Rent control drives out affordable housing.

Author:Tucker, William
SUMMARY

Rent control has a negative economic impact on municipal finance and the rental market. First, landlords with rent control units need lower property assessments which reduce tax revenue. Second, rents on non-controlled units are driven up to compensate landlords' losses.

 
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Classified ads in rent-controlled cities show that very few moderately priced apartments are actually available. Yet, in cities without controls, such units are universally on the market.

Rent control has been in force in a number of major American cities for many decades. The best-known example is New York, which retains rent controls from the temporary wartime price regulations imposed during World War II.

In the 1970s, it appeared that rent control might be the wave of the future. Boston and several surrounding suburbs imposed it during the inflationary years of 1969-71. Pres. Richard Nixon placed wage and price controls on the entire country in 1971, freezing all rents in the process. Many cities kept rent controls, eventually making them permanent, after wage and price regulations expired. Washington, D.C., retains regulations from this period, as do about 125 municipalities in New Jersey, including Newark, Jersey City, and Elizabeth.

During the Proposition 13 anti-tax campaign in 1978, activist Howard Jarvis promised California tenants that their rents would be reduced if the proposed state constitutional amendment lowered property taxes. In the midst of an inflationary period, though, this reduction failed to materialize, frustrating many tenants. Berkeley and Santa Monica, two smaller cities with radical political cultures, led California in imposing very strict rent ordinances. Political activists Tom Hayden and Jane Fonda, who lived in Santa Monica, then toured the state urging other cities to follow suit. Ten cities--including San Francisco, Los Angeles, San Jose, West Hollywood, and East Palo Alto--eventually adopted rent regulation, putting more than half the state's tenant population under rent ordinances. San Diego bucked the trend, rejecting rent control by a two-to-one vote in a 1985 referendum.

By the mid 1980s, more than 200 municipalities, encompassing about 20% of the nation's population, were living under rent control. However, this proved to be the high tide of the movement. As inflationary pressures eased, the agitation for rent control subsided.

Some cities have remained immune from the rent control temptation. Chicago, with one of the largest proportions of renters of any American city, never seriously has entertained proposals for it. Philadelphia, Baltimore, Cleveland, and other cities outside the Boston-New York-Washington axis never have experimented with this policy. In the major cities of the South and Southwest--Atlanta, New Orleans, Dallas, Houston, and Phoenix--rent control is not an issue. During the 1980s, 31 states as diverse as Idaho, Florida, Texas, and Vermont adopted laws and constitutional amendments forbidding it.

Once in place, though, rent control usually proves extremely difficult to undo. London and Paris still have controls that started as temporary measures during World War I. "Nelson's Third Law," the contention by economist Arthur Nelson that the worse a government regulation is, the harder it is to get rid of it, seems to apply here. Whatever distortions a regulation creates, some people will adjust to it and actually profit. These people then become a tightly focused interest group that fights tenaciously to retain the regulation. When this interest group is a tenant population that forms a near-majority of a municipality, the chances that rent control can be abolished through local political efforts are extremely small.

Nevertheless, it is proving vulnerable. On Jan. 1, 1997, Boston, Cambridge, and Brookline, Mass., became the first major American cities to abandon rent controls since 1950. The process was not altogether voluntary. The initiative came from a statewide campaign organized by Boston and Cambridge property owners, who put up a state ballot initiative banning rent control. The initiative that passed in 1994 required immediate removal of rent controls. Landlords, however, agreed to a two-year extension of controls for hardship cases.

The property owners argued that the costs of rent control were being borne by other taxpayers. When landlords start losing money because of low rents, they usually are able to get their property assessments lowered. This leads to a general decline in property values in a rent-controlled city and thus less revenue going to governments. In Massachusetts, property tax receipts are shared at the state level through a complicated formula that takes money from cities with high property tax bases and gives money to those with low ones. The owners of rental units argued that lower rents in Boston, Cambridge, and Brookline were being subsidized by higher property taxes elsewhere. Massachusetts voters found this argument persuasive and passed an initiative phasing out rent control by a 51-49 margin--even though it lost two-to-one in the state's three rent-controlled cities.

The aftermath has been encouraging to those who believe that rent control can be abolished without widespread disruption. Tenant activists had predicted huge rent increases, mass evictions, and a surge in the homeless population if the regulations were abandoned. None of this has occurred. Formerly regulated rents have risen, but construction of new apartments has begun for the first time in 25 years. Since the overwhelming majority of rental units were deregulated in 1995, and the rest by Jan. 1, 1997, the worst probably is over.

To be sure, there have been individual cases...

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