RENT CONTROL RENT CONTROL But We Were Only Trying to Help… By: Sierra Solomon & Eileen Norman

RENT CONTROL In order to retain lower- and middle- income people who need affordable housing, some cities have tried to control rents by enacting Rent Control laws. These laws have been shown to often have the opposite effect than was intended over the long-run. Why? Article Summary

RENT CONTROL People Respond to IncentivesSupply & DemandPrice ControlsUnintended Consequences of Policy Directives Relevant Economic Concepts

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts How do landlords respond to incentives in a “free” rental market? Keep their apartments clean, safe, and well-kept because they can command higher rents So what happens to this incentive when we introduce rent control into the market? Stop responding to renters’ concerns Defer maintenance Abandon buildings all together

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts Proponents of Rent Control argue that Rent Control should work because Housing is inelastic (everyone has to live somewhere)…. BUT, what do we know happens to both Supply & Demand in the Long-term vs. the Short-term? They get ______ elastic.

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts Proponents of Rent Control argue that Rent Control should work because Housing is inelastic (everyone has to live somewhere)…. BUT, what do we know happens to both Supply & Demand in the Long-term vs. the Short-term? They get MORE elastic.

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts This means…. Though short-term effects of rent control are often positive, over the long-term, the negative effects are exacerbated as Supply & Demand become more elastic.

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts Rent Control is a price ceiling, which occurs when the government puts a legal limit on how ____ the price of a product can be.

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts Rent Control is a price ceiling, which occurs when the government puts a legal limit on how HIGH the price of a product can be. In order for a price ceiling to be binding, it must be set ______the natural market equilibrium.

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts Rent Control is a price ceiling, which occurs when the government puts a legal limit on how HIGH the price of a product can be. In order for a price ceiling to be binding, it must be set BELOW the natural market equilibrium.

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts Rent Control is a price ceiling, which occurs when the government puts a legal limit on how HIGH the price of a product can be. In order for a price ceiling to be binding, it must be set BELOW the natural market equilibrium.

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts What are some intended consequences of Rent Control? -Combat out-of-control housing prices -Provide affordable housing -Keep middle- and low-income in City Do these actually happen in the short- run? BUT, what happens in the long-run?

RENT CONTROL People Respond to Incentives Supply & DemandPrice Controls Unintended Consequences of Policy Directives Relevant Economic Concepts Reduction in consumer mobility and potentially “hoarding” housing. Despite Fair Housing laws, rent control promotes housing discrimination. People with higher incomes benefit the most from rent control. Abandonment or conversion of rental housing…

RENT CONTROL The Case of San Francisco In San Francisco, all apartments built in 1979 and earlier are rent-controlled.

RENT CONTROL The “Ellis Act” is a state law passed in 1985 allowing landlords the unconditional right to evict tenants to “go out of business” The landlords chose from 2 options: Take the apartment off the market for 5 years and then re- rent at whatever starting rent they want. Take the apartments off the market entirely and change them into condos or TICs Either way, fewer apartments are available for rent. Landlords trying to escape rent control…

RENT CONTROL As landlords take apartments off the market through Ellis Act evictions, the supply of affordable apartments decreases, shifting the supply curve to the left. So what happens then?

RENT CONTROL As landlords take apartments off the market through Ellis Act evictions, the supply of affordable apartments decreases, shifting the supply curve to the left. So what happens then? With this shift, the shortage we had of demanded apartments further increases. S1S1 S2S2 QDQD PEPE

RENT CONTROL

RENT CONTROL So how do we fix it? Possible policy solutions might include Repealing the Ellis Act to aid in the reduction of supply Repealing “Costa Hawkins” which removed “vacancy control” or rent control from starting rents, allowing starting rents to be set at any price Helping the “demand curve” by increasing and improving subsidized housing and rental assistance to consumers. Providing financial assistance to renters/property owners to upkeep and maintain their buildings.

RENT CONTROL Discussion A study shows that over the long-run rent control was associated with… A 10% reduction in the stock of rental housing in both Berkeley & Santa Monica over a ten-year period; AND Major reductions in subgroups “targeted” by rent control such as low-income households, college students, people with disabilities, elderly people, and families with children. Knowing this, why are people (even economists) still in disagreement over whether Rent Control should be imposed?