Kinds of Rent Control

In my previous post I argued that rent control is generally undesirable. Affordable housing is important, but it is not the kind of thing that can be done by fiat, at least not without serious negative consequences. In general if you want cheaper housing you need to (A) allow more of it to be built, and more densely, or (B) improve transit so that the supply of housing within x minutes of the city center is increased (the Tokyo approach). Or, ideally, both.

However, not all rent control is created equal. The principal harm of rent control is that it pushes rents far below market prices, causing serious distortions as described in my previous post. Small deviations from market prices aren't nearly as big a problem. Here are a few policies that I think could alleviate a lot of tenants' worries without causing too many problems.

1. Encourage (or mandate) "rolling" leases that don't terminate on any specified date, but instead are perpetual until they are terminated on x months' notice. The landlord also can't raise rents except on x months' notice. By itself this isn't really rent control, since the amount of the rent increase needn't be regulated, this simply means that tenants will always have x months to make new housing arrangements if the landlord either decides to allow the lease to expire or to raise the rents dramatically. (By the way, I think x = 8 is pretty good, but I could see going all the way to x = 12.) The idea is that tenants shouldn't be caught in a situation where they have to secure new housing in a hurry or face steep rent increases. It's kind of crazy that how protected your living situation is fluctuates every year between 1 and 12 months. Much better to have a constant, modestly high level of protection throughout the year.

A landlord who truly needs a hard deadline on a lease (for instance, because he wants to move back into the unit) would have to make that abundantly clear at the outset. Basically any lease shorter than x months would have to be for special circumstances only (e.g. a student leasing an apartment for a summer internship). This creates a bit of a line-drawing problem, but not an insurmountable one.

(By the way, this regulation would only apply to the landlord. The tenant would still be able to terminate a lease on shorter notice, maybe 2 months or something.)

Admittedly it's a little puzzling to me that this solution doesn't seem to be very common in the marketplace. I would have thought it would be very popular with tenants and only mildly annoying to landlords, and therefore would be bargained for. This is maybe a warning sign that this would be worse for landlords than it appears, although there's also just a tremendous amount of stasis in the way people do things, and quite possibly landlords wouldn't mind much.

2. Allow rents to increase by no more than y% per year. Here, y needs to be low enough to offer real protection to tenants, but high enough that rents don't get too far below market prices. To me, the high single digits seems good. The idea is not to mimic traditional rent regulation, where an apartment remains cheap for generations, eventually becoming comically cheap relative to market rents. The idea is to protect tenants from rapid shocks that totally upend entire neighborhoods at once. If a neighborhood becomes vastly more desirable, because of a drop in crime or a new subway station or whatever, under this system rents can still double within about 10 years, ensuring that they don't remain below market for too long. On the other hand, tenants have plenty of time to make new arrangements, never facing a terribly steep rent increase in any given year.

Now there are three important caveats here. One is that if you adopt this policy, you also have to make leases perpetually renewable at the tenant's option. Otherwise the landlord will simply terminate the lease in lieu of letting the tenant stay at below-market rents. (Obviously a tenant who is violating the lease can still be evicted, but a tenant who is paying rent timely and not wrecking the place has to be able to renew as of right.) Alternatively I suppose you could lock in the rent even if a new tenant moves into the apartment, so the landlord can decide to get rid of an existing tenant he doesn't like but can't evict him for profit.

The second caveat is that you probably have to make an exception for big improvements that the landlord pays for. If the landlord does something like install a new laundry room so that tenants don't have to walk outside to do laundry, the landlord should probably be allowed to recoup the costs through a one-time rent increase in excess of the legal limit. You have to be careful to make sure these improvements aren't pretextual ("I installed some new patio furniture on the roof, now your rent is 50% higher!"), but legitimate improvements should probably be grounds for increased rent.

The third caveat is that landlords may front-load their rent increases. Let's say a landlord is leasing an apartment at market rent. If the landlord anticipates that market rents might rise by more than y% for the next several years, he might raise rents by y% this year so as not to fall behind. That means that temporarily the rent for this apartment is above market rent, a perverse outcome. I don't think a landlord could get away with this for very long (the tenant will just move to a market-rate apartment), but you can't rule out the possibility that this would become a problem in some situations. In particular, landlords would probably start raising rents at the legal limit well in advance of a major improvement to a neighborhood like the addition of a new subway station. I'm not sure what you could do about that, maybe nothing.

By the way, I think these two policies go really well together. Every year your landlord would tell you, "Hey, in x months your rent is going up by (z where z <= y) percent, or you can move, your choice." You would be able to stay in the apartment at a non-ruinous price, or you would have x months to find a new place. Meanwhile an apartment would generally only stay below market rent for a few years at a time, so the distortions caused by the policy would be pretty minor.

Thinking About Rent Control

It appears the New York State legislature is moving toward an expansion of rent control. I want to lay out some basic thoughts, possibly in preparation for a more detailed post later, we'll see. Throughout this post I use the term "rent control" to mean a legal prohibition on charging more than a specified amount for leasing a residential unit (so in other words, I use the term to include "rent stabilization"). I also assume that tenants in rent-controlled apartments have perpetual renewal options—that is, the landlord cannot choose to rent the unit to anyone else or to move into the unit at the termination of the lease. Instead the landlord has to continue to rent the unit to the tenant for as long as the tenant is in compliance with the lease. This is not a necessary feature of rent control, but I believe it is true in New York.

Rent control is sometimes presented as a left-right issue, the assumption being that leftists will favor rent control while conservatives will oppose it. I think it's important to resist that framing for a variety of reasons, the most important being that the winners and losers from rent control don't neatly correspond to "the rich" and "the poor" or whatever.

Instead I think the right way to think about rent control is to consider (A) its direct consequences, (B) its political consequences, and (C) basic principles of fairness.

The main pragmatic problem with rent control is that it leads to under-provision of housing and leads to inefficient use of existing housing. Taking the second issue first, in general rent control will encourage people to consume more housing than they need where it is scarcest. Here are two examples:

1. A family lives in a 4-bedroom apartment in NYC with a maximum legal rent of $1,400. The children move away, and the parents would prefer to downsize to a 1-bedroom apartment in NYC. But they can't afford to—the rent for a 1-bedroom apartment would cost at least $2,500. As a result, an apartment that could house an entire family is used by two people. If they get divorced, maybe the apartment will end up being occupied by one person, a tremendous waste of space.

2. An individual lives in a 1-bedroom apartment in NYC with a maximum legal rent of $1,000 (on the free market, the apartment would cost $2,500). This individual is offered a job in Chicago that pays just as well as her job in New York, and she is inclined to take the job because she prefers Chicago to NYC. Also, the cost of living in Chicago is lower than in NYC (there is less of a housing shortage there). However, the market price of a 1-bedroom apartment in Chicago is $1,700, far more than she is paying in NYC. As a result, she stays in NYC, unwilling to take what would amount to a $700/month pay cut.

In both cases, people had preferences that, if acted on, would have freed up housing in NYC (where it is especially scarce), but rent control prevented it. Now in fairness, rent control can cut the other way—imagine a couple that has a baby and wants to move to a bigger apartment, but can't afford to give up the rent-controlled studio that they are occupying. But that's not great either, even if (unlike our earlier examples) it reduces observed demand. In an ideal world, the price of housing would reflect its social cost, and people would make decisions according to their needs. In a lot of cases, that would involve economizing on space or moving to a different city, which would increase the available supply and lower market costs.

Rent control also tends to suppress supply, although there is a tricky question here involving how landlords and developers form expectations about the future. One thing you can theoretically do is impose draconian rent control on existing units, while leaving all units built in the future totally unregulated. In that case, if developers believe that rent control will never be imposed again, their incentives to build new units are not necessarily reduced. However, I think it's somewhat unrealistic for expectations to work this way, particularly if the legislature periodically imposes new rent controls. Certainly if the topic being debated is "Should we impose new rent controls on top of the ones that already exist?" it seems as though developers should not expect the pro-rent-control side of the debate to win just this once and then lose forever after.

To the extent developers expect rent control to be imposed in the future, it obviously affects the buildings that are built today. In particular, no one has ever suggested imposing rent controls on owner-occupied units, so developers will tend to build condos rather than rental units in expectation that rental units will lose lots of value in the future. Or developers will focus on luxury units that are likely to have tenants who are not likely targets of the legislature's sympathy. All of this will decrease the construction of affordable rental units, exacerbating the shortage of rental housing in the city. (To the extent developers simply build condos one-for-one instead of rental units, possibly the housing shortage wouldn't be worsened too much, but of course a lot of people can't afford a down payment and so the affordability of the city's housing would still take a hit.)

Zoning politics are complicated, but I think it's fair to say that people are more likely to support construction of new housing units when they will personally benefit. Of course the main beneficiaries of housing construction are (A) people who don't live in the city yet but would like to move here (but who definitely don't vote here yet), and (B) renters who live in the city and would like rents to fall. Obviously people who don't vote in the city aren't going to exert very much electoral power, but market renters are a natural constituency for more building. Expanding rent control shrinks this constituency and makes it less likely for pro-building policies to be enacted. This, in turn, exacerbates the housing shortage.

Finally, fairness is obviously debatable, but rent control has a few features that are particularly obnoxious. It amounts to a tax imposed on some landlords and not others, rather than a broad-based, equitable tax. Property taxes in New York are shockingly low for some kinds of housing (mostly single-family houses, I believe), and it would be possible to raise taxes and use the revenues for housing vouchers targeted at low-income people. Instead we picked random landlords and stripped them of most/all of the value of their property and bestowed it on random renters (not necessarily low-income). Those incumbent renters are now paying vastly less rent than poorer people who happened to move to the city more recently.

So this is my basic framework for thinking about rent control. Rent control reduces the supply of housing, increases effective demand, reduces support for upzoning, and is much less fair than a broad-based policy that benefits people proportionately to their current circumstances. But all of this has been fairly broad-brush, and I hope to drill down on a few variants of rent control in future posts.

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