Tag: rent control

Listen to Grumpy (con’t)

The biggest losers of rent control are the young, the mobile, the ambitious, immigrants, and people without a lot of cash. If you want to move from Fresno to take a job in San Francisco and move up, and you don’t have millions lying around to buy, you need rentals. Rent control means they are not available. Income inequality, opportunity, equity, all get worse.

In this paragraph, John Cochrane begins to draw lines around groups of people who will lose out under a rent-control, a policy that favors those who have established leases with landlords.

The reader can quickly imagine a young person being squeezed out of houisng by the combination of entry-level pay and bulked-up rent. The surcharge is necessary to balance out the rent-controled units. That’s the persona that comes to mind and it is the one the author intends to convey. But wait. What about the just-out-of-school coders and engineers that are swooped up by the tech companies?

These kids are paid a lot money. They are can choose where to live without much concern as, most often, they have no other attachments. They all live together in some big tech hub, often times leaving their childhood communties behind. They no longer have other points of reference like a brother who took up plumbing, or grandparents on fixed income. Not only do the have the cash flow to spend they are not being reminded that others do not.

One descriptor is not enough to form a group. To say the population of Minnesota has remained constant is light on details. Susan Bower, the state demographer, explains some of the demographic breaks down in Eden Prairie, a SW suburb of the Twin Cities. At the presentation she notes the the state loses 5,000-10,000 people a year but it is made up through international immigration. In other words, the people who leave have no concerns regarding rent control are replaced by a group who are disadvantaged by rent control.

To be efficient, matching people in consideration of their stage in life with their housing needs is best. Policies which keep people in place or discourages them from moving up, moving closer to employment, moving to a stronger school district, moving closer to support systems and so on are detrimental.

Learn from Grumpy

The Grumpy Economist has another great post, this time about rent control. For those of us in real estate, it’s an irritating topic. The errors in the use of price controls are numerous. Using John Cochrane’s article as a road map might be interesting to illustrate this point. Let’s start with this paragraph.

Sure, “sharply rising rents and utility bills wreak havoc on family budgets,” if the families don’t follow the screaming market signal to move. (Which is not painless, for sure. Incentives never are.) But the money comes from somewhere. Rent controls and energy price caps wreak havoc on landlord end electric utility budgets. The money must come from somewhere.

The claim is that rents are rising sharply. The reader pictures a Scrooge-like figure pounding on the door of a cowering family of four, announcing a ‘sharp’ rent increase (extra dollar symbols for emphasis), while behind this embodiment of the typical landlord stands an eviction notice ready to be served. I’d love to see numbers to this effect. I challenge that the ‘sharp’ rent increases are occurring at lease renewals.

Large corporate landlords might have a set policy of annual increases, but they account for only 3-4% of proprietors. Landlords must juggle the cost-benefit of increasing rent. As 80% own and manage the units, they calculate the costs, time, and uncertainty of a new tenant. This is weighed against a 3% increase on $1,100 or $33/mo in additional income. Needless to say, many landlords will forego a rent increase to keep a good tenant.

These subtleties are lost in real estate analysis, where all the numbers are averaged as if there were one typical renter, one typical landlord, and one typical property. This couldn’t be further from the truth. There are whole economies of renter groups. There are students who will have negative income before they join the workforce; there are singles with high-fluting jobs and no other responsibilities; there are single parents; there are couples with kids in a city just for a bit; there are elderly on fixed income with low mobility; there are recently divorcees looking for a glamorous downtown lifestyle.

Are all these groups to receive the same treatment? The same concern for their monthly budgets?Rent controls are initiated at the city level. Every group of renters would receive the benefit of a market-restrained obligation. Is that the intention?

Landlords are also assumed to be a certain type. The persona has tremendous equity in their property, no debt, and other cash they are stashing like squirrels do with acorns in the fall. And certainly some landlords fit this description. But more likely than not, the landlord has a mortgage and obligations against their time. The new entrants to the field, those trying to get ahead by getting a foothold in real estate, are undoubtedly the ones who need to make the cash flow.

When property taxes, utilities, or the cost of hiring labor rise, a landlord has no way to respond until a lease comes up for renewal. Rent control tightens this squeeze, leaving property owners caught between increasing public demands funded through taxation and their limited ability to recover those costs through rent. The first to be pushed out are often the newcomers—the small, aspiring owners who bring fresh energy and ambition to the market, but lack the cushion to absorb sustained losses.

Lesson number one. Averaging is a mistake. Assuming there is only one type of each actor in this economic trade of money for lodging makes for an impossible conversation.

A routine reminder

Rent control is counter productive. From the Federal Reserve Bank of St. Louis:

Weighing Trade-offs

Economists generally have found that, while rent-control policies do restrict rents at more affordable rates, they can also lead to a reduction of rental stock and maintenance, thereby exacerbating affordable housing shortages. At the same time, the tenants of controlled units can benefit from lower costs and greater neighborhood stability—as long as they don’t move.4

For policymakers considering rent control, economics can help them anticipate possible effects and may even inform policy design for those who decide to pursue such policies. Given the trade-offs, policymakers must balance maintaining affordability for those with rental housing, while possibly shrinking the stock of affordable housing for others, especially when such housing is already in short supply.

What Are the Long-run Trade-offs of Rent-Control Policies?

Targeting a pecuniary benefit to a low-income group seems like an easy solution. The shift of funds from the property owners to a social value, however, promotes undesireable long-term social shortfalls. These include the convesion of rental property to owner occupied housing as the incentives cause landlords to exit the market. Or a deterioration in the quality of rental housing as, again over a longer time frame, long term maintenance becomes more difficult to fund.

It’s silly to rob Peter to pay Paul

Kenneth Ahrens recently wrote a paper, Robbing Peter to Pay Paul, The Redistribution of Wealth Caused by Rent Control. He was kind enough to join the Minneapolis Area Association of Realtors in a zoom call to present the material. It’s of particular interest in our market as he uses the effects of a recent ballot measure in the city of St. Paul. The paper is written in clear plain language and starts with a nice historical review of rent control in the US. It’s well worth the read. Here is the abstract.

Abstract

We use the price effects caused by the passage of rent control in St. Paul, Minnesota in 2021, to study the transfer of wealth across income groups. First, we find that rent control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. Both owner-occupied and rental properties lost value, but the losses were larger for rental properties, and in neighborhoods with a higher concentration of rentals. Second, leveraging administrative parcel-level data, we find that the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities. For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.

Ahrens mentioned that his peers were wondering why he was working on demonstrating the problems with a policy that has been shown to have greater negative impacts than positive ones. Experiments with rent control in the 50s and the 70s are long forgotten. A new generation of problem solvers and activists are reviving old ideas despite their flaws. The focus seems to be on preserving a renter’s ability to stay in their apartment by capping rent increases. This in turn transfers wealth from the landlord to the tenant.

Although the intent might be to have a one-for-one transfer from the pocket of the property owner to the renter, Ahrens points out that it is not that straightforward. “Basic economic theory predicts that rent control causes both transfers of wealth and deadweight losses (DWL) for property owners. These losses can be divided into a direct capitalization loss and an indirect negative externality loss.” A deadweight loss might derive from postponement of maintenance and repairs due to lack of income. “The sum of these effects is observable as a decline in the market value of real estate, as the property can no longer generate a market rate flow of income and fewer repairs to the property mean a lesser quality building.”

Furthermore, the transfers benefit the wealthy and hurt the less wealthy. In their findings, the lower income owners realize the greatest decline in home values- 8.52%- than any other transfer.

Excerpt from Table VII

There have already been meetings in St. Paul to adjust the stringent rent control measures passed last November. But there is no talk of reversal. Constituents seem to feel that renters in some way are not getting a fair shake.

Maybe I can take a run at the reasoning. Renters play a role in the community as do property owners. They are not as vested as they are more mobile, yet they too can be good citizens. Perhaps they go to city hall to petition for a road safety concern, a new playground, or more observance of a problem property. Perhaps they are the bus stop mom or the football coach. Perhaps they help maintain a safe light rail system or advocate for better bike lanes. For all that personal time spent on city infrastructure, they enjoy an improved environment. Yet the homeowners enjoy greater home values. And renters face the possibility of being priced out.

Of course, homeowners do not always enjoy greater home values. I remember a period of three years following the great recession where most sellers brought a check to closing to buy out their remaining mortgage balance. Sellers also feel a pinch in their bottom line when cosmetic updates have not been done, or repairs deferred. Renters find it far less costly simply to move to a newer updated unit. Such are the differences between ownership and rentals.

Maybe there is a new framework to consider. One that takes into consideration the economic issues of civic participation yet still tallies the risks of ownership. What’s clear to me is that if economists do not come up with analytical tools that better express the motivations and incentives constituents are expressing in their political decisions, then we will continue to suffer through cascading unintended consequences of bad policy.