Effects of Rent Control Policies on Housing Supply and Quality

As the affordability crisis in the US deepens, discussions around rent control are gaining traction. President Biden's proposed rent control agenda seeks to address rising rents by capping increases at 5% annually. While this may appear to be a solution for tenants facing steep rent hikes, many economists argue that such measures could lead to unintended consequences, including a decline in housing quality and a reduced supply of rental units. This article examines the potential impact of rent control on both tenants and landlords, as well as the broader implications for the housing market. It also explores the underlying causes of the affordability crisis and the role that deficit spending and inflation have played in driving up housing costs. Understanding these factors is crucial for finding effective solutions to the housing challenges facing the country today.

Proposed Rent Control Agenda

President Biden is planning to propose a rent control agenda in response to the affordability crisis affecting the US, including North Alabama. While we usually focus on home purchases on this channel, it's important to note that the rental market is also struggling with affordability issues.

The president's plan aims to cap rent increases to help tenants stay in their homes without facing eviction or the need to relocate. The proposed structure would limit rent increases to 5% annually, and it’s set to last for two years. It’s worth noting that many policies start as temporary measures but can eventually become permanent laws. We’ll discuss whether we think this is a good or bad idea in just a moment, but that’s the basic concept behind it.

I believe the reasoning behind the two-year period is that politicians hope the housing supply will be resolved within that time frame. If you’ve been following this channel, you know that we are far from solving the housing supply issue in this country within the next year or even two years. It’s unlikely to be a short-term fix. The second aspect of the proposed bill is to exclude new construction from these rent control measures.

Rent Control: A Policy Widely Opposed by Economists

What do the experts say about this? If you've ever taken a business or economics class, you know that most economists are strongly opposed to rent control. In fact, 93% of economists believe rent control is a bad idea.

Swedish economist Assar Lindbeck famously said, "Rent control appears to be the most efficient technique presently known to destroy a city, except for bombing." Even Barack Obama's former top economic adviser, Jason Furman, has also spoken out against rent control. So, 93% of economists, including key figures like Furman, agree that rent control could be very harmful for this country.

Understanding the Downside of Rent Control

If you're a tenant, you might wonder why many economists think rent control is a bad idea. As a tenant, you're focused on controlling your expenses, and you may question why landlords feel the need to raise rents by more than 5% each year.

Studies show that rent control often leads to a decline in housing quality. This happens because landlords, facing limits on rent increases, don't have enough revenue to maintain properties at a high standard. Without the ability to recover the costs of repairs and upkeep, landlords may defer maintenance, leading to a gradual decline in the quality of housing over time.

Another major issue is reduced housing supply. If investors can't make a profit in a city with rent control, they'll invest elsewhere where they can get a better return. This can backfire, as it reduces the overall supply of rental housing. When supply decreases, prices often rise in the remaining non-controlled rental units, which is the opposite of what rent control aims to achieve.

From a tenant's perspective, it might be easy to blame landlords, but the reality is that rising costs due to inflation, increased insurance premiums, and higher taxes are putting pressure on landlords. If landlords can't cover these additional expenses and their investments stop generating cash flow, it becomes a problem not just for them, but for tenants as well.

Why Rents Increase

Why are rents increasing in the first place? The main reasons include remodeling and raising the quality standards for tenants in their apartments and homes. Labor costs are also rising, and supplies have become more expensive due to inflation. Insurance premiums are skyrocketing, especially in certain markets.

Property taxes are another factor. We’ve seen a 40% increase in home values, which has led to a significant rise in property taxes. This is all tied to inflation. In reality, home prices haven’t increased much relative to real money. Many people refer to dollar bills as money, but in truth, they are fiat currency, which is different. Dollar bills can be printed, while true money, like gold, has a fixed supply.

If you look at a chart comparing housing values to gold, you’ll see that housing values are actually on the lower or average side. They're not as high as you might expect, considering the current concerns about housing affordability. The rise in home prices is largely due to an increase in currency supply, but when measured against the true value of gold, home prices are at a normal, or even slightly below normal, level according to this chart.

The Affordability Crisis

We clearly have an affordability crisis in this country. How did we get here? The primary reasons are deficit spending and excessive currency printing, which have led to a misalignment between housing prices and affordability for most Americans. This is a significant challenge.

The proposed rent control policy seems to be more about politics and winning votes than providing a real solution. Many people don’t expect it to pass at this time. Affordability is a major concern for Americans as they head to the polls in November, and politicians are trying to capitalize on that, even if they can’t implement these policies right now. While it’s unlikely to pass nationwide, we may see rent control measures appearing in some larger cities. With 93% of economists opposing rent control, I believe it will have negative consequences for the cities that adopt it.

A Better Path Forward

Politicians often point fingers or try to appear as if they’re taking action, instead of addressing the root causes of the problem. The real responsibility lies in getting our deficit under control, stopping the overprinting of money to curb inflation, and creating policies that increase housing supply. Fixing the supply-demand imbalance will help improve affordability in the US.

The government has been raising taxes and inflating the costs of everything landlords purchase. It’s unfair to expect landlords to absorb these increased costs. Such an approach is not a win-win solution and will likely result in a reduced housing supply, lower housing quality, and ultimately higher prices.

While rent control might seem like a good idea on the surface, history shows it can be disastrous, as some economists have warned. The solution lies in creating policies that foster long-term supply growth in both the rental and purchase markets. This is where we need to focus, especially given the current deficit of about 6 million homes across the US.

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