Rent control
Encyclopedia
Rent control refers to laws or ordinances that set price controls on the rent
ing of residential housing
. It functions as a price ceiling
.
Rent control exists in approximately 40 countries around the world. Rent control laws vary from one country to another, and may vary from one jurisdiction to another within some countries.
during World War I
, rents were "controlled" through the efforts of local rent anti-profiteering committees and public pressure. Between 1919 and 1924, a number of cities and states adopted rent and eviction control laws. Modern rent controls were first adopted in response to WWII
-era shortages, or following Richard Nixon
's 1971 wage and price controls. They remain in effect or have been reintroduced in some cities with large tenant
populations, such as New York City
, San Francisco, Los Angeles
, Washington, D.C.
, and Oakland, California
. Many smaller communities also have rent control, notably the California
cities of Santa Monica
, Berkeley
, and West Hollywood
, along with many small towns in New Jersey
. In recent years, rent control in some cities, such as Boston
and Cambridge, Massachusetts
, has been ended by state referenda
.
New York State
has had the longest history of rent controls
, since 1943. (Although only 51 communities currently participate in the state's program, New York City is one of them, and contains the vast majority of units covered by that program.) The period has been marked by the lack of an "adequate supply of decent... housing". The worsening in the rental market led to the enactment of the Rent Stabilization Law of 1969, which aimed to help increase the number of places put up for rent. The current system is very complicated, which is especially troublesome as most of the protected renters are elderly, and understanding the city's complex rent-control regulations is difficult even for experienced lawyers.
In California, municipal enactment of rent controls followed the statewide Proposition 13, which capped property tax
increases; however, a principal author of Prop 13, Howard Jarvis
, reportedly:
San Francisco community activist Calvin Welch has stated “Jarvis was the father of rent control."
California adopted the Ellis Act
giving municipalities the ability to regulate the removal of properties from rent control ordinance after the California Supreme Court ruled landlords could not be prevented from "going out of business" and withdrawing their properties from the rental market.http://www.beyondchron.org/news/index.php?itemid=1265
In some regions, rent control laws are more commonly adopted for mobile home
parks. Reasons given for these laws include residents owning their homes (and renting the land), the high cost of moving mobile homes, and the loss of home value when they are moved. California
, for example, has only 13 local apartment rent control laws but over 100 local mobile home rent control laws. No new mobile home parks have been built in California
since 1991.
or to a fraction thereof. San Francisco, for example, allows annual rent increases of 60% of the CPI, up to a maximum 7%.
Unregulated rent increases may be allowed when a tenant moves ("vacancy decontrol"). Rent-control laws that don't include vacancy decontrol are called strong rent-control laws. Such laws were in effect in five California
cities (West Hollywood
, Santa Monica
, Berkeley
, East Palo Alto
and Cotati
) in 1996, when AB 1164 (known as the Costa/Hawkins Rental Housing Act) made strong rent-control unenforceable in California
(except in special cases like mobile home parks
).
. With rent control, tenants can request that hidden defects, if they exist, be repaired to comply with building code
requirements, without fearing retaliatory rent increases. Rent control could thus compensate somewhat for inefficiencies of the housing market.
Income tax
codes often provide benefits for house
s, and rent control allows tenants to share in some of those benefits. In the United States
, the Internal Revenue Code
allows landlords to claim depreciation
deductions for rental property even while increasing rents. Homeowners may also deduct property tax
es and mortgage
interest
, and exclude capital gains, from their taxable income
. Tenants pay income tax
but get none of these housing-related deductions or exclusions. (Within the United States, some state and local income tax codes may provide comparatively modest credits, subject to income limits and other restrictions, but income tax in the U.S. is primarily federal.) By limiting the extent to which landlords can raise rent on purportedly depreciated property, rent control restores balance to tax benefits that would otherwise become concentrated primarily in the hands of landlords.
To promote investment in new housing stock, rent control laws often exempt new construction. For example, San Francisco's Rent Stabilization Ordinance exempts all units built after 1979. New York State generally exempts units built after 1974 anywhere in the state (although owners can agree to rent stabilization in exchange for tax benefits). In jurisdictions where rent stabilization has exempted new construction for so long, construction trends in more recent decades must be related to other factors (for example zoning
and other regulations related to urban planning
).
In older buildings, rent control may actually broaden incentives to renovate individual units: tenants may invest sweat equity
and their own money to improve their homes if they are protected from landlords trying to capture the added value, while vacancy decontrol preserves landlords' financial incentive to renovate vacant units because it allows them to re-rent at market value.
By allowing tenants who are meeting their obligations (including paying the legal rent) to remain in their homes instead of moving, rent control may reduce instability and associated external costs
. For example, in times of economic crisis, bank foreclosures have produced uneconomic vacancies including lost rental income, attractive nuisance
s, vandalism
, and increased crime adversely affecting local property values.
The economic arguments against rent control are often based on its oldest versions, i.e. strong rent control applied to virtually the entire rental housing supply; in many jurisdictions, rent control has since been reformed, for example adding vacancy decontrol and exempting new construction. "Second-generation rent controls are typically mild and so can be expected to have only modest effects on the housing market... As a result, expert opinion on the effects of modern rent control policies has become increasingly agnostic." Thus, arguments and surveys based on previous versions of rent control may no longer apply to current versions.
Rent control may influence housing investment either positively or negatively, depending on how it affects the local economy
and public services (both of which may benefit from retaining key worker
s), and tax
burden (which can increase if rent instability increases turnover among municipal employees), in addition to myriad other voter-driven regulations. If regulation
were the only factor driving investment in housing, and if regulation were a purely negative factor, then investment would be highest in the areas with the least regulation, for example desolate rural areas; in fact, the opposite is true, as the largest and most prosperous municipalities tend to have more regulation, including rent control.
s from imposing rent increases that cause key worker
s or vulnerable people to leave an area. Maintaining a supply of affordable housing is believed to be essential to sustaining the local society. Homeowners who support rent control point to the neighborhood instability caused by high or frequent rent increases and the effect on schools, youth groups, and community organizations when tenants move more frequently.
In certain instances the term "rent stabilization" is used instead of rent "control," for example, in some cities in California
, such as San Francisco. With rent stabilization and vacancy de-control landlords are free to set prices of vacant units at market prices, but once rented to a tenant, subsequent increases are capped based on the rate of inflation or a regulated percentage. This is considered a basic form of consumer protection
: once tenants move into a vacant unit at market rents they can afford and establish lives in these homes, they won't have to renegotiate. Without rent regulation, landlords can demand any amount and tenants must either pay or move. Thus, tenants can become vulnerable to arbitrary and extortionate increases above market value. For example, elderly or disabled tenants may be unable to move, and families risk disrupting children's educations by moving in the middle of a school year. Advocates insist that finding a new home is not a trivial matter, and tenants should have some assurance that they can maintain some stability in their housing situation.
Some property tax
measures also promote the societal goals of community stability and allowing people to remain in their homes even in times of inflation
. In California
, Proposition 13 generally caps real estate tax increases at 2% per year. Leading the campaign to enact Proposition 13, California
politician
Howard Jarvis
claimed that landlords would pass tax savings along to tenants; when most failed to do so, as would be predicted by the Law of Rent
, it became an argument for rent control, to allow tenants to share in the benefit of the property tax control.
argues that housing is a positive human right that equals or exceeds the property rights of landlords. For example, rent controls in Berkeley, California
were enacted with the stated goal of expropriating private property.
Without rent control, even tenants paying full rent can be forced unexpectedly from their homes through no fault of their own. For example, if their landlords mortgaged
excessively and the property goes into foreclosure
, tenants may be evicted even in the middle of a lease. In the U.S., federal legislation enacted in 2008 and 2009 may protect some tenants from foreclosure evictions, e.g. if the loan is owned by the Federal National Mortgage Association
, but others still face eviction. Many believe, "People who work hard and play by the rules should not find themselves out on the street when things turn sour through no fault of their own."
's Foreign Minister Nguyen Co Thach
said, "The Americans couldn't destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy".
Writing in 1946, economists Milton Friedman
and George J. Stigler said: "Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building."
Although those paying lower than market rent are "protected," most economists argue that newer residents actually pay higher rent due to reduced supply.
In a 1992 stratified
, random survey of 464 economists and economics graduate student
s in the US, 76.3% generally agreed that "[a] ceiling on rents reduces the quantity and quality of housing available."
and Thomas Sowell
, have criticized rent regulation as poor economics which, despite its good intentions, leads to the creation of less housing, raises prices, and increases urban blight. A survey of articles on EconLit regarding rent control finds that economists consistently and predominantly agree that rent control does more harm than good. The survey encompasses particular issues, such as housing availability, maintenance and housing quality, rental rates, political and administrative costs, and redistribution.
Price ceilings can create shortages and reduce quality when they are less than the equilibrium price
. By capping the price of housing, rent control can increase demand
and reduce available supply
, causing a shortage. It is argued that rent control also reduces the quality of available housing, deters investment, and raises rents on tenants who are excluded from its protections (for example, in jurisdictions with vacancy decontrol, tenants who move or arrive later). While property owners are restricted in the rents they charge, they are less willing to construct more housing. Since supply is low, landlords worry less about tenants leaving and have little incentive to maintain the property. For example, unless owners can reasonably expect that punitive action will be taken against them, they might let building maintenance deteriorate in order to mitigate the lower rental income. People moving into the city have difficulty finding housing because of the shortage created by rent control.
When housing is limited, it must be rationed in some way. After the San Francisco earthquake of 1906, the number of houses relative to the amount of people who needed housing fell by 40%, but a shortage was avoided because the market price mechanism effectively rationed housing and provided an incentive for new housing to be built. In 1946, however, a far less extreme situation was dealt with via chance and favouritehood.
, a leading libertarian
thinktank, have argued that rent control laws are a textbook example of the problems that arise in trying to artificially reduce prices. The natural consequence in a free-market economy is a reduction in supply and consequent shortages. Tucker has argued that rent control has the perverse effect of creating less affordable housing. By artificially lowering rents on some units with long term tenants, even in some cases forcing landlords to maintain that at a loss, rent control forces landlords to recoup this lost income on newly vacated units, thus increasing rent for new tenants beyond what is necessary. They also argue that, by creating a disincentive to move from units where they enjoy artificially low rent, such rent regulation will actually limit individuals’ mobility, and thus either prevent them from taking advantage of employment opportunities that may require relocation, or force them into longer commute times, with all of the financial, environmental, and personal impacts thus created. Such economists point to policies such as housing vouchers as both more equitable and more successful in ensuring housing for poorer renters, without many of the damaging externalities
created by imposing price regulation on landlords.
Furthermore, rent control may not be effective at lowering rents in the area under control. A rent control board or regulatory agency may be captured or politically influenced by the land owners or "landlords", and may be able to influence the regulatory process or "game the system" to the extent that the rent-controlled increases are more than what they would have been in the free market without the rent control law.
Areas with rent-controlled housing are blamed for difficulty of finding vacant housing and the resulting power imbalance between landlords and tenants as tenants may "game the system" to impose onerous conditions on the landlord, forcing long cycles of judicial action, leading to considerable economic hardship for the landlord. Likewise, new tenants have serious difficulty finding housing, so they are seriously disadvantaged if they must move. As a result, landlords can impose numerous conditions and requirements.
In the case of mobile home rent control, that state is actually transferring the value of the property from the owner of the land to the owner of the mobile home. Thus, mobile homes in certain highly desirable locations in California
sell for an excess of a million dollars, even as the owner of the site which allows for that high price enjoys none of that increase in value as it is realized entirely by the owner of the mobile home.
In jurisdictions that do not already have rent control, introducing it may reduce the resale value of affected property. The benefits of rent control can accrue disproportionately to wealthy and well-connected tenants. Affordable housing can be more efficiently made available to the poor and middle income through rent subsidies, making use of the free market
for distribution. Such programs allow the community to better target those requiring assistance, have a less distorting effect on rents and development, and distribute affordable housing
cost over the community instead of unfairly burdening property owners in the effort to achieve a social good.
against any group they dislike if they believe there is a surplus of prospective tenants. Jurisdictions that implement rent controls may have to pass laws in response such as those forbidding landlords from compelling new tenants to hire the landlord's moving company. In some areas with especially strict rent controls, landlords may require "key money
" (a non-refundable deposit). Demanding key money is illegal in most of North America
, but since the landlord will invariably demand it in cash
, it is very difficult to trace and nearly impossible to prove in court. Rent control enforcement may likewise create considerable bureaucratic hurdles for the repair and improvement of properties, creating a disincentive for landlords to carry out such actions.
People
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
ing of residential housing
Apartment
An apartment or flat is a self-contained housing unit that occupies only part of a building...
. It functions as a price ceiling
Price ceiling
A price ceiling is a government-imposed limit on the price charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. However, a price ceiling can cause problems if imposed for a long period without controlled...
.
Rent control exists in approximately 40 countries around the world. Rent control laws vary from one country to another, and may vary from one jurisdiction to another within some countries.
History in the United States
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
during World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
, rents were "controlled" through the efforts of local rent anti-profiteering committees and public pressure. Between 1919 and 1924, a number of cities and states adopted rent and eviction control laws. Modern rent controls were first adopted in response to WWII
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
-era shortages, or following Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
's 1971 wage and price controls. They remain in effect or have been reintroduced in some cities with large tenant
Leasehold estate
A leasehold estate is an ownership of a temporary right to land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord....
populations, such as New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
, San Francisco, Los Angeles
Los Ángeles
Los Ángeles is the capital of the province of Biobío, in the commune of the same name, in Region VIII , in the center-south of Chile. It is located between the Laja and Biobío rivers. The population is 123,445 inhabitants...
, Washington, D.C.
Washington, D.C.
Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
, and Oakland, California
Oakland, California
Oakland is a major West Coast port city on San Francisco Bay in the U.S. state of California. It is the eighth-largest city in the state with a 2010 population of 390,724...
. Many smaller communities also have rent control, notably the California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
cities of Santa Monica
Santa Monica, California
Santa Monica is a beachfront city in western Los Angeles County, California, US. Situated on Santa Monica Bay, it is surrounded on three sides by the city of Los Angeles — Pacific Palisades on the northwest, Brentwood on the north, West Los Angeles on the northeast, Mar Vista on the east, and...
, Berkeley
Berkeley, California
Berkeley is a city on the east shore of the San Francisco Bay in Northern California, United States. Its neighbors to the south are the cities of Oakland and Emeryville. To the north is the city of Albany and the unincorporated community of Kensington...
, and West Hollywood
West Hollywood, California
West Hollywood, a city of Los Angeles County, California, was incorporated on November 29, 1984, with a population of 34,399 at the 2010 census. 41% of the city's population is made up of gay men according to a 2002 demographic analysis by Sara Kocher Consulting for the City of West Hollywood...
, along with many small towns in New Jersey
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
. In recent years, rent control in some cities, such as Boston
Boston
Boston is the capital of and largest city in Massachusetts, and is one of the oldest cities in the United States. The largest city in New England, Boston is regarded as the unofficial "Capital of New England" for its economic and cultural impact on the entire New England region. The city proper had...
and Cambridge, Massachusetts
Cambridge, Massachusetts
Cambridge is a city in Middlesex County, Massachusetts, United States, in the Greater Boston area. It was named in honor of the University of Cambridge in England, an important center of the Puritan theology embraced by the town's founders. Cambridge is home to two of the world's most prominent...
, has been ended by state referenda
Referendum
A referendum is a direct vote in which an entire electorate is asked to either accept or reject a particular proposal. This may result in the adoption of a new constitution, a constitutional amendment, a law, the recall of an elected official or simply a specific government policy. It is a form of...
.
New York State
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
has had the longest history of rent controls
Rent control in New York
Rent control in New York refers to rent control and rent stabilization programs in New York State, USA. Each city may choose whether to participate or not, and , 51 municipalities participated in the program, including Albany, Buffalo and most famously, New York City, where over one million...
, since 1943. (Although only 51 communities currently participate in the state's program, New York City is one of them, and contains the vast majority of units covered by that program.) The period has been marked by the lack of an "adequate supply of decent... housing". The worsening in the rental market led to the enactment of the Rent Stabilization Law of 1969, which aimed to help increase the number of places put up for rent. The current system is very complicated, which is especially troublesome as most of the protected renters are elderly, and understanding the city's complex rent-control regulations is difficult even for experienced lawyers.
In California, municipal enactment of rent controls followed the statewide Proposition 13, which capped property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
increases; however, a principal author of Prop 13, Howard Jarvis
Howard Jarvis
Howard Arnold Jarvis was an American businessman, lobbyist, and politician. He was an anti-tax activist responsible for passage of California's Proposition 13 in 1978.-Early life and education:...
, reportedly:
- "was at the time employed by the Los Angeles Apartment Owners Association as a lobbyist. In a fundraising letter to the landlords that employed him, he claimed, 'We are the biggest losers' if Prop. 13 fails. (Not to mention: The Yes on 13 headquarters were located in a Los Angeles Apartment Owners Association office.) He tried to persuade renters to vote for Prop. 13 by saying it would drive down rents, by decreasing the property taxes that landlords paid. Post-13 news reports found rents weren’t going down, despite Jarvis’s promises – apparently landlords were just pocketing their property tax savings. That revelation prompted many of the rent controls still in effect around California."
San Francisco community activist Calvin Welch has stated “Jarvis was the father of rent control."
California adopted the Ellis Act
Ellis Act
The Ellis Act is a provision in California Law, which provides landlords in California with a legal way to "go out of business" short of selling the property to another landlord...
giving municipalities the ability to regulate the removal of properties from rent control ordinance after the California Supreme Court ruled landlords could not be prevented from "going out of business" and withdrawing their properties from the rental market.http://www.beyondchron.org/news/index.php?itemid=1265
In some regions, rent control laws are more commonly adopted for mobile home
Mobile home
Mobile homes or static caravans are prefabricated homes built in factories, rather than on site, and then taken to the place where they will be occupied...
parks. Reasons given for these laws include residents owning their homes (and renting the land), the high cost of moving mobile homes, and the loss of home value when they are moved. California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
, for example, has only 13 local apartment rent control laws but over 100 local mobile home rent control laws. No new mobile home parks have been built in California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
since 1991.
Purpose and scope
Although the political debate over rent control is far-reaching, as described below, the purposes and provisions of such laws are intended to be limited in scope. They define which rental units are affected, and may have only larger or older rental complexes covered by the law. The frequency and degree of rent increases are limited, usually to the rate of inflation defined by the Consumer Price IndexConsumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
or to a fraction thereof. San Francisco, for example, allows annual rent increases of 60% of the CPI, up to a maximum 7%.
Unregulated rent increases may be allowed when a tenant moves ("vacancy decontrol"). Rent-control laws that don't include vacancy decontrol are called strong rent-control laws. Such laws were in effect in five California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
cities (West Hollywood
West Hollywood, California
West Hollywood, a city of Los Angeles County, California, was incorporated on November 29, 1984, with a population of 34,399 at the 2010 census. 41% of the city's population is made up of gay men according to a 2002 demographic analysis by Sara Kocher Consulting for the City of West Hollywood...
, Santa Monica
Santa Monica, California
Santa Monica is a beachfront city in western Los Angeles County, California, US. Situated on Santa Monica Bay, it is surrounded on three sides by the city of Los Angeles — Pacific Palisades on the northwest, Brentwood on the north, West Los Angeles on the northeast, Mar Vista on the east, and...
, Berkeley
Berkeley, California
Berkeley is a city on the east shore of the San Francisco Bay in Northern California, United States. Its neighbors to the south are the cities of Oakland and Emeryville. To the north is the city of Albany and the unincorporated community of Kensington...
, East Palo Alto
East Palo Alto, California
East Palo Alto is a city in San Mateo County, California, United States.-Overview:As of the 2010 census, the population of East Palo Alto was 28,155. It is situated on the San Francisco Peninsula, roughly halfway between the cities of San Francisco and San Jose...
and Cotati
Cotati, California
Cotati is an incorporated city in Sonoma County, California, U.S.A., located about north of San Francisco in the 101 corridor between Rohnert Park and Petaluma....
) in 1996, when AB 1164 (known as the Costa/Hawkins Rental Housing Act) made strong rent-control unenforceable in California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
(except in special cases like mobile home parks
Trailer park
A trailer park is a semi-permanent or permanent area for mobile homes or travel trailers. The main reasons for living in such trailer parks are the often lower cost compared to other housing, and the ability to move to a new area more quickly and easily, for example when changing jobs to another...
).
Economic
The rental-accommodation market suffers from information asymmetries and high transaction costs. Typically, a landlord has more information about a home than a prospective tenant can reasonably detect. Moreover, once the tenant has moved in, the costs of moving again are very high. Unscrupulous landlords could conceal defects and, if the tenant complains, threaten to raise the rent at the end of the leaseLease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
. With rent control, tenants can request that hidden defects, if they exist, be repaired to comply with building code
Building code
A building code, or building control, is a set of rules that specify the minimum acceptable level of safety for constructed objects such as buildings and nonbuilding structures. The main purpose of building codes are to protect public health, safety and general welfare as they relate to the...
requirements, without fearing retaliatory rent increases. Rent control could thus compensate somewhat for inefficiencies of the housing market.
Income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
codes often provide benefits for house
House
A house is a building or structure that has the ability to be occupied for dwelling by human beings or other creatures. The term house includes many kinds of different dwellings ranging from rudimentary huts of nomadic tribes to free standing individual structures...
s, and rent control allows tenants to share in some of those benefits. In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
allows landlords to claim depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
deductions for rental property even while increasing rents. Homeowners may also deduct property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
es and mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
, and exclude capital gains, from their taxable income
Taxable income
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...
. Tenants pay income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
but get none of these housing-related deductions or exclusions. (Within the United States, some state and local income tax codes may provide comparatively modest credits, subject to income limits and other restrictions, but income tax in the U.S. is primarily federal.) By limiting the extent to which landlords can raise rent on purportedly depreciated property, rent control restores balance to tax benefits that would otherwise become concentrated primarily in the hands of landlords.
To promote investment in new housing stock, rent control laws often exempt new construction. For example, San Francisco's Rent Stabilization Ordinance exempts all units built after 1979. New York State generally exempts units built after 1974 anywhere in the state (although owners can agree to rent stabilization in exchange for tax benefits). In jurisdictions where rent stabilization has exempted new construction for so long, construction trends in more recent decades must be related to other factors (for example zoning
Zoning
Zoning is a device of land use planning used by local governments in most developed countries. The word is derived from the practice of designating permitted uses of land based on mapped zones which separate one set of land uses from another...
and other regulations related to urban planning
Urban planning
Urban planning incorporates areas such as economics, design, ecology, sociology, geography, law, political science, and statistics to guide and ensure the orderly development of settlements and communities....
).
In older buildings, rent control may actually broaden incentives to renovate individual units: tenants may invest sweat equity
Sweat equity
Sweat equity is a term that refers to a party's contribution to a project in the form of effort --- as opposed to financial equity, which is a contribution in the form of capital....
and their own money to improve their homes if they are protected from landlords trying to capture the added value, while vacancy decontrol preserves landlords' financial incentive to renovate vacant units because it allows them to re-rent at market value.
By allowing tenants who are meeting their obligations (including paying the legal rent) to remain in their homes instead of moving, rent control may reduce instability and associated external costs
Externality
In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...
. For example, in times of economic crisis, bank foreclosures have produced uneconomic vacancies including lost rental income, attractive nuisance
Attractive Nuisance
Attractive Nuisance, released in 2000, is The Loud Family's fifth full length album. It featured the same line-up as on 1998's Days for Days...
s, vandalism
Vandalism
Vandalism is the behaviour attributed originally to the Vandals, by the Romans, in respect of culture: ruthless destruction or spoiling of anything beautiful or venerable...
, and increased crime adversely affecting local property values.
The economic arguments against rent control are often based on its oldest versions, i.e. strong rent control applied to virtually the entire rental housing supply; in many jurisdictions, rent control has since been reformed, for example adding vacancy decontrol and exempting new construction. "Second-generation rent controls are typically mild and so can be expected to have only modest effects on the housing market... As a result, expert opinion on the effects of modern rent control policies has become increasingly agnostic." Thus, arguments and surveys based on previous versions of rent control may no longer apply to current versions.
Rent control may influence housing investment either positively or negatively, depending on how it affects the local economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
and public services (both of which may benefit from retaining key worker
Key worker
A key worker is a public sector employee who is considered to provide an essential service. The term is often used in the United Kingdom in the context of those essential workers who may find it difficult to buy property in the area where they work....
s), and tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
burden (which can increase if rent instability increases turnover among municipal employees), in addition to myriad other voter-driven regulations. If regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
were the only factor driving investment in housing, and if regulation were a purely negative factor, then investment would be highest in the areas with the least regulation, for example desolate rural areas; in fact, the opposite is true, as the largest and most prosperous municipalities tend to have more regulation, including rent control.
Social
Rent control is considered necessary by the state of New York to protect the public and to prevent landlordLandlord
A landlord is the owner of a house, apartment, condominium, or real estate which is rented or leased to an individual or business, who is called a tenant . When a juristic person is in this position, the term landlord is used. Other terms include lessor and owner...
s from imposing rent increases that cause key worker
Key worker
A key worker is a public sector employee who is considered to provide an essential service. The term is often used in the United Kingdom in the context of those essential workers who may find it difficult to buy property in the area where they work....
s or vulnerable people to leave an area. Maintaining a supply of affordable housing is believed to be essential to sustaining the local society. Homeowners who support rent control point to the neighborhood instability caused by high or frequent rent increases and the effect on schools, youth groups, and community organizations when tenants move more frequently.
In certain instances the term "rent stabilization" is used instead of rent "control," for example, in some cities in California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
, such as San Francisco. With rent stabilization and vacancy de-control landlords are free to set prices of vacant units at market prices, but once rented to a tenant, subsequent increases are capped based on the rate of inflation or a regulated percentage. This is considered a basic form of consumer protection
Consumer protection
Consumer protection laws designed to ensure fair trade competition and the free flow of truthful information in the marketplace. The laws are designed to prevent businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors and may provide additional...
: once tenants move into a vacant unit at market rents they can afford and establish lives in these homes, they won't have to renegotiate. Without rent regulation, landlords can demand any amount and tenants must either pay or move. Thus, tenants can become vulnerable to arbitrary and extortionate increases above market value. For example, elderly or disabled tenants may be unable to move, and families risk disrupting children's educations by moving in the middle of a school year. Advocates insist that finding a new home is not a trivial matter, and tenants should have some assurance that they can maintain some stability in their housing situation.
Some property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
measures also promote the societal goals of community stability and allowing people to remain in their homes even in times of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. In California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
, Proposition 13 generally caps real estate tax increases at 2% per year. Leading the campaign to enact Proposition 13, California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
politician
Politician
A politician, political leader, or political figure is an individual who is involved in influencing public policy and decision making...
Howard Jarvis
Howard Jarvis
Howard Arnold Jarvis was an American businessman, lobbyist, and politician. He was an anti-tax activist responsible for passage of California's Proposition 13 in 1978.-Early life and education:...
claimed that landlords would pass tax savings along to tenants; when most failed to do so, as would be predicted by the Law of Rent
Law of Rent
The law of rent was formulated by David Ricardo around 1809, and this is the origin of the term Ricardian rent. Ricardo's formulation of the law was the first clear exposition of the source and magnitude of land rents, and is among the most important and firmly established principles of economics. ...
, it became an argument for rent control, to allow tenants to share in the benefit of the property tax control.
Moral
The Socialist InternationalSocialist International
The Socialist International is a worldwide organization of democratic socialist, social democratic and labour political parties. It was formed in 1951.- History :...
argues that housing is a positive human right that equals or exceeds the property rights of landlords. For example, rent controls in Berkeley, California
Berkeley, California
Berkeley is a city on the east shore of the San Francisco Bay in Northern California, United States. Its neighbors to the south are the cities of Oakland and Emeryville. To the north is the city of Albany and the unincorporated community of Kensington...
were enacted with the stated goal of expropriating private property.
Without rent control, even tenants paying full rent can be forced unexpectedly from their homes through no fault of their own. For example, if their landlords mortgaged
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
excessively and the property goes into foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
, tenants may be evicted even in the middle of a lease. In the U.S., federal legislation enacted in 2008 and 2009 may protect some tenants from foreclosure evictions, e.g. if the loan is owned by the Federal National Mortgage Association
Federal National Mortgage Association
The Federal National Mortgage Association , commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise , though it has been a publicly traded company since 1968...
, but others still face eviction. Many believe, "People who work hard and play by the rules should not find themselves out on the street when things turn sour through no fault of their own."
Arguments against
In 1989, VietnamVietnam
Vietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...
's Foreign Minister Nguyen Co Thach
Nguyễn Cơ Thạch
Nguyễn Cơ Thạch was a Vietnamese revolutionary, diplomat, and politician. He was Foreign Minister of Vietnam from February 1980 to July 1991.Thạch was seen as pragmatic and influential ....
said, "The Americans couldn't destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy".
Writing in 1946, economists Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
and George J. Stigler said: "Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building."
Although those paying lower than market rent are "protected," most economists argue that newer residents actually pay higher rent due to reduced supply.
In a 1992 stratified
Stratified sampling
In statistics, stratified sampling is a method of sampling from a population.In statistical surveys, when subpopulations within an overall population vary, it is advantageous to sample each subpopulation independently. Stratification is the process of dividing members of the population into...
, random survey of 464 economists and economics graduate student
Graduate school
A graduate school is a school that awards advanced academic degrees with the general requirement that students must have earned a previous undergraduate degree...
s in the US, 76.3% generally agreed that "[a] ceiling on rents reduces the quantity and quality of housing available."
Economic
Most economists believe that a ceiling on rents reduces the quality and quantity of housing available. This view is based on analysis of empirical evidence as well as the understanding generated by theoretical models. Economists from differing sides of the political spectrum, such as Paul KrugmanPaul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
and Thomas Sowell
Thomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...
, have criticized rent regulation as poor economics which, despite its good intentions, leads to the creation of less housing, raises prices, and increases urban blight. A survey of articles on EconLit regarding rent control finds that economists consistently and predominantly agree that rent control does more harm than good. The survey encompasses particular issues, such as housing availability, maintenance and housing quality, rental rates, political and administrative costs, and redistribution.
Price ceilings can create shortages and reduce quality when they are less than the equilibrium price
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
. By capping the price of housing, rent control can increase demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
and reduce available supply
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
, causing a shortage. It is argued that rent control also reduces the quality of available housing, deters investment, and raises rents on tenants who are excluded from its protections (for example, in jurisdictions with vacancy decontrol, tenants who move or arrive later). While property owners are restricted in the rents they charge, they are less willing to construct more housing. Since supply is low, landlords worry less about tenants leaving and have little incentive to maintain the property. For example, unless owners can reasonably expect that punitive action will be taken against them, they might let building maintenance deteriorate in order to mitigate the lower rental income. People moving into the city have difficulty finding housing because of the shortage created by rent control.
When housing is limited, it must be rationed in some way. After the San Francisco earthquake of 1906, the number of houses relative to the amount of people who needed housing fell by 40%, but a shortage was avoided because the market price mechanism effectively rationed housing and provided an incentive for new housing to be built. In 1946, however, a far less extreme situation was dealt with via chance and favouritehood.
Social
Some, such as William Tucker of the Cato InstituteCato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
, a leading libertarian
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
thinktank, have argued that rent control laws are a textbook example of the problems that arise in trying to artificially reduce prices. The natural consequence in a free-market economy is a reduction in supply and consequent shortages. Tucker has argued that rent control has the perverse effect of creating less affordable housing. By artificially lowering rents on some units with long term tenants, even in some cases forcing landlords to maintain that at a loss, rent control forces landlords to recoup this lost income on newly vacated units, thus increasing rent for new tenants beyond what is necessary. They also argue that, by creating a disincentive to move from units where they enjoy artificially low rent, such rent regulation will actually limit individuals’ mobility, and thus either prevent them from taking advantage of employment opportunities that may require relocation, or force them into longer commute times, with all of the financial, environmental, and personal impacts thus created. Such economists point to policies such as housing vouchers as both more equitable and more successful in ensuring housing for poorer renters, without many of the damaging externalities
Externality
In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...
created by imposing price regulation on landlords.
Furthermore, rent control may not be effective at lowering rents in the area under control. A rent control board or regulatory agency may be captured or politically influenced by the land owners or "landlords", and may be able to influence the regulatory process or "game the system" to the extent that the rent-controlled increases are more than what they would have been in the free market without the rent control law.
Areas with rent-controlled housing are blamed for difficulty of finding vacant housing and the resulting power imbalance between landlords and tenants as tenants may "game the system" to impose onerous conditions on the landlord, forcing long cycles of judicial action, leading to considerable economic hardship for the landlord. Likewise, new tenants have serious difficulty finding housing, so they are seriously disadvantaged if they must move. As a result, landlords can impose numerous conditions and requirements.
In the case of mobile home rent control, that state is actually transferring the value of the property from the owner of the land to the owner of the mobile home. Thus, mobile homes in certain highly desirable locations in California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
sell for an excess of a million dollars, even as the owner of the site which allows for that high price enjoys none of that increase in value as it is realized entirely by the owner of the mobile home.
In jurisdictions that do not already have rent control, introducing it may reduce the resale value of affected property. The benefits of rent control can accrue disproportionately to wealthy and well-connected tenants. Affordable housing can be more efficiently made available to the poor and middle income through rent subsidies, making use of the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
for distribution. Such programs allow the community to better target those requiring assistance, have a less distorting effect on rents and development, and distribute affordable housing
Affordable housing
Affordable housing is a term used to describe dwelling units whose total housing costs are deemed "affordable" to those that have a median income. Although the term is often applied to rental housing that is within the financial means of those in the lower income ranges of a geographical area, the...
cost over the community instead of unfairly burdening property owners in the effort to achieve a social good.
Rights
Rent control restricts the property rights of the property owners, as it limits what they may do with their property.Enforcement issues
Some landlords use extralegal means to evade rent controls and attempt to take advantage of housing conditions. Some landlords may step up discriminationDiscrimination
Discrimination is the prejudicial treatment of an individual based on their membership in a certain group or category. It involves the actual behaviors towards groups such as excluding or restricting members of one group from opportunities that are available to another group. The term began to be...
against any group they dislike if they believe there is a surplus of prospective tenants. Jurisdictions that implement rent controls may have to pass laws in response such as those forbidding landlords from compelling new tenants to hire the landlord's moving company. In some areas with especially strict rent controls, landlords may require "key money
Key money
The term "key money" is used differently in different parts of the world. It sometimes means money paid to an existing tenant who assigns a lease to a new tenant where the rent is below market. It sometimes means a bribe to a landlord...
" (a non-refundable deposit). Demanding key money is illegal in most of North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
, but since the landlord will invariably demand it in cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
, it is very difficult to trace and nearly impossible to prove in court. Rent control enforcement may likewise create considerable bureaucratic hurdles for the repair and improvement of properties, creating a disincentive for landlords to carry out such actions.
See also
- Affordable housingAffordable housingAffordable housing is a term used to describe dwelling units whose total housing costs are deemed "affordable" to those that have a median income. Although the term is often applied to rental housing that is within the financial means of those in the lower income ranges of a geographical area, the...
- Price ceilingPrice ceilingA price ceiling is a government-imposed limit on the price charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. However, a price ceiling can cause problems if imposed for a long period without controlled...
- Just cause eviction controls
- Subsidized housing
- Rent control in New YorkRent control in New YorkRent control in New York refers to rent control and rent stabilization programs in New York State, USA. Each city may choose whether to participate or not, and , 51 municipalities participated in the program, including Albany, Buffalo and most famously, New York City, where over one million...
People
- Don A. Allen, member of the California State Assembly and of the Los Angeles City Council in the 1940s and 1950s, urged lifting of wartime rent controls in Los Angeles
Further reading
- Baar, Kenneth K. (1983). "Guidelines for Drafting Rent Control Laws: Lessons of a Decade." Rutgers Law Review, Vol. 35 No. 4 (Summer 1983).
- Baar, Kenneth K. (1992). "The Right to Sell the “Im”mobile Manufactured Home in Its Rent Controlled Space in the “Im”mobile Home Park: Valid Regulation or Unconstitutional Taking?" The Urban Lawyer, Vol. 24 pp. 157–221.
- Downs, Anthony (1996). A Reevaluation of Residential Rent Controls. Washington, D.C. : Urban Land Institute, ISBN 0874208017.
- Friedman, Milton, and George J. Stigler (1946). Roofs or Ceilings? The Current Housing Problem. Irvington-on-Hudson, N.Y.: Foundation for Economic Education.
- Gilderbloom, John I., editor (1981). Rent Control: A Source Book. Center for Policy Alternatives; 3rd edition, June 1, 1981. ISBN 0-938806-01-7.
- Keating, Dennis, editor (1998). Rent Control: Regulation and the Housing Market. Center for Urban Policy Research, ISBN 0-88285-159-4.
- McDonough, Cristina (2007). "Rent Control and Rent Stabilization as Forms of Regulatory and Physical Taking." Boston College Environmental Affairs Law Review, Vol. 34 pp. 361–85.
- Niebanck, Paul L., editor (1986). The Rent Control Debate. University of North Carolina Press, ISBN 0-8078-1670-1.
- Tucker, William (1991). Zoning, Rent Control and Affordable Housing. ISBN 0-932790-78-X.
- Turner, Margery Austin (1990). Housing Market Impacts of Rent Control. Washington, D.C.: Urban Institute Press, ISBN 0877664439.
External links
- Rent Control Around the World: Pros and Cons
- California cities with rent control
- additional California cities with rent regulation
- New York communities with rent control
- Pro-rent control article from tenant.net
- Pro-Rent Control 60+ year history about Ontario Canada
- New York Magazine article on Rent Control including interviews with tenants
- Rent Control in the New Millennium by Dennis Keating
- Almanac of Policy Issues - Rent Controls
- Rent Controls and Housing Investment
- Pro-rent control article from Dollars & Sense magazine
- Four Thousand Years of Price Control - Mises Institute
- Rent Stabilized Apartments Go Up Again! - Best Rents NYC