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Does rent control work?

Rising rents in UK cities has brought rent control policies to the forefront of political debate. The Scottish National Party/Scottish Green Party coalition has recently proposed a nationwide system of rent controls, in an attempt to make housing more affordable.

Rents have been rising steadily in most of the UK’s biggest cities, making rental housing more difficult to afford for millions of people living in (or aiming to live in) rental accommodation. 

In Scotland, cumulative rents increased by 45.9% and 40.9% over the last decade in the country’s two largest urban areas, Edinburgh and Glasgow, respectively. Recently, the ruling Scottish National Party (SNP) have agreed to work together with the Scottish Green Party (SGP) to create a shared economic programme, which contains the plan to ‘implement an effective national system of rent controls’. 

Rent control policies are aimed at regulating the rental prices of properties, with the objective of making rents more affordable and tenants less likely to be ‘priced out’ of their housing units due to rent increases. This article provides an overview of the related research to assess the costs and benefits associated with rent control policies and if they are effective in making housing more affordable. The focus is on the private rented sector (PRS), where properties are rented from private landlords and, unlike in the case of the social rented sector (SRS), housing is not subsidised.

What does evidence from research tell us?  

Rent controls are meant to mitigate the harmful economic consequences of rapid increases in rent costs – or rent inflation – in urban areas. Rent inflation can squeeze lower income tenants out of the neighbourhoods they live in and increase commuting times (Ahrens and Lyons, 2020). By limiting or obstructing residential mobility, it can lead to a misallocation of labour when rising rents drive workers out of high-productivity areas (Nunns, 2021). Displacement of tenants from their homes due to rising rents can also have damaging psychological and social consequences on the individuals and communities affected, as people having to move away from their long-term homes can sever long-standing community ties (Slater, 2021).  

The key question that economists are trying to answer is whether rent control policies are effective at mitigating these negative economic (and social) consequences. 

Most of the empirical evidence on the effectiveness of rent control comes from large US cities, where rent control regulations have been in place for decades. For example, San Francisco has had rent controls in place for the last 42 years on properties built before 1980, while in New York City, rent control policies have been a feature of the housing market since the 1940s (Arnott, 1995). The main aim of these policies is to prevent rents from rising, and several recent studies find that they are generally successful at lowering (or maintaining) rents for controlled housing units (Sims, 2007Autor et al, 2014Diamond et al, 2019). 

Rent controls are also found to reduce displacement for controlled units – that is, tenants having to move out due to rising rents (Glaeser and Luttmer, 2003Sims, 2007Diamond et al, 2019) There is even evidence that they are particularly effective at preventing the displacement of racial minorities in some contexts, with one study showing that San Francisco’s rent control resulted in minority tenants being much less likely to move away from the city compared with white tenants. This suggests that when rent control policies cover disadvantaged minority populations, these policies can help foster racial diversity in affected areas.   

Despite its benefits for tenants, there is also evidence that rent control can have large negative effects on the rest of the rental market. For example, San Francisco’s 1994 rent control law led to a 5.1% increase in overall (city-wide) rents over the course of the next two decades (Diamond et al, 2019). The overall rise in rents created a cost of $2.9 billion accrued to current and future renters, which was offset by the benefits received by tenants living in the controlled units. 

This study also sheds light on an important behavioural response to rent control by owners of rental properties: landlords substituted to other types of real estate (such as properties exempt from rent control). This lowered the housing supply and shifted it towards less affordable types of housing, leading to rents rising at an even higher rate. 

This finding is largely consistent with the predictions of basic microeconomic models: rent controls lower the price of housing and at this lower price less housing is offered (Glaeser and Luttmer, 2003). Housing quality is also reduced as landlords can no longer make up losses from renovating properties by raising rents (Sims, 2007). 

These theoretical stipulations are supported by evidence from several empirical studies (Early, 2000Sims, 2007Autor et al, 2014). These have also shown a deterioration in housing quality resulting from landlords’ reduced inclination to  pay for upkeep of rent-controlled housing, decreasing the value of other (even uncontrolled) properties in the area (Sims, 2007Autor et al, 2014).  

These policies should target lower-income residents who would otherwise be priced out of rapidly gentrifying neighbourhoods. Yet, even when there are benefits from rent control for certain incumbent households, it is not always clear whether the ‘right’ households are the ones that are targeted. 

For example, one study has highlighted that a smaller share of rent-controlled housing units belonged to the bottom quartile of the income distribution than to the top quartile (Sims, 2007). Similarly, evidence shows that New York City’s rent control policies benefited all rent-controlled households equally across the income distribution (Gyourko and Linneman, 1989)

Another important consideration is that rent controls can lead to mismatches between tenants and housing units. Once rent control is imposed on a property, the tenant might choose not to move away in the future (this would mean effectively giving up rent control) even if their housing unit is no longer appropriate for them (Glaeser and Luttmer, 2003Sims, 2011Bulow and Klemperer, 2012). This can lead to, for example, single households living in large apartments, or large families living in small studios (Diamond, 2018).  

Are there gaps in the research?  

Recent studies use high-quality administrative data and the effects they identify rely on varying exposure to rent control. The results tend to correspond to theoretical stipulations (Sims, 2007Autor et al, 2014Diamond et al, 2019). In fact, few issues induce such unanimous agreement among economists as what we see concerning the detrimental effects of rent control. Although most of the empirical evidence focuses on US cities, there are studies looking at rent control in a European context, and these also tend to find negative results (Oust, 2018Donner and Kopsch, 2021Breidenbach et al, 2021). For example, Germany introduced a nationwide system of rent controls in 2015, but, according to recent research, this has had no persistent effect on rental prices, instead resulting in reduced housing quality. The households who benefitted from lower rents in the short run were mostly higher income ones (Breidenbach et al, 2021).

But are researchers looking at all types of rent control? One crucial piece of ambiguity in the analysis of rent control policies is related to the way in which they are designed. 

First, there can be harder (first-generation) rent control policies which set price ceilings, and softer (second-generation) policies that regulate rent increases whilst ensuring certain provisions for landlords. In fact, first-generation rent controls are all but extinct in European countries (Kettunen and Ruonavaara, 2020). Yet most of the empirical evidence is focused on the harmful effects of these policies, and not the effects of second-generation rent controls (Slater, 2021).

Second, rent control policies can include very specific provisions to address known issues associated with them. For example, while rent control could incentivise landlords to convert rental properties into other types of real estate, if policy-makers limit these responses through well-designed regulations, and complement rent control with other policies (promoting homebuilding, for example) some of the related negative effects could be mitigated (Pastor et al, 2018). 

What does the future hold? 

High rates of rent inflation in urban areas, like that witnessed over the last decade in Scotland’s two largest cities, can bring with it several negative economic consequences. As mentioned, rising rents can exclude lower income tenants from urban rental markets, making it more difficult to live close to (or relocate for) employment opportunities. If these tenants need to move away to suburban and rural locations where rents are more affordable, this could increase commuting times or make people turn down work opportunities that would have otherwise been appropriate. 

Policy-makers have good reason to target this issue and design policies that mitigate the harmful effects of rapidly rising rents. But a key question is whether rent control is the appropriate policy to tackle rent inflation, and, if so, what type of rent control policies would be the most efficient?  

In Scotland, if the SNP-SGP coalition were to go ahead with its plans to implement a nationwide system of rent controls, such a system would have to be carefully designed to avoid the potential negative effects of rent control policies discussed above. The specific details of this policy are not yet clear, although the SGP leadership have alluded to provisions for landlords to cover certain costs, suggesting that the proposed rent controls will likely be of the second-generation kind. It is also worth noting that the Scottish Government already has a localised rent control policy in place, called Rent Pressure Zones (RPZ). Local councils can apply to become a RPZ if rents are rising too fast in the area, and the government can apply rent caps if these applications are accepted. There are currently no RPZs in Scotland, and it is unclear how this policy would be incorporated into the new rent control framework. 

Rent controls can benefit those in controlled housing units, but these benefits must accrue to disadvantaged groups who need the wealth transfer and access to neighbourhood opportunities the most. Importantly, they should not just apply to those who happened to occupy rent-controlled housing at the moment of policy implementation. 

If rents controls are implemented, landlords must also be compensated (perhaps through a subsidy or tax-credit system) so that they continue to invest in rental housing, and do not sell or convert their properties. 

Finally, given that such policies will likely lead to a reduction in the housing supply, rent controls should be complemented with policies that increase the supply of available housing. This is line with the Scottish Government’s current policy of encouraging investment in building affordable homes. At the same time, plans to expand social housing could also help mitigate the effects of rising rents on lower income tenants.

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Author: Daniel Borbely
Image credit: Toa Heftiba on Unsplash
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