A Real Look at Rent Control
Dollars & Sense, January 1986
Before Santa Monica voted for rent control in April 1979, the anti-rent control forces distributed a postcard bearing a photograph of an abandoned five story brick tenement, its ground floor windows boarded up. On the back a printed message warned: "This is a New York City apartment building, devastated by rent control. Don't let it happen here!"
The charge is not a new one. Scenes of burnt-out buildings in the South Bronx are invariably linked with the grim specter of rent control. Shortages of new apartments and the decay or abandonment of old ones have also been attributed to these legal constraints on landlords' profits.
In 1982, tenant groups were fighting in all major U.S. cities and in many suburbs to save affordable rental housing from extinction. Yet rent control as a strategy remains plagued by its bad reputation -- a reputation it doesn't deserve. Cities with rent control may have problems with housing abandonment and decay, but so do their non-rent controlled counterparts. There is no evidence that rent control leads to lower rates of construction or less maintenance. In fact, none of the apartments shown in the Santa Monica postcard were subject to rent control at the time the building was abandoned.
On the other hand, rent control by itself is not a solution to housing problems. Many renters suffer as much from low incomes as from high rents. Even a strict rent control law would not ensure adequate affordable housing.
The Nitty GrittyRent control has been around since the early 1900s and was an integral part of the socialist movement in the United States by 1920. Rents were frozen nationwide during World War II, and New York City enacted its own rent control law immediately after the wartime freeze was lifted. But for most of the next two decades, no other cities had rent control.
In the early 1970s, the growth of the civil rights and student movements combined with inflation to create a push for rent control laws. New Jersey, California, and Massachusetts enacted "local option" laws, which permitted individual municipalities to pass rent control laws. During the same period, other cities tried to enact rent control laws which were either voted down (as in Ann Arbor and East Lansing) or declared unconstitutional (Miami Beach). By the latter part of the 1970s, rent control movements had lost momentum; the passage of rent control in Santa Monica represented a rare victory in that period.
Today about 100 communities have some form of rent control. While they are not all large cities (Bayonne, New Jersey, for example), almost without exception they are concentrated on the East and West Coasts, where rental units make up an important part of the housing market.
Most of these cities have what is called moderate rent control. These laws allow rents to increase if operating costs (such as the price of fuel) and maintenance costs rise. Some cities also allow rents to rise by the rate of inflation each year. In cities where landlords are only permitted to pass on cost increases, rents tend to rise more slowly, since typically only half the rent money collected goes to operating costs. (The rest goes to paying off the mortgage and to profits.)
In addition, most moderate rent control laws exempt new construction from rent control, either initially or permanently. Many cities also now have vacancy decontrol, which permits a one- time rent increase when tenants move or are evicted.
Some communities have loose rent control (also know as “market- based" or "fair rate of return" laws). These statutes generally peg rents to the levels charged in nearby cities without rent control, and exert little control over the rent level. While loose rent control may protect renters in neighborhoods experiencing rapid speculative rent increases, it is of little use in maintaining affordable housing for the community as a whole.
Restrictive rent control laws, such as those which existed in New York City until 1970, would actually freeze rents for all tenants, or at least for poor tenants. Recent attempts to enact restrictive laws have been struck down in court as unconstitutional -- as violating landlords' rights to a “fair rate of return" and to protection from "unreasonable seizure" of property. No city currently has restrictive rent control.
Opponents of rent control argue that such laws make it unprofitable to maintain, build, or own multifamily housing. However, an examination of current rent control laws and their impact on city housing casts doubt on this argument. In a city where the rents are adjusted by the rate of inflation each year, a landlord will always receive the same net profit as s/he earned at the time of the law's enactment. In addition, the landlord will benefit from any increase in the value of his or her building. The rent control law itself will not cut into landlords' profits and drive landlords out of business.
A comparison of rent controlled cities with similar cities without rent control further contradicts the grim picture painted by opponents. To start, it is often alleged that rent control discourages new construction. Opponents point to the case of New Jersey, where many cities enacted some form of rent control during 1973 or 1974. In these cities, apartment construction fell by 52% between the periods 1970-72 (pre-rent control) and 1975- 77. However, apartment construction in New Jersey cities without rent control dropped by 88% over the same period. The housing problem has been felt nationwide, indicating broad structural causes beyond local constraints on landlord profits.
The most serious charge against rent control is that it leads to housing decay and abandonment. Abandonment occurs when landlords stop maintaining and paying taxes on a building. As the building falls into serious disrepair, tenants gradually abandon the decaying structure. Rent control, however, is at most a minor contributing factor to housing abandonment. A 1978 housing study done by the federal government showed that eight cities reported major abandonment problems (Camden, Cleveland, Cary, Lynn, New York City, Oakland, St. Louis, and Toledo). Out of these, only New York City had some form of rent control.
More detailed studies of abandonment in New York City have reached the same conclusion. In Manhattan, neighborhoods where a high proportion of apartments are rent controlled typically have little abandonment. Even in the South Bronx, rent control seems not to have been the major cause of abandonment. In 1977, the Women's City Club, one of the oldest civic organizations in New York City, made a very detailed examination of 38 individual buildings in a neighborhood undergoing abandonment in the South Bronx. Based on data from a five-year period, they concluded that the chances of a building becoming abandoned were not related to the maximum level of rent permitted in that building. They found that abandonment more often resulted from depressed renter incomes and high interest rates faced by landlords.
There is also no evidence that rent control even reduces the level of maintenance of a building. Separate studies of maintenance expenditures in Massachusetts and New Jersey found little difference in spending levels between similar rent controlled and non-rent controlled buildings.
Because moderate rent control may reduce but does not eliminate landlord profits, the current laws have minimal negative effects. On the other hand, most cities with rent control now also have a very high demand for housing. In the absence of rent control, rent increases in these cities would likely have far exceeded the rate of inflation.
Under these conditions, rent control can afford some protection to middle- and lower-income tenants, keeping a mix of people in gentrifying areas. Moreover, limiting residential rent increases may also provide some protection for small businesses and light industry. Regulation of apartment rents may prevent the switching of land and buildings to residential uses -- a tactic which becomes highly profitable when gentrification occurs.
The benefits from rent control are not evenly distributed among all groups of tenants, however. Since many cities have vacancy decontrol, the elderly and long term stable households benefit from the low levels of their original rent. People just entering the rental market and renters who move frequently tend to pay higher rents.
Moreover, rent control cannot prevent low-priced apartments from being abandoned, renovated, or converted to condominiums. Nor can it stop the trend toward the construction of high-priced luxury apartments. Rent control holds down the rents for individual apartments. But the replacement of low-priced apartments with luxury models may still cause the average rent in a city to rise rapidly.
A Helpful HintThe shortage of affordable rental units is not just restricted to a few large cities -- it is a national problem. Between 1970 and 1983, the median share of income going to rent rose from 20% to 30%. This was not a small change. Since the 1880s, the rule of thumb has been "a week's wage for a month's rent." This 25% standard in fact reflected actual conditions for most of this century, with poor tenants paying more and wealthier tenants paying less of their incomes in rent. The shift to 30% conceals a much larger change for poor tenants. In 1980 renters with incomes under $3,000 paid more than 72% of their income in rent, while those with incomes between $3,000 and $7,000 paid 47% of their income.
However, rent control would not have solved this problem. Surprisingly, overall rent levels did not rise much during the 1970's. In 1970 the median rent was $108; in 1983 it was $315. Adjusted for inflation, median rents rose only by 14% over the last 15 years. In addition, most of this increase reflected the abandonment of low-priced apartments and their replacement by high-priced apartments. Rents on individual apartments actually rose, on average, slower than the rate of inflation in all large metropolitan areas through the 1970s and early 1980s.
Meanwhile, the primary cause of the housing affordability problem was the increasing poverty of tenants. During the 1970's, home ownership was very attractive and many who could afford to do so bought a home. The result was that the composition of tenant households changed. Between 1970 and 1980, families headed by married couples dropped from 54% to 35% of the renting population. The remaining renters were more likely to be single- parent households with lower incomes. As a result, the median income of renters, adjusted for inflation, dropped by 25% between 1970 and 1983, while the real income of homeowners only decreased by 2%.
If moderate rent control had been enacted nationwide during the 1970's, it would have kept some but not most rents down. Moreover, it would not have touched the main affordability problem -- the increasing mismatch between high-priced luxury apartments being built and low-income families looking for rental shelter. It could not therefore have completely prevented the drastic increase in the percentage of renter income paid for housing.
Rent Control and ProfitsWhat is the effect of rent control on landlord profits? The total profit from owning an apartment building comes from three sources: operating profits, tax write-offs, and increases in the value of the building (capital gains). Operating profits are the difference between the rents that a landlord collects and her/his costs -- primarily mortgage payments and the costs of fuel and maintenance.
Owning an apartment building also allows the landlord to pay less taxes on other income. The tax laws include the fiction that a building depreciates each year (even when its value is going up). The amount of depreciation can be deducted from the landlord's other income, lowering total taxes.
The third type of profit is capital gains. Buildings can increase in value either because of inflation, or because of a sudden upsurge of housing demand in a neighborhood. The second type of capital gains is always profit. Gains from inflation may or may not be profitable for the landlord, depending on when the building was bought. If the building was bought before the inflation of the 1970's, then the mortgage is either paid off or has a very low interest rate. In this case, any gains from inflation represent pure profit. For more recent mortgages, the banks anticipated inflation and charged higher interest rates (so that effectively, mortgage payments rise with inflation).
What rent control does is take away the chance for landlords to earn big profits from capital gains. Without rent control, when a neighborhood suddenly becomes upgraded the landlord can either boost rents sharply or sell out and make big bucks. With rent control, rent increases are limited so the value of the building does not soar. But moderate rent control does not eliminate operating profits or the tax advantages from owning an apartment building.
In effect, rent control limits landlords to a normal rate of profit and keeps them from collecting big windfalls. It may also sometimes squeeze small landlords more than big ones, but on average it should not eliminate profits for anyone.
Rent Control in the 1980'sAccording to Peter Marcuse, a housing activist who teaches Urban Planning at Columbia University, rents will rise much faster in the 1980's. Throughout the 1970's, the value of apartment buildings was increasing rapidly from inflation, providing large capital gains to landlords. This combined with the shift from renting to home ownership to lessen upward pressures on rents.
In the 1980's, however, inflation has slowed, decreasing the capital gains accruing to landlords. Moreover, stagnant incomes and the high cost of buying a home have produced a new group of middle class "permanent renters" -- people who would have bought a home in the past but who can't afford one now. Landlords are now in a good position to demand higher rents.
As a result, the pressure for some form of rent control is increasing, creating the possibility of new coalitions between low- and middle-income tenants (although historically such coalitions have tended to submerge the goals of lower-income tenants to those of other members). Peter Marcuse expects rent control to be a likely strategy for such a coalition. He suggests that direct action, like rent strikes or squatting, involves high personal risks and can expose tenants to direct landlord or police pressure. At the other extreme, campaigns for increased public subsidies are often too remote in their targets and too diffuse in their impact to generate major mass involvement. Rent control is local and direct, and the issues are familiar to everyone, making it an easier goal for emerging coalitions.
Rent control by itself is not a complete housing policy, however. An effective housing policy would include provisions for rent subsidies and public housing. Rent control is but one step toward moving housing allocation from the market to the public domain.