Economic theory and history show they instead limit supply and raise costs
Milwaukee is one of the most competitive cities for renters in the country, a report in the Wall Street Journal found this week. With 94 percent of units in the city occupied and at least eight renters competing for one apartment, average rents have shot up to $1,541 this past February, 29 percent higher than the rent in February 2020.
And the problem is not just confined to the city of Milwaukee. A recent Badger Institute report found that home prices across the Milwaukee metro area and Wisconsin as a whole continue to increase, causing spillover effects in rental markets. Rents as a share of median incomes in the Madison area, for instance, have grown sharply over the past few years and are on the rise in metros such as Oshkosh, Racine and La Crosse.
In response, politicians and activists in Milwaukee and Madison have called for rent control or stabilization — laws limiting or prohibiting rent increases — even though Wisconsin state law forbids it. Half an hour west of the western border, meanwhile, St. Paul has implemented rent stabilization in recent years.
A review of past experience and studies reveals a clear economic consensus: Such policies result in a lower stock of available housing, a lower quality of available housing, increased rents for properties that are not controlled, and spillover effects that harm those in the surrounding community.
Rent control in theory
In standard economic models, the curves representing supply and demand intersect at the market clearing price, where the quantity supplied equals the quantity demanded. In rental housing, for example, if more people want to move into a city, the increase in demand will cause an increase in the market clearing price; if developers build more housing, the increase in supply lowers the market price.
Rent caps are a typical example of a “price ceiling” — a legal barrier that prohibits buyers and sellers from transacting a good or service above an arbitrary price point. There are other forms of rent price regulation as well, such as rent stabilization policies that regulate the rate at which landlords can raise rents rather than specifying a fixed price, but these still have the effect of keeping rents below the market price.
The economic literature suggests that even if controls on rent help a subset of protected tenants, they also produce unintended consequences that harm other people. A 2022 comprehensive metanalysis of the economic literature conducted by Konstantin Kholodilin found evidence that rent controls had negative effects on the supply and quality of rental housing, discouraged the construction of new housing, and increased rents in uncontrolled properties.
Rent control in practice
In a 2019 paper, Rebecca Diamond, Tim McQuade and Franklin Qian found that the application of a rent control law to a new class of housing in San Francisco in 1994 increased the likelihood that tenants would stay in that housing, which was an intended goal of the policy. But it also drove some landlords to take their properties out of the market and convert them into owner-occupied condominiums. Rather than solving the problem of housing availability, the policy decreased the stock of housing available to renters: The authors found that rental supply in rent-controlled buildings decreased by 15 percent. This likely drove even higher the price of rents in buildings not covered by the rent control law. Further analysis of the San Francisco market by Eilidh Geddes and Nicole Holz found that the rent control law increased the rate of evictions, due to a provision that allowed landlords to raise rents for new tenants.
Another case study arose in Cambridge, Mass., in 1995. There, a rent control law was suddenly lifted, giving economists David H. Autor, Christopher J. Palmer and Parag A. Pathak the chance to study how the market would respond once the rental market returned to a market-clearing price. They found, according to their 2014 report, that property values rose dramatically in the area. This was expected: If you can charge higher rents on your property, the value of that property would increase. But they also found unexpectedly that the biggest increase in property values came from properties that were not originally subjected to price controls at all. In other words, the existence of price control on even a fraction of buildings in a neighborhood had a deleterious impact on the value of the whole neighborhood.
The study found that one of the effects of decontrol was an increase in property investments — that is, improvements to the quality of the buildings — among both formerly controlled and never-controlled buildings, with annual investment expenditure doubling for never-controlled houses and tripling for never-controlled condominiums. These investments explained up to 18% of the increase in property value for never-controlled properties.
Another effect was to increase new construction permits by approximately 20% after 1994 — that is, an increase in the supply of housing. Overall, the authors assert that decontrol caused “the production of other localized amenities that made Cambridge a more desirable place to live.”
Wyatt Eichholz is the Policy and Legislative Associate of the Badger Institute.
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