1. Rent Control Began across US during WWII as emergency measure that controlled many prices. Controls lifted by federal government immediately after war (mid 1940s). NY city elected to maintain controls. NY controls: –Applied to apartment housing built pre-1947. –Exclude buildings less than 5 apartment units. –Severely restricted rent increases over time. Over roughly 25 year period NY only city in country with rent control. In 1970s 2 nd generation controls adopted by some cities: Mainly in California and northeastern states: (Massachusetts, New Jersey, Maryland and DC).

2. Characteristics of 2 nd generation controls (sometimes called rent stabilization): 1.Controls rent growth only for continuously occupied apartments; apts. allowed to charge market rate when tenant vacates. 2.Allows automatic rent growth tied to inflation rate. 3.Allows for decontrol of apartments once they increase to a certain price. By mid 80s over 200 cities representing 20% of US population had some form of controls. As of early 90s approximately eight California cities had some form rent control including SF, LA, Santa Monica, San Jose, West Hollywood, Berkeley and others.

3. Contrast LA and Santa Monica. Both adopted rent control in 1979. LA implemented less strict controls (2 nd generation); allowed for vacancy decontrol. Santa Monica adopted strict measures without vacancy decontrol. Both LA and Santa Monica controls apply only to housing built before 1979. LA allows for rent growth related to inflation rate (and apartment complex improvements); LA growth schedule.LA growth schedule SM law does not allow automatic rent growth. State law passed in 1995, implemented in 1999 outlawed local rent control laws that dont allow for vacancy decontrol.

4. Motivation for Rent Control: A.Redistribute income from land owners to tenants/renters. B.Encourage economically, socially integrated neighborhoods. C.Allow the poor to afford housing. Gyourko and Linneman (1989) study NY rent controls on apt. built pre-1947. Data from 1968 Housing and Vacancy Survey. Estimates the price that controlled apartments would have received if not for price controls. Calculated Subsidy = Estimated Rent – Actual Controlled Rent; presents average subsidy (called benefits) for various groups. Found the mean annual subsidy equaled 27.2% of tenants mean annual income. Krol and Svorny (2004) estimate the effect rent controls in the New York area have on commuting times. Rent controls increase the cost of moving, and may leave some people far from their job. Study finds communities with rent control had a higher percentage of commuters with long commutes compared to communities without controls.

5. Economic Analysis - Short Run During short run time period quantity supplied fixed at 90 apartments. Market establish price $600 where Q d =Q s Suppose rent control establish price at $400. Short run shortage: 30 units. Caused by increased quantity demanded from point B to E along demand curve. Rent apartments SR supply Demand 600 90 B 400 C E 120

6. Long Run In long run property owners may adjust by converting property to alternative uses. Causing elastic supply of housing and move from B to D along supply curve. Shortage is now more severe D-E. Rent apartments SR Supply demand LR Supply 90120 B ECD 50 600 400

7. Municipalities using rent controls have acted to discourage property owners from converting buildings to alternative uses. –Santa Monica disallows most conversions of apartments to condos. –Cambridge Massachusetts disallowed converted condo owners from living in their own units. They were forced to rent them out at controlled prices. Decrease in available apartments also results from reduced turnover in occupancy. People in controlled apartments less likely to move and give up subsidy. Length of tenancy should be higher in rent controlled cities. –Example of Santa Monica table 1 (WHO BENEFITS FROM RENT CONTROL? EFFECTS ON TENANTS IN SANTA MONICA, CALIFORNIA by Ned Levine, J. Eugene Grigsby III, and Allan Heskin).table 1

8. Rent control may cause deterioration in apartments. Provider of apartment units actually offering services in addition to physical good. »Parking »Water »Maintenance »Security Rent may be considered the payment for these services. These services amount to variable costs to property owner. Property owners may wish to decrease those costs if rents are controlled. Decrease in tenant turnover may allow property owners to decrease services without increasing vacancy.

9. Rent control and social / economic integration With binding rent control, more people will be able to afford housing. In long run model everyone willing to pay $400 will compete for housing, whereas the market would have eliminated those not willing to pay $600. With shortage, property owners may have greater influence in determining who occupies apartments. Potential renters cant distinguish themselves by offering higher rent. Landlords use other, non-market criteria to determine occupancy. Santa Monica: –In 1987 almost 60% surveyed residents found apartments through personal contacts. Tenants acquired their units either through a friend or relative or by knowing the landlord. Personal contact of person typically similar race, income, social class.

10. Santa Monica study survey: table 3table 3 –The city grew whiter (!) after rent controls were implemented. –Proportion of those surveyed who were black or latino was smaller in the survey after controls implemented than before. –Hispanic population in all of LA County rose from 20% to 25% of residents from 1980 – 1987. Proportion in Santa Monica fell by roughly 25% over same time period. Those who were black or Hispanic were more likely than whites to have been living in Santa Monica since before rent controls. –73% of surveyed whites moved in after rent controls. –40% of blacks and 53.3% of surveyed Hispanics moved in after rent controls. Income distribution of renters in Santa Monica largely unchanged pre- and post controls, although lower income residents are found to benefit more from the controls than higher income residents.

11. How do we decrease the cost of housing?