Rent control was supposed to make housing more affordable for lower-income Americans. Turns out, it may be doing just the opposite.
Rent control efforts in St. Paul, Minn. have benefited more white, higher-income tenants, a new study authored by researchers at the University of Southern California and distributed by the National Bureau of Economic Research found.
For low-income homeowners who were renting out their homes, many of whom were of a minority race, rent control didn’t exactly benefit them, the researchers said.
“The intention of St. Paul’s rent control is to reduce the burden of housing costs for low-income renters,” the authors said, but the results “indicate that the winners and losers from rent control are the opposite of its intended goal.”
Rent control measures introduced in St. Paul caused a significant decline in property values. Researchers estimated the aggregate loss in property value in St. Paul to be $1.6 billion.
“‘The winners and losers from rent control are the opposite of its intended goal.’”
“While the costs the law imposes on owners are substantial, our results show that its benefits are poorly targeted,” the authors stated.
Their research found that wealth transfers weren’t working as intended via rent controls.
“We find that the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities,” the report found.
Study by researchers at the University of Southern California on rent control in St. Paul
Instead of rich homeowners transferring wealth to poorer renters, wealth transfers were reversed in St. Paul — they were largest when homeowners were poor and their tenants rich. In addition, rent control benefitted renters who were less likely to be of a minority race, and more likely to be highly educated.
The findings of the latest study were echoed by previous studies on the issue that rent control starts off with the aim of helping low-income renters, but over generations can work against the poorer residents who are looking for affordable housing.
When rent control backfires
The implications are significant given market conditions today.
“Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood,” according to this 2018 report by the Brookings Institution, a think tank in Washington, D.C. “These results highlight that forcing landlords to provide insurance to tenants against rent increases can ultimately be counterproductive.”
“If society desires to provide social insurance against rent increases, it may be less distortionary to offer this subsidy in the form of a government subsidy or tax credit,” it adds. “This would remove landlords’ incentives to decrease the housing supply and could provide households with the insurance they desire. A point of future research would be to design an optimal social insurance program to insure renters against large rent increases.”
An analysis on the effects of rent control on housing as a way to reduce inequality was published by the Urban Institute the following year. It too found limits in its effectiveness in promoting intergenerational transfer of wealth. “If rent control is judged on its ability to promote stability for people in rent-controlled units, evidence has generally found it to be successful,” it said. “Research on rent control’s effects on the broader housing market (whether on rents, construction, or conversion) have yielded mixed results.”
“‘Evidence is also mixed for rent control’s ability to promote economic opportunity or reduce racial disparities.’”
“However, evidence is also mixed for rent control’s ability to promote economic opportunity or reduce racial disparities,” it added. “Part of this stems from a trade-off: promoting stability may, over time, lead to a growing mismatch between people who live in a rent-controlled unit and people who need one.”
Rental housing is a big market. As of 2019, 36% of housing units were occupied by renters, according to the U.S. Census Bureau. The median household spent 35% of their income on rent, according to the researchers.
Rents are growing at a breakneck pace. Rent prices increased in February by 13.1% year-over-year nationally, hitting a new record, according to the CoreLogic single-family rent index.
National median rent through the month of May is $1,343 – up by 15% compared to the previous year, according to Apartment List, which also tracks monthly rents.
Due to rising rents – and the inflationary environment – cities like St. Paul, have introduced rent control.
The city caps annual rental growth at 3% year-over-year, with no adjustments for inflation, and no provisions to allow rental prices to be reset to market prices upon vacancy, the researchers wrote, and all residential properties are covered by the law with few exceptions.
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