I was recently asked to do a talk here in Boston at The Urban Land Institute. The topic was every economist’s favorite punching bag: rent control. Just a few things exist that can elicit economists’ unanimous agreement. We love us some right angles on which we can draw our beloved supply and demand graphs. And, we enjoy being non-committal and saying things like “on the one hand,” and “on the other hand.” Then, there is our unquestionable love of being the biggest downers at every party. Recently, at a Super Bowl Party, I was telling some friends about how child abuse can really ruin someone’s economic future. I was sent home.
On the topic of rent control, economists are similarly in agreement. In theory, it’s a horrible idea. Rent control — which in its most traditional form puts a fixed upper bound on rents — leads to the undersupply of housing. I was invited to talk on the subject because Boston is considering implementing its own sort of rent control “lite” policy. Given that the topic of rent control comes up any time housing prices rise quickly, I figured it’s worth a quick post to answer a few questions. Why do economists hate rent control so much? What’s the deal with these newer, “lite” versions of this policy? And, if these sorts of policies aren’t great, what can we do instead?
Why are Economists Such Rent Control Haters?
As I alluded to above, economists love to draw them some supply and demand graphs. The below shows such a graph for a rental market in “equilibrium”. The yellow line is the supply curve, showing how much rental housing is supplied at each price. The curve is generally upward sloping, to reflect the fact that higher prices lead to more rental housing supplied. The blue line is the demand curve. It is downward sloping because the lower the price the more rental housing is demanded. The intersection is the market price — it’s the point where the amount of rental housing supplied by landlords equals the amount demanded by tenants. (If you pay attention, you’ll notice the supply curve is vertical below this point. This just reflects the fact that even if prices dropped, the amount of units wouldn’t drop immediately…they usually don’t demolish vacant units.)
Figure 1. Rental Market in Equilibrium
Now, imagine that rent control is implemented at the equilibrium price. And, say that demand suddenly expanded thanks to a new job opportunity in the area. Normally, the price would rise, so that more rental units would be supplied. Instead, the price is fixed, and thus landlords and developers do not supply more units. The result is shown on the graph below — the red arrows indicate all the people who want to move into the area, but cannot. Economists dislike rent control mainly for this reason. It creates a class of winners — people who already lived in the area and benefit from lower rents. But, rent control also creates a class of losers, who unluckily are kept out of the area even though they are willing to pay higher rents.
Figure 2. The Effect of Rent Control Following a Demand Increase
But, is Modern Rent Control Really That Bad?
The picture above is something economists lose sleep over. People want to rent in the area, they can afford to rent, but they can’t do it. If the price were just allowed to climb, developers would build and renters would have access to the new job opportunities.
The only thing is…these strict control policies don’t really exist anymore. The kind of hard price ceilings shown above can be thought of as “Rent Control 1.0.” Today, what most people still call “rent control” would be better referred to as “Rent Stabilization.” These policies restrict rent increases in a given year to the inflation rate plus some amount. For example, the State of Oregon allows an increase of the Consumer Price Index (CPI) plus 7 percent. Because inflation was high in 2023, the maximum allowable rent increase in Oregon is also high, at 14.6 percent.
Boston’s proposed policy is similar. It allows an increase of the local CPI plus six percent, with a maximum cap of 10 percent. The policy also contains two important features. When tenants move out, the landlord can increase rent by as much as they want for the new tenants. And, the policy exempts new buildings for their first 15 years of existence. Both these features are meant to allay developers’ fears. After all, landlords can always raise rents when tenants leave (the law contains strict eviction controls to prevent landlords from tossing out old tenants). And, any new buildings won’t really be affected. Plus, the figure below shows that the average rent increase is typically lower than the maximum. So, most of the time the constraint won’t bind. And, if the constraint doesn’t bind, then it shouldn’t impact supply. Still….
Figure 3. Allowable Increase in Rent and Zillow Observed Rent Increases, 2015-2022
Sources: Bureau of Labor Statistics and Zillow Research.
Still, is Rent Stabilization Really the Best Option?
OK, so the new class of “rent control” policies aren’t nearly as bad as the originals. Yet, as a proud Bostonian, I worry about this policy. Developers I have talked to acknowledged that Boston’s policy is not as bad as the pictures above. But, developers still don’t like it. The policy introduces uncertainty. After all, it’s always possible that more high inflation is in our future, in which case the price constraint could very well bind like it did in 2021-2022. Plus, some developers fear a “trojan horse” for more strict price controls. At the very least, rent stabilization introduces an administrative burden onto developers. All of these factors could lead to lower housing supply in Boston than would exist otherwise.
A much better option is just to use policy to expand supply. The graph below shows how increases in supply can meet the increased demand, resulting in more housing at the original price. Supply expansion can accomplish the price stability of rent control without keeping people out of the market.
Figure 4. Expanding Supply Can Keep Prices Low in the Face of Increased Demand
The problem is that expanding supply within a city like Boston is tough. Space is limited. But, in the surrounding suburbs, lots of space exists. Unfortunately, many Boston suburbs have restrictions on the number of allowable units per acre. So, when you drive west of Boston, you see lots of big houses on big plots of land. Indeed, about 25 percent of the area around Boston only allows 1 unit per acre. Just like rent control artificially depresses prices, these policies artificially depress supply and increase prices. So, according to the Boston Fed, these policies end up resulting in higher rents than would exist otherwise.
Indeed, relaxing zoning laws should be a policy both parties can get behind. Conservatives can love the relaxation of an artificial regulation. Liberals can love the increased equity of allowing lower-income people into often high-opportunity suburbs. Or, maybe the leaders of both parties will just balk at a policy that could lower their housing values. Sigh.