Today, partly as a public service, we’re going to dig into the academic literature on an arcane policy topic: rent control. We also have a parochial interest in the subject: the Oregon Legislature is considering legislation that would lift the state’s ban on cities imposing rent control. The legislation is being proposed by Oregon House Speaker Tina Kotek.
Indeed. But how to fix it is still a question. (Flickr: Tiger Pixel)
For decades, one of the few topics on which nearly all economists agree is that rent control is bad thing: it discourages new investment in housing and in housing maintenance; it tends to reduce household mobility, encourages the conversion of apartments into condominiums (removing them from the rental housing supply), and leads to the misallocation of housing over time.
In response to the economist’s objections, one of the arguments that rent control advocates make is to draw a distinction between “bad, old first generation rent control” and “new, improved second generation rent control.” Yes, these advocates concede, back in the day there were poorly designed systems that involved rent freezes, and which had the effect of reducing housing supply. But today, we are told, rent controllers are smarter, and have developed new types of rent control that are supposedly free of these negative effects. As Speaker Kotek described it to The Portland Oregonian:
What you’re hearing from landlords about rent control is they have an idea of it that’s very much the model that began right after World War II where properties had hard, fast caps on rents. That’s not the kind of rent control we’re talking about. We’re talking about second-generation rent stabilization where there’s a process for managing rent increases that protects investors and tenants.
And to bolster their point, rent control advocates will sometimes quote from two economists–Tony Downs and Richard Arnott–who’ve explored the differences between first and second generation rent controls. They point out–correctly–that Downs and Arnott have identified some important differences in rent control regimes. But neither of them actually endorses rent control, especially of the kind that’s likely to be on offer under the proposed Oregon legislation.
First Generation and Second Generation Rent Control
The first article that some point to is a 1988 Urban Institute report authored by Brookings Institution economist Anthony Downs: Residential Rent Controls: An Evaluation. Downs distinguishes between “strict” and “temperate” rent control regimes. But Downs is clear that there’s a wide continuum and that many different features of rent control affect its stringency, including the share of the housing stock that is covered, whether there is vacancy decontrol, whether the ordinance allows automatic rent increases and generous allowances for increases to cover the cost of maintenance or improvements. Stringent rent control has the worst effects, temperate rent control the least.
As Michael Lewyn notes, the reason that “temperate” rent control regimes haven’t been shown to have much of an adverse effect on supply is because they don’t control rents. Let’s take a close look at what Anthony Downs had to say about differences in rent control regimes in different cities. New York’s stringent rent control holds rents for controlled apartments about 57 percent below market rates. In contrast, the more temperate controls in Los Angeles reduced rents by only about 3.5 percent.
Similarly, advocates of rent control sometimes point to the work of Richard Arnott, who like Downs, distinguishes between different levels of stringency in rent control regimes. In 1995, Arnott wrote an article for the Journal of Economic Perspectives asking “Time for revisionism on rent control?” Arnott has argued that systems of rent control that include vacancy decontrol (i.e. that let landlords raise rents on vacant apartments to whatever level they like) would be unlikely to have the same kind of negative effects as first generation rent control schemes.
Many people seized on Arnott’s article as an endorsement of second-generation strategies. So much so, that in 2003, Arnott went to the trouble to specifically deny any support for such strategies, writing an article entitled “Tenancy Rent Control” in The Swedish Economic Policy Review. While advocates imply that Arnott therefore supports rent control, Arnott himself made it clear he does not, stating that “most second generation rent control programs . . . have been on balance harmful”:
Far from endorsing rent control, both Downs and Arnott make it clear that rent control regimes that actually have the effect of lowering rents significantly below what the market would otherwise provide would have negative economic consequences.
More to the point, in the legislation on offer in Oregon, Speaker Kotek’s HB 2001 and HB 2004, there are actually no provisions that precludes cities from enacting the damaging kind of strict or first generation rent control. The first bill, HB 2001, begins with a moratorium on rent increases of more than five percent. And nothing in the legislation precludes Oregon cities from adopting rent control with the most demonstrably damaging features, including applying rent controls to new construction. The other bill, HB 2004, simply repeals the state ban on city and county imposed rent controls altogether.
Plainly there are better and worse forms of rent control: those that do not apply to many (or most units), that allow landlords to raise rents regularly in line with inflation, and that fully decontrol apartments when they become vacant, arguably have fewer negative effects than more stringent measures. But these two proposed bills allow “bad” rent control just as much as they allow “less bad” rent control). Consider just one feature of rent control: “vacancy decontrol.” Under vacancy decontrol, an incumbent tenant has a protection against rent increases above some level, but when a unit becomes vacant landlords are free to raise the rent to whatever level they want. Downs views this a an essential element of temperate regimes; Arnott makes it the centerpiece of his definition of “second generation” rent control. Nothing in HB 2001 or 2004 requires vacancy decontrol; as a result its simply not accurate to cite either Downs or Arnott’s research as supporting such legislation.
So here’s the takeaway: Neither Downs nor Arnott endorse second generation or less stringent rent controls. Both agree that measures that effectively limit rent have negative consequences and are, in Arnott’s words “on balance harmful.” But even if there were some forms of rent control that had fewer negative effects, there’s nothing in the legislation that’s so far been proposed in Oregon that would preclude cities or counties from adopting some of the worst, most-disruptive forms of rent control.
What we know about rent control
Today, partly as a public service, we’re going to dig into the academic literature on an arcane policy topic: rent control. We also have a parochial interest in the subject: the Oregon Legislature is considering legislation that would lift the state’s ban on cities imposing rent control. The legislation is being proposed by Oregon House Speaker Tina Kotek.
For decades, one of the few topics on which nearly all economists agree is that rent control is bad thing: it discourages new investment in housing and in housing maintenance; it tends to reduce household mobility, encourages the conversion of apartments into condominiums (removing them from the rental housing supply), and leads to the misallocation of housing over time.
In response to the economist’s objections, one of the arguments that rent control advocates make is to draw a distinction between “bad, old first generation rent control” and “new, improved second generation rent control.” Yes, these advocates concede, back in the day there were poorly designed systems that involved rent freezes, and which had the effect of reducing housing supply. But today, we are told, rent controllers are smarter, and have developed new types of rent control that are supposedly free of these negative effects. As Speaker Kotek described it to The Portland Oregonian:
And to bolster their point, rent control advocates will sometimes quote from two economists–Tony Downs and Richard Arnott–who’ve explored the differences between first and second generation rent controls. They point out–correctly–that Downs and Arnott have identified some important differences in rent control regimes. But neither of them actually endorses rent control, especially of the kind that’s likely to be on offer under the proposed Oregon legislation.
First Generation and Second Generation Rent Control
The first article that some point to is a 1988 Urban Institute report authored by Brookings Institution economist Anthony Downs: Residential Rent Controls: An Evaluation. Downs distinguishes between “strict” and “temperate” rent control regimes. But Downs is clear that there’s a wide continuum and that many different features of rent control affect its stringency, including the share of the housing stock that is covered, whether there is vacancy decontrol, whether the ordinance allows automatic rent increases and generous allowances for increases to cover the cost of maintenance or improvements. Stringent rent control has the worst effects, temperate rent control the least.
As Michael Lewyn notes, the reason that “temperate” rent control regimes haven’t been shown to have much of an adverse effect on supply is because they don’t control rents. Let’s take a close look at what Anthony Downs had to say about differences in rent control regimes in different cities. New York’s stringent rent control holds rents for controlled apartments about 57 percent below market rates. In contrast, the more temperate controls in Los Angeles reduced rents by only about 3.5 percent.
Similarly, advocates of rent control sometimes point to the work of Richard Arnott, who like Downs, distinguishes between different levels of stringency in rent control regimes. In 1995, Arnott wrote an article for the Journal of Economic Perspectives asking “Time for revisionism on rent control?” Arnott has argued that systems of rent control that include vacancy decontrol (i.e. that let landlords raise rents on vacant apartments to whatever level they like) would be unlikely to have the same kind of negative effects as first generation rent control schemes.
Many people seized on Arnott’s article as an endorsement of second-generation strategies. So much so, that in 2003, Arnott went to the trouble to specifically deny any support for such strategies, writing an article entitled “Tenancy Rent Control” in The Swedish Economic Policy Review. While advocates imply that Arnott therefore supports rent control, Arnott himself made it clear he does not, stating that “most second generation rent control programs . . . have been on balance harmful”:
Far from endorsing rent control, both Downs and Arnott make it clear that rent control regimes that actually have the effect of lowering rents significantly below what the market would otherwise provide would have negative economic consequences.
Proposed Legislation: Promising Benign, Enabling Malignant
More to the point, in the legislation on offer in Oregon, Speaker Kotek’s HB 2001 and HB 2004, there are actually no provisions that precludes cities from enacting the damaging kind of strict or first generation rent control. The first bill, HB 2001, begins with a moratorium on rent increases of more than five percent. And nothing in the legislation precludes Oregon cities from adopting rent control with the most demonstrably damaging features, including applying rent controls to new construction. The other bill, HB 2004, simply repeals the state ban on city and county imposed rent controls altogether.
Plainly there are better and worse forms of rent control: those that do not apply to many (or most units), that allow landlords to raise rents regularly in line with inflation, and that fully decontrol apartments when they become vacant, arguably have fewer negative effects than more stringent measures. But these two proposed bills allow “bad” rent control just as much as they allow “less bad” rent control). Consider just one feature of rent control: “vacancy decontrol.” Under vacancy decontrol, an incumbent tenant has a protection against rent increases above some level, but when a unit becomes vacant landlords are free to raise the rent to whatever level they want. Downs views this a an essential element of temperate regimes; Arnott makes it the centerpiece of his definition of “second generation” rent control. Nothing in HB 2001 or 2004 requires vacancy decontrol; as a result its simply not accurate to cite either Downs or Arnott’s research as supporting such legislation.
So here’s the takeaway: Neither Downs nor Arnott endorse second generation or less stringent rent controls. Both agree that measures that effectively limit rent have negative consequences and are, in Arnott’s words “on balance harmful.” But even if there were some forms of rent control that had fewer negative effects, there’s nothing in the legislation that’s so far been proposed in Oregon that would preclude cities or counties from adopting some of the worst, most-disruptive forms of rent control.
Related Commentary