It was never in doubt that California would back Joe Biden in Tuesday’s election. But voters in the Golden State also faced key policy referendums at the ballot box. One of those initiatives was Proposition 21, a measure that would have allowed cities to enact rent control in the state.
Encouragingly, California voters rejected it.
You’re not alone if you were under the impression that California already had “rent control” in place. After all, San Francisco has famously high housing costs and much attention has been paid to the area’s housing restrictions. Currently, the city has something known as “rent stabilization” for units in older buildings, which is a lesser form of rent control.
The difference between the two is marginal. But, basically, rent control freezes rent payments so that they cannot increase. Meanwhile, rent stabilization only allows small increases in rental prices per year for some units. For example, this would include a policy that limits annual rent increases to 2 percent. This defeated ballot initiative would have allowed localities to pursue more restrictive policies that freeze rent rather than just limiting its increase.
Such drastic measures simply weren’t justified by the facts. Don’t forget that rents are already falling across most major cities this year, thanks to a tremendous decrease in the demand for leases amid COVID-19. Landlords have even started offering free incentives to attract renters.
Many landlords are hurting and struggling to make ends meet as their revenue streams dry up. Those who are unable to float the missed income are now seeking to sell their properties at a loss or are facing taking on massive debt to keep themselves afloat.
This year more than most, it’s unconscionable to think of placing more economic hardships on hardworking people who’ve been hurt by the response to the pandemic. But even in a normal year, rent control is a terrible idea that has proven itself to be a failure time and time again.
While they usually differ wildly in their policy views, economists across the political spectrum tend to agree that rent control is an awful policy.
Nobel-Prize-winning economist Gunnar Myrdal once stated that, “Rent control has in certain Western countries constituted maybe the worst example of poor planning by governments lacking courage and vision.” Meanwhile, even the socialist Swedish economist Assar Lindbeck once said that, “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.”
So, why is rent control such a bad policy?
The end goal of its well-intentioned supporters is to make housing more affordable. In reality, rent control not only fails to deliver, it creates unintended consequences that end up making the housing shortage worse and making rent more expensive.
First and foremost, rent control leads to a shortage of rental units.
At a frozen rate, there are more prospective renters hoping to rent apartments than there are landlords who want to lease them. Two things happen in this scenario. Some landlords use their properties for other means when they no longer feel the rental rate they receive is worth the hassle. And on the other hand, rent control curtails the profit motivation that drives construction.
Some developers stop building new housing when they can no longer be guaranteed the market rate for their investment. Or, they switch construction to commercial property and luxury housing, which are usually not affected by rent control proposals.
Either way, regular renters are left with a smaller amount of available units. This inevitably forces prices to skyrocket in non-controlled buildings and leaves hopeful renters fighting over rent-controlled units. In places like New York City, people even leave their rent-controlled apartments to family members in their wills.
It’s often the wealthy who hoard the rent-controlled properties. A select few benefit from rent control—while the rest of the city pays the price.
There are other negative impacts as well.
Landlords who own units in rent-controlled buildings no longer have an incentive to renovate and maintain them. There is no reason for an owner to spend money on improvements when they’re prevented from earning anything additional in return. Eventually what this means is those in rent-controlled apartments receive poor treatment.
In rent control, we observe a common failure that plagues big government policies: leaders are seeking to treat the symptom of the problem instead of the root cause. The famed economist Frederic Bastiat described this fallacious thinking as a focus on “what is seen” at the expense of what is “unseen.” Politicians “see” the select few tenants who get to keep their housing and have it be more affordable. What goes “unseen” is all the housing that never gets built as a result of the rent control.
If policymakers truly want to make housing more affordable, they could roll back the expensive regulations restricting construction that limit the supply of housing and cause high prices to begin with.
More than enough cities and states have given rent control a try and paid the price when it failed. Californians were wise to learn from the failures of other states on this issue.