Rent Control Will Make Things Worse for the Poor

This article is contributed by Jeffrey Harding

(Editor’s Note: The study being referred to in the first paragraph, “Minneapolis Rent Stabilization Study,” can be found by searching the website located at www.cura.umn.edu. While this article was written in the context of the City of Santa Barbara, which has had many proposals and battles over rent stabilization and tenant protection policies, much of the points made by the author about the effectiveness of these policies warrants careful reading, particularly the commentary on why doesn’t rent control work.)

Professors O’Connor and Appelbaum’s recent article, “Rent Stabilization Is a Necessary Tool”, is an exercise in polemics. They pick one study by Progressive non-economists which they claim supports rent control yet they ignore the 81% of economists who concur that rent control is a bad idea. I will concede that criminalizing rent increases would be an effective tool to prevent rising rents. Landlords would be committing a criminal act by raising rents beyond what is permissible. Governments have the power to fine them, sue them, arrest them, seize control of their property, or even confiscate their property.

The problem is that there are major negative consequences to rent controls: they harm the very people the proponents thought they were helping. Professors O’Connor and Appelbaum choose to ignore those consequences. Rent control is not something new on the planet. Various schemes of rent and price controls go back millennia. Economists have studied rent control programs in the U.S. for many decades. It’s rare in academia for scholars to agree unanimously on anything, but economists almost unanimously agree that rent control is a bad idea.

Yet professors O’Connor, a history professor, and Appelbaum, a sociology professor, seize on one single study from fellow Progressive non-economists to justify the need for rent control in this “unprecedented crisis of housing affordability”. They intentionally ignore the negative consequences of rent control because it doesn’t fit into their Progressive social justice ideology. They dismiss offhand the conclusions of a fellow University of California, Santa Barbara (UCSB) professor, Peter Rupert, former Chair of UCSB’s Economics Department, who studied the economic literature on rent control and concluded that rent control has never worked anywhere, ever. O’Connor and Appelbaum dismiss Rupert’s claim saying, “Reciting the mantra that ‘rent controls have never succeeded’ prevents rational discussion of policy choices.” By “rational discussion” I think they mean discussion only with people who agree with them.

Why doesn’t rent control work? Rent control basically worsens the housing situation by reducing the supply of rentals. Here are some results gleaned from studies of rent control:

• Landlords will be more selective in choosing tenants. Landlords operate on very thin margins in Santa Barbara. Making it more difficult to evict tenants and to raise rents will cause them to be more selective, making it harder for poor renters to qualify for housing.
• Lower profitability margins on investment combined with rent caps would lead some landlords to reduce maintenance costs which will lower housing quality.
• Tenants will be reluctant to move from rent controlled properties which tends to freeze the rent-controlled rental market leaving fewer apartments available for rent.
• There is a substantial reduction in tenant mobility as a result of rent control.
• The beneficiaries of rent controls in Southern California have been mostly middle income, educated white folks rather than poor immigrants. We should expect the same here.
• The supply of rental housing will stagnate because rent controls disincentivize developers from building new rental housing.
• Landlords will have more difficulty in financing or refinancing their properties when loans come due because of lower profit margins.
• It will necessitate a significant expansion of staff to enforce these controls, imposing a substantial new cost on a budget-challenged city. While this is dismissed by O’Connor and Appelbaum, the rent control department of Santa Monica (a city the same size as Santa Barbara), has a $6,000,000 annual budget and a staff of 25, including 3 attorneys, 3 legal support staff, a hearings officer and 3 hearings support staff, plus 5 rent control board members. It’s not a small bureaucracy.
• Based on the experience of other rent-controlled markets (such as 40+ years of rent control in Santa Monica), it is likely that such controls will ultimately have very little impact on rising rents. O’Connor and Appelbaum say this time will be different because they advocate “smart” rent control.

It is interesting that O’Connor and Appelbaum rely on the University of Minnesota study of Minneapolis upon which to base their claim that rent control could “work”. Minneapolis has no rent control and, based on the study’s data, it has a relatively healthy, competitive rental market. Nowhere in the 63-page report does it mention the impact of rent controls in St. Paul, the “Twin City” right across the river. St. Paul voters approved a strict rent control law. As a result, new construction of apartments has shriveled up, rental properties have declined in value, and developers have walked away from ongoing projects. I’m sure that O’Connor and Appelbaum would say their “smart” rent control would avoid such bad consequences.

The reality is that there is no solution to the perennial Santa Barbara “housing crisis”. We like our town the way it is and don’t wish to ruin it with massive apartment blocks or the ADUs which were jammed down our throats by Sacramento. Forget low-cost rentals: in an expensive city famous for blocking new development, it just can’t be done. Affordability in Santa Barbara is a myth. You can’t blame landlords for that.

Yet Progressives demonize landlords as greedy capitalists because they seek “profit maximization”. Without the possibility of maximizing the profit of one’s investment there would be no rental properties. Waving the bloody shirt of “profit” is part of the Progressive playbook to rile their base against landlords. Is it fair to blame landlords and put the burden on their backs? Helping poor renters is society’s problem. The fair solution is for the community to subsize rents for the poor. Instead of imposing what is in essence an unfair hidden tax on landlords, the citizens of Santa Barbara should back an increase of the sales tax to provide the funds to subsidize poor renters. Otherwise, rent control will just make it worse for the poor and for Santa Barbara.

Jeffrey Harding is a former adjunct professor at Santa Barbara City College where he taught real estate investment. He is a real estate investor and former real estate lawyer. He is also an economics and finance writer who appeared on NPR’s Marketplace Money and Fox Business News. His articles were cited, republished, or linked to by popular investor sites such as Zero Hedge and Seeking Alpha, as well as media sites such as Huffington Post, Forbes’ Real Clear Markets and Real Clear Politics, Wall Street Journal, MarketWatch, Business Insider, Yahoo! Finance, The Street, Forbes.com, the Foundation for Economic Education (FEE), and The Mises Institute. This editorial first appeared in the Santa Barbara Independent magazine, and has been republished with permission from its author.