Rent Stabilization Is Just Another Word For Rent Control

Rent Stabilization Is Just Another Word For Rent Control

Advocates are trying to rebrand rent control with the words “rent stabilization,” but it is the same policy with a different name, Jason Sorens writes in an article in the American Institute For Economic Research article.

By Jason Sorens

he Washington State House has passed a bill to cap rent increases at 7 percent a year. The Senate has yet to vote on it, and the governor has not taken a position. If enacted, this law would hurt renters, including low-income renters.

Advocates of the legislation call it “rent stabilization” rather than “rent control,” because “rent control” has gotten a bad name over the years (and for good reason). But in practice, it works the same way.

Capping rents means lots of people will want to rent at the capped rate, but fewer units will be available to rent, creating a shortage. After all, owners of apartment buildings can put their units to alternative uses,  selling them off as condos, converting them to office spaces, occupying the units themselves, or simply leaving them vacant.

In the long run, rent caps encourage apartment owners to skimp on maintenance as well. So fewer units are available, and they are of lower quality

The Washington legislation exempts apartments built in the past 10 years. But the law could still discourage new apartment construction. After all, builders have to keep in mind the possibility that 10 or 15 years from now, those new units themselves will be added to rent stabilization. This is precisely what has happened in New York over and over again.

Once a place adopts rent caps, it’s very hard to un-ring the bell and make investors feel safe again about building new apartments.

Advocates of rent stabilization say that “vacancy decontrol” — letting rents adjust when a tenant moves out — makes the legislation less harmful. But rent stabilization makes tenants less likely to want to move out. That makes it harder for young people and workers moving to an area to find a place to rent, and keeps people locked into locations where it might not make sense for them to live anymore.

In markets that have had rent caps for many years, there’s even a well-known scam, described in Tom Wolfe’s Bonfire of the Vanities, whereby a renter pretends to still occupy a unit, while subletting it to someone else, to avoid vacancy decontrol.

Advocates of rent stabilization also say that a high rent cap, like one that limits a one-year increase to 7 percent, is less harmful than traditional rent control. But it’s no defense of a policy that it might cause only a little harm. And in any case, a 7-percent cap could cause a lot of harm.

Why might a housing provider need to raise rent more than 7 percent in a year?

First, inflation might run above that rate. We just went through a year in which inflation topped 9 percent. It could happen again.

Second, even if inflation doesn’t run that high, rent inflation could run that high if land-use regulations have choked off housing supply and demand is growing. Again, the recent pandemic is a case in point: Americans’ demand for housing went up because people were spending more time at home, but a lot of places did not let property owners build lots of new units. Last year, annual rent growth topped 10 percent in several markets that have limited the supply of new homes.

Third, repairs and renovations can be costly for housing providers, and the value of these improvements, especially after a tenant has stayed several years and if building codes change, could justify a rent increase of much more than 7 percent.

Fourth, the city of Seattle requires a court order to evict a tenant. For instance, if the tenant is involved in drug activity, the housing provider has to prove it in court. But a housing provider might prefer not to get the police involved. Sometimes a rent increase is the only realistic way to get rid of a problem tenant. In this way, just-cause eviction laws and rent stabilization laws interact to make it extremely difficult to remove tenants who are damaging the property, annoying their neighbors, or engaging in illegal activity.

The economic research on rent caps shows unequivocally very large economic losses, even for tenants of those units themselves. A recent study of San Francisco rent caps shows that after adoption, corporate housing providers reduced supply by 64 percent, while individuals reduced supply by 14 percent. Perhaps the definitive study of the welfare effects of rent control in New York, published in Journal of Urban Economicsfound that even tenants in rent-capped units suffered from the policy.

Thus, it’s no surprise that only 2 percent of top economists agree that “ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing,” while 81 percent disagree.

Rent caps also have unintended consequences in other markets. Rent caps reduce the value of multifamily properties, because owners and investors expect to earn less. In New York, a recent tightening of “rent stabilization” drove down multifamily properties’ values by more than 30 percent, leaving some housing providers with negative equity and encouraging foreclosure. As a result, a major housing lender has incurred large losses, and investors are worried it could go bankrupt.

Instead of rent caps, cities and states can make housing affordable by letting people build more of it. That’s just what has happened in the last year in several Sunbelt markets. Investors are even complaining that multifamily has a “supply problem,” meaning too much supply, resulting in rent declines.

Just about the worst way to “help” renters is by punishing property owners for providing rental housing, which is just what rent caps do, regardless of whether they call them “rent control” or “rent stabilization.”

About the author:

Jason Sorens, Ph.D., is Senior Research Fellow at AIER. He is also Principal Investigator on the New Hampshire Zoning Atlas. Jason was formerly the director of the Center for Ethics in Society at Saint Anselm College. His research is focused on housing policy and land-use regulation, U.S. state politics, fiscal federalism, and movements for regional autonomy and independence around the world.

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