 7 percent plus inflation during any given 12 month-period. Another example of rent control is the AB1482 implemented by California in January 2020, which made it “illegal for residential landlords to raise rent more than 5 percent, plus the local rate of inflation, in one year.” as per LA.CURBED
Where is Rent Control Implemented?
Although Oregon is the first state to implement state-wide rent control regulations as of 2019, California quickly followed suit January 1st of 2020. In addition, a number of cities such as New York City, Los Angeles, San Francisco, Oakland and New Jersey are also some key implementer’s of rent control.
The National Multifamily Housing Council published an article in September of 2019 which details a visual map displaying rent control across the United States and what version of rent control is present.
Rent Control Across the United States for 2019 :
Note: California now has state-wide rent control starting January 1st 2020.
Why : Pros & Cons
When we look at why rent control is being implemented, like many efforts with government regulation the intent is mostly positive. By regulating rents, the goal is to provide affordable housing to those who need it. However, similar to other methods of government regulation such as interest rate control, trade regulations and retirement plan management, these methods don’t always have the desired outcomes.
Pros of Rent Control:
Caps rental increases for tenants and protects tenant interests
Can also protect tenants from evictions
Possible higher occupancy due to lack of tenants leaving
Protects tenants on lease termination causes in some cases
Cons of Rent Control
Encourages housing quality issues - Less landlord renovations for less potential profits
Decrease in tax/income revenue for city - Asset values stay low due to lack of renovations
Requires administrative cost by city/state to maintain
Reduces movement of tenant base to new units - ie. 1 person staying in 3br unit for low rent
Less desirability for outside capital or investments if rents are capped
Landlords forced to pay rising expenses/inflation while having income(rents) regulated
Development of Housing slowed - Lack of profitability = less interest in development
Impacts other industries - Construction, Property Management, Housing Resource Suppliers
In Final
Rent control is another form of regulation aimed at helping provide affordable housing however in the long term it has more negative affects on a city or local economy that in the end put the entire system into question. Although as multifamily real estate investors, we of course seek non-rent controlled states or cities, it is important for anyone to at least understand these regulations and their impact to the overall desired result. Until next week, Invest smart!