Rent control laws could be contributing to shortage of affordable housing

As the cost of housing in the U.S. has surged in recent years, movements have cropped up across the country seeking rent control measures in an effort to stabilize prices. However, such laws could be making the problem even worse.

Despite warnings from economists, rent control is becoming more and more popular in progressive strongholds. Oregon led the charge in 2019 when the state imposed a cap on older units, and California followed suit in 2020. Since then, municipalities in Illinois, Colorado, Massachusetts and elsewhere are considering similar moves.

Many states had various forms of rent control in the 1970s, another time of high inflation. However, several banned rent control after that, when there was a consensus that price controls were destructive policies. Now, the trend has re-emerged.

Ryan Bourne, chair for the public understanding of economics at the Cato Institute’s Center for Economic Studies, said economists overwhelmingly agree that imposing rent control tends to reduce the amount and quality of affordable housing and explained why in an interview with FOX Business.

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Bourne said that at a time when cost of living concerns are such a pressing issue, rent tends to be families’ single greatest expense. So, it is natural for politicians to look at ways to make people’s cost of living more affordable. However, when considering the underlying economics of rent control, it becomes much less simple than that.

“Capping rents at a time when you know demand for property is growing strongly creates a situation where you have a shortage of rental accommodation relative to demand, so it creates shortages,” Bourne said. “And to the extent they create shortages, that can actually kind of raise the underlying market rents because if you kept rents below market rates, a lot of landlords will decide to convert their properties to condos or sell them for owner occupation.”

“So quite often,” he added, “it makes the kind of underlying market rate of property actually more expensive, rather than less expensive.”

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The more coverage from rent control, the more damage, and the policies are more worrisome in places where the laws are applied across the board, according to Bourne.

He gave the example of how New Jersey has had rent control in place for a long time, but it does not really have much of an impact because it only applies to certain properties and tends to have a fairly high cap. 

However, when Minneapolis tried rent control in 2021, the coverage was broad and set a very tight cap that had “pretty disastrous consequences,” he explained.

Bourne said after Minneapolis imposed its rent control, the city saw a significant decline in construction permits for new apartments, so the city had to change the law quickly after officials realized it covered new construction and was going to have awful consequences on the availability of property.

A nationwide inventory shortage is causing elevated rent prices across the country, especially in major metros. Still, many large cities have rent control measures in place while others are considering them, despite the fact that the policies could further hurt housing supplies and drive up prices across the board.

One example is New York City, which has had rent control laws in place for decades, and is now defending them before the Supreme Court. According to a recent report from Moody’s, New York City has the highest rent-to-income ratio in the U.S. at 64.9%.