James Schneider  

Rent Control Devalues the Whole Neighborhood

Questions that have no answer... In the 1930s it seemed "obviou...

Rent control has numerous negative effects on the housing market. If a landlord is forced to charge below-market rent, it reduces the incentive to improve the property or even perform basic maintenance. Perhaps, even more importantly, it misallocates who lives in a property. Tenants will continue living in an apartment even though someone else has a greater willingness to pay for the same apartment. Rent control can effectively lock people into a location; someone who is enjoying below-market rent in New York City will be disinclined to pursue a job opportunity in another city.

A home's value is not just determined by its own condition, but also by the attributes of the entire community. If your neighbor's landlord lets his building fall into disrepair, it might negatively affect you. Over time, rent control can gradually make the neighborhood a less appealing place to live. This impact will be magnified to the extent that higher income neighbors are themselves an amenity. A forthcoming JPE piece quantifies how rent control reduces the property values of not just controlled properties but surrounding properties as well. It does this by studying what happened in Cambridge, Massachusetts, after the state legislature suddenly eliminated rent control in 1995.

When Cambridge enacted its version of rent control, it only applied to non-owner-occupied housing built before 1970. This meant that non-rent-controlled units existed side by side with controlled units. When rent control was eliminated, 37.5 percent of units were controlled. However, the concentration of rent controlled units varied a great deal. Some properties were in areas that were over 80 percent rent controlled. If rent control devalues the surrounding community, then uncontrolled properties in these areas would be impacted more than other uncontrolled properties.

For each property, the researchers calculated what percentage of units were controlled within a radius of 0.2 miles. The researchers then looked at how housing values evolved after the elimination of rent control. As expected, formerly controlled properties appreciated in value compared to the overall market. But rent decontrol also spurred appreciation in houses that were never rent controlled but had merely been located near a lot of rent-controlled units.

When rent control was eliminated, the assessed value of the uncontrolled housing was $2.8 billion. This grew to $7.5 billion by 2003. The researchers estimated that a billion dollars of this appreciation was due to the elimination of rent control.

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CATEGORIES: Price Controls

COMMENTS (9 to date)
Brandon Berg writes:

Well, that's one way of looking at it. But high values mean high prices. If I were an advocate of rent control, I'd point to this as evidence that rent control works even better than expected---not only does it keep rent down on the rent-controlled units, but it lowers rent on neighboring units as well.

rvman writes:
Tenants will continue living in an apartment even though someone else has a greater willingness to pay for the same apartment.

That would, indeed, be the point. To allow lower income people to live in places where only middle class people could live without rent control.

James Schneider writes:

@ Brandon Lower rents are a good sign if it is due to a policy that increases the supply of housing, but rent control doesn't do that. Most of the things that lower the value of your house are bad things not good things.

@rvman I agree. Rent control is a little unusual in that one of the main economic costs is the actual policy objective.

Jay writes:

You guys are missing the point. Yes, artificially skewing the rent-controlled units down in price allows people to live where they would not otherwise be able to afford (this isn't an obvious good thing by the way, the system is corrupt and feels like a lottery for the poor people who "win" the extremely limited spots), but it does so in such a way as to incorrectly line up incentives such that the units become slums and the surrounding area soon follows (while at the same time making tenants feel home-locked for fear of losing the rent-control).

Wouldn't direct subsidies to rent (isn't this how Section 8 works?) be less skewing to the market and damaging to the area?

Tom West writes:

Wouldn't direct subsidies to rent (isn't this how Section 8 works?) be less skewing to the market and damaging to the area?

Yes, but that would entail the government paying the cost of the benefit. This is more of a tax on apartment owners.

Perhaps, even more importantly, it misallocates who lives in a property.

The term 'misallocate' has a whole lot of value judgement associated with it. If the allocation of housing fulfills various social goals that the populace generally approves of, I suspect few would feel the term 'misallocate' to be accurate.

shelley hartman writes:

re Tom West's comment, I believe you're incorrect. The government ends up "paying" in the form of less real estate taxes collected due to the lower assessments. In the article, he states the assessments rose from $2.8 to $7.5 billion. If you had kept the same tax rate the city's real estate taxes collected would have gone up almost 3 times. This forgone revenue is how the government "pays" for rent control.

Mr. Econotarian writes:

Perhaps as an alternative to direct rent control, local governments could simply hire graffiti artists to put up gang symbols on the walls, encourage open-air drug markets on the corners, and hire drunks to smash bottles on the ground and yell at each other in the middle of the night?


Tom West writes:

To the best of my knowledge, municipal taxes generally work by the government choosing how much revenue to draw, and then dividing by the total value (for property taxes) of all the taxable property in order to get the "mill rate".

So, if everybody's value doubles, taxes would stay the same. This would mean that apartment owners would get a bit of a break on taxes at the expense of other property owners.

It's why I'm not a fan of living in a hot neighborhood. Property values go up far in excess of property values around the city and thus your property taxes go up, and if you aren't selling, you gain very little benefit (except that you get more SUVs on the street, which make it harder to find parking...)

Andrew writes:

If rent control doesn't apply to commercial tenants, moreover, then landlords of mixed-use property (very common in NYC) might have to recoup losses from rent control by charging higher rates for their commercial tenants. Those business would have to charge their customers more, and so on.

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