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.
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.
posted by James | 11:21 AM
1 Comments:
Retaining the controls after someone moves out is better than just making the lease renewable at the tenant's discretion. If the landlord stands to gain substantially from the tenant moving out, there are many effective and sneaky/illegal ways of harassing the tenant into wanting to leave. Most tenants are not lawyered up and won't be able to do anything to combat these, so it is better to just take away the incentive. Especially since (say under the rest of the package of policies you've outlined) there is no obvious policy downside.
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