Rent Control: A Shortsighted Approach to Housing Affordability

Written By SPOA Inc

During periods of rapid cost increase, price controls are often suggested as a method of keeping goods and services affordable. Unfortunately, while these policies may be intuitively appealing as political slogans, in reality they produce substantial negative side effects without addressing the root cause of the problems they seek to fix.

It’s undeniable that, at this point, the Boston area faces a housing affordability crisis. Rents have more than doubled[1] over the past few decades, and the increase in prices shows no sign of abatement. This increase in the price of housing is caused by two factors: rapidly increasing demand for housing and the failure of the housing supply to keep up.

The demand side of this equation is something to celebrate, as I’ve written elsewhere[2]:

"[Boston] has an incredible concentration of knowledge industries, especially in healthcare and biotechnology. Their output is invaluable for the world; Cambridge-based Moderna’s COVID vaccine is the most famous recent example, but countless other inventions and innovations are produced here and applied globally every year. The revenue generated by this output allows the firms that produce it to pay high salaries that attract highly skilled workers from across the world to keep the innovation going. In addition to this economic pull, Boston’s growing cultural attractions help make the city a desirable place to live."

The supply side, on the other hand, is a problem. Zoning and other land use regulations dramatically increase the cost and complexity of building new housing, suppressing the number of available units and artificially inflating the price of the units that exist. As of 2006[3], Boston was the second most regulated metropolitan area in the country, and it continues to lag significantly behind other large metros[4] in terms of new housing construction. 

Increasing demand and stagnant supply have predictably resulted in skyrocketing housing prices, as shown in the Fed data above. This has made Boston less affordable for everyone, especially low- and middle-income households, which has in turn generated political pressure to do something about the problem. Unfortunately, much of this pressure has been channeled into advocacy for policies that, while they may sound appealing, would do little to address the fundamental economic problems at play here and that would almost certainly produce substantial negative side effects for the current and future residents of Massachusetts. 

Housing policies that don’t increase the supply of housing can help subsets of the population, but only by imposing costs on other parts of the system. These policies don’t decrease the baseline cost of housing; they just change who’s paying for it. Foremost among these policies is rent control. At a micro level, the lower costs enjoyed by tenants in rent-controlled units come directly at the expense of property owners, many of whom are small landlords who depend on rental income to be able to afford their mortgages. On a macro level, converting market-rate units into rent-controlled units results in a smaller remaining supply of market-rate units, making those units more expensive for other tenants in the market. Rent control also suppresses long-term supply growth by deterring investment, causing market rental rates to climb even higher.

Rent control keeps coming up as a solution because it can benefit a subset of current renters/voters in the short term. This makes it a powerful tool for politicians looking for votes in competitive elections, but it is not the right solution to the problem of insufficient housing supply. Even worse, it comes at the expense of future renters and everyone outside of that specific voting region, for instance by pushing people out of Boston into non-rent-controlled cities like Newton that may be less well suited to handle an influx of population. And if Boston’s suburbs in turn implement these policies, the population outflow continues outward to exurbs or different

parts of the country entirely. As a side note, all of this also tends to increase the carbon footprint of the people involved, as residents of dense cities use less energy on both housing and transportation than residents of lower-density cities or non-urban areas. This shifts housing pressure out of a given voting region but does little to solve the underlying problem.

It’s worth noting at this point that, unlike with many other questions in economics, there is overwhelming consensus[5] among top economists that rent control doesn’t have a positive impact on housing affordability. This isn’t only theoretical; empirical studies have shown that rent control reduces the supply of available rentals and reduces renter mobility[6] (which results in lower productivity and wages).

In Berlin[7], rent control caused rents for tenants in market-rate apartments to increase faster than in other large German cities. Just last year, St. Paul’s newly approved rent control measure began deterring large investments in the city’s housing[8]. The percentage of economists that believe rent control is the wrong policy for increasing the affordability of housing is nearly as high as the percentage of climatologists who believe climate change is man-made and epidemiologists who believe vaccines are effective at combating COVID-19. This is especially frustrating when real solutions–changing zoning laws to make more housing construction feasible–are available, if somewhat more politically complicated given their tendency to irritate neighbors.

Advocates of the rent control bills that are currently in the Massachusetts legislature (H.1378[9] and S.886[10]) frequently argue that, since the bills in question only give municipalities the option to implement rent control rather than imposing rent control at the state level, the bills should be unobjectionable; after all, shouldn’t individual cities and towns be able to freely set their own housing policy? This argument would be more reasonable if each municipality in the state were a standalone economic unit, economically independent from its neighbors and other polities within the state. As we know, this is not the case. Every day, hundreds of thousands of people commute into Boston and Cambridge (the two largest cities pushing for rent control) from other parts of Massachusetts for work, school, or other commercial activity. If either of them were to implement rent control, the negative effects described above would not be limited to their residents. In effect, the proposed bills would impose a prisoner’s-dilemma-like[11] coordination problem on the state’s towns and cities. Any given municipality would be incentivized to defect against the interest of the state as a whole by implementing rent control to favor its existing voters, shifting more of the burden of supplying housing to other municipalities. 

It’s not that we don’t understand why rent control is an appealing idea. Housing costs in Boston are outrageous as a result of high demand and restrictive zoning, and people are desperate for a policy that promises access to Boston’s economic opportunity at low cost. The problem with rent control is that, while it may deliver on this promise to a small subset of the population, it would do so only at the expense of countless other people who would be locked out of the city by the suppressing effect it would have on supply growth. Throughout its history, Boston has grown stronger and more prosperous by opening its doors to newcomers from across the country and around the world. It would be a mistake now to put a ceiling on our future growth by implementing policies like rent control that have repeatedly led to stagnation. 

By Chris Lehman

SPOA Inc
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