In July, President Biden called on Congress to enact nationwide rent control legislation that would cap rent increases at 5% for corporate landlords (i.e. those with 50 or more units). In a recent U.S. Economic Experts Panel question on the topic, only 2% of economists thought that this would make middle-income households substantially better off over the next 10 years.
Some of the respondents took issue with the word “substantially,” saying that there might be some or no effect. However, many economists felt quite strongly that rent controls are a harmful policy. As Dr. Anil Kashyap from the Chicago Booth School of Business wrote “We have tried this kind of policy many times and it will benefit some people who get locked in below market rates, but raise costs for others who need to rent apartments that are not capped and supply will fall.” His colleague Steven Kaplan was less kind, calling this rent control proposal “an embarrassingly bad idea.”
Why are so many high profile economists so pessimistic about what is often a very popular policy? The answer boils down to the fact that economic theory generally suggests that price ceilings distort markets. The end result is theoretically a housing shortage, and some research has suggested this actually happens.
Essentially, people who are currently renting see some pretty significant benefits. This comes at the cost of people who are not currently renting, who may find it more difficult and more expensive to rent a new place.
This may not always be the case however. Especially if the rent control is not a binding price ceiling then there should not be any market distortion. One study out of the University of Southern California found that a rent control policy did not have an impact on rent prices and housing construction. This study is a bit of an anomaly in the literature, however.
One issue with rent control is that it doesn’t help people who are currently housing cost burdened. It may begin to help them if they remain in the same place and are able to increase their earnings, but it doesn’t make their current situation any easier.
The literature shows that rent control is an effective tool for reducing rent–for people in rent-controlled units. But this doesn’t mean rent controls produce socially optimal outcomes. Much of the literature revolves around the problem with rent control not only for economic efficiency, but for distributional outcomes, too.
Rent controls are a poorly-targeted policy with the goal of helping low-income people. The problem with rent control is that many upper-income people benefit from them as well. Upper-income households tend to be less mobile and have the ability to stay in one place for longer. Because of this, rent controls often are more advantageous for them (or more feasible for them to take advantage of) than lower-income households.
If a policymaker is looking to make housing affordable, tools like zoning reform and basic income are likely more efficient, effective, and equitable ways to solve this problem. As policymakers spur these options, they settle for second-best policy interventions.