Which Of The Following Is Not A Characteristic Of Rent Controls?

Steadily rising housing rents in many of the The states's large, productive cities have reignited the give-and-take whether to expand or enact hire control provisions. Under force per unit area to fight rising rents, state lawmakers in Illinois, Oregon, and California are because repealing laws that limit cities' abilities to pass or expand rent control. While rules and regulations of rent command vary from place to identify, most hire command consists of caps on cost increases within the elapsing of a tenancy, and sometimes beyond the duration of a tenancy, every bit well as restrictions on eviction.

New research examining how rent command affects tenants and housing markets offers insight into how rent command affects markets. While rent command appears to help current tenants in the brusque run, in the long run information technology decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhood.

A substantial body of economic research has used theoretical arguments to highlight the potential negative efficiency consequences to keeping rents below marketplace rates, going dorsum to Friedman and Stigler (1946). They argued that a cap on rents would pb landlords to sell their rental properties to owner occupants then that landlords could nevertheless earn the market price for their real estate. Rent command tin can also atomic number 82 to "mis-friction match" betwixt tenants and rental units. Once a tenant has secured a rent-controlled apartment, he may not choose to move in the future and give up his rent command, fifty-fifty if his housing needs modify (Suen 1980, Glaeser and Luttmer 2003, Sims 2011, Bulow and Klemperer 2012). This mis-allocation can lead to empty-nest households living in family-sized apartments and young families crammed into minor studios, clearly an inefficient resource allotment. Similarly, if rental rates are below marketplace rates, renters may choose to consume excessive quantities of housing (Olsen 1972, Gyourko and Linneman 1989). Hire command can as well lead to disuse of the rental housing stock; landlords may not invest in maintenance because they tin't recoup these investment by raising rents. (Downs 1988, Sims 2007).

Of course, rent command likewise offered potential benefits for tenants. For case, rent control provides insurance against rent increases, potentially limiting displacement. Affordable housing advocates argue that these insurance benefits are valuable to tenants. For instance, if long-term tenants accept developed neighborhood-specific majuscule, such as a network of friends and family, proximity to a job, or children enrolled in local schools, so tenants confront big risks from hire appreciation. In dissimilarity, individuals who have footling connection to any specific area can easily insure themselves against local rental price appreciation by moving to a cheaper location. Those invested in the local community are not able to use this type of "self-insurance" as hands, since they must give upward some or all of their neighborhood specific capital. Hire control tin provide these tenants with this blazon of insurance.

Until recently, there was footling data or natural experiments with which to assess the importance of these competing arguments, and to assess how rent controls affects tenants, landlords, or the broader housing market. But newly-bachelor housing-market place data spanning periods of dramatic change in hire control laws in Cambridge, MA and in San Francisco, CA have allowed economists to examine these questions empirically. While these studies do find support for the idea that existing tenants benefit from the insurance provided by rent control, they also discover the overall cost of providing that insurance is very large.

From December 1970 through 1994, all rental units in Cambridge built prior to 1969 were regulated by a hire control ordinance that placed strict caps on rent increases and tightly restricted the removal of units from the rental stock. The legislative intent of the rent control ordinance was to provide affordable rental housing, and at the eve of rent control's elimination in 1994, controlled units typically rented at 40-plus percent below the cost of nearby non-controlled backdrop. In November 1994, the Massachusetts electorate passed a referendum to eliminate rent control by a narrow 51–49 percent margin, with most lx percent of Cambridge residents voting to retain the hire control ordinance. This law change straight impacted properties previously subject to rent control, enabling landlords to begin to charge market rents.

Autor, Palmer, and Pathak (2014) (APP), studies the impact of this unexpected change and find that newly decontrolled properties' market values increased by 45 percentage. In improver to these direct furnishings of hire decontrol, APP find removing hire control has substantial indirect effects on neighboring properties, boosting their values too. Post-decontrol price appreciation was significantly greater at properties that had a larger fraction of formerly controlled neighbors: residential backdrop at the 75th percentile of rent control exposure gained approximately thirteen percent more in property value following decontrol than did properties at the 25th percentile of exposure. This differential appreciation of properties in rent command–intensive locations was every bit pronounced amid decontrolled and never-controlled units, suggesting that the effect of rent control had been to reduce the whole neighborhood's desirability.

The economic magnitude of the effect of rent control removal on the value of Cambridge'south housing stock is large, boosting property values by $ii.0 billion betwixt 1994 and 2004. Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly controlled units, while $1.7 billion is due to the indirect effect. These estimates imply that more than one-half of the capitalized price of hire command was borne by owners of never-controlled properties. Hire controlled properties create substantial negative externalities on the nearby housing market place, lowering the amenity value of these neighborhoods and making them less desirable places to alive. In short, the policy imposed $ii.0 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.

Diamond, McQuade, and Qian (2018) (DMQ) examine the consequences of an expansion of rent control on renters, landlords, and the housing market that resulted from a unique 1994 local San Francisco election initiative. In 1979, San Francisco imposed rent control on all standing buildings with five or more apartments. Rent control in San Francisco consists of regulated hire increases, linked to the CPI, inside a tenancy, but no price regulation between tenants. New construction was exempt from rent control, since legislators did not desire to discourage new development. Smaller multi-family buildings were exempt from this 1979 law modify since they were viewed as more "mom and pop" ventures, and did non have market power over rents.

This exemption was lifted by a 1994 San Francisco ballot initiative. Proponents of the initiative argued that small multi-family housing was at present primarily owned past large businesses and should face the same rent control of large multi-family unit housing. Since the initial 1979 hire control law only impacted properties built from 1979 and before, the removal of the minor multi-family exemption besides simply affected backdrop built 1979 and earlier. This led to a differential expansion in rent control in 1994 based on whether the small multi-family unit housing was congenital prior to or post 1980—a policy experiment where otherwise similar housing was treated differently past the law.

To examine rent control's furnishings on tenant migration and neighborhood choices, DMQ examine panel information that provides accost-level migration decisions and housing characteristics for the majority of adults living in San Francisco in the early 1990s. This allows them to define a treatment grouping of renters who lived in small multi-family unit flat buildings congenital prior to 1980 and a control group of renters living in modest multi-family housing congenital between 1980 and 1990. Their data allows them to follow each of these groups over time upward until the present, regardless of where they migrate.

Between 5 and ten years after the law change, the beneficiaries of rent command are 19 percentage less likely to have moved to a new accost, relative to the control grouping's migration rate. Further, impact on the likelihood of remaining in San Francisco as whole was the same, indicating a big share of the renters that hire command caused to remain at their 1994 address would have left San Francisco had they not been covered past hire command.

These effects are significantly stronger among older households and among households that have already spent a number of years at their address prior to treatment. This is consistent with the fact that both of these populations are likely to exist less mobile. Renters who don't need to move very oft are more than probable to observe information technology worthwhile to remain in their rent controlled flat for a long time, enabling them to accrue larger rent savings. Finally, DMQ find these effects are especially big for racial minorities, probable indicating that minorities faced greater displacement pressures in San Francisco than whites.

While expansion of rent control did foreclose some displacement among tenants living in San Francisco in 1994, the landlords of these properties responded to mitigate their rental losses in a number of ways. In practice, landlords have a few possible ways of removing tenants. Beginning, landlords could motility into the property themselves, known as motility-in eviction. Second, the Ellis Human activity allows landlords to adios tenants if they intend to remove the belongings from the rental market, for case, in gild to convert the units to condos. Finally, landlords are legally allowed to offer their tenants monetary compensation for leaving. In do, these transfer payments from landlords are common and tin be quite big.

DMQ find that rent-controlled buildings were 8 percentage points more likely to convert to a condo than buildings in the control group. Consistent with these findings, they find that rent control led to a 15 percentage bespeak reject in the number of renters living in treated buildings and a 25 per centum point reduction in the number of renters living in hire-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by converting existing structures to possessor-occupied condominium housing and by replacing existing structures with new construction.

This 15 percentage point reduction in the rental supply of pocket-sized multi-family housing likely led to rent increases in the long-run, consequent with standard economic theory. In this sense, rent control operated as a transfer betwixt the time to come renters of San Francisco (who would pay these college rents due to lower supply) to the renters living in San Francisco in 1994 (who benefited direct from lower rents). Furthermore, since many of the existing rental properties were converted to higher-end, owner-occupied condominium housing and new construction rentals, the passage of rent control ultimately led to a housing stock that caters to higher income individuals. DMQ find that this high-stop housing, developed in response to rent control, attracted residents with at least 18 pct higher income. Taking all of these points together, it appears rent command has actually contributed to the gentrification of San Francisco, the exact opposite of the policy's intended goal. Indeed, by simultaneously bringing in college income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city.

It may seem surprising that the expansion of rent control in San Francisco led to an upgraded housing stock, catering to high-income tastes, while the removal of rent control in Cambridge also pb to upgrading and value appreciation. To reconcile these effects, information technology is useful to think about which types of landlords would answer to a rent control expansion versus a rent control removal. In the case of rent control expansion, some landlords volition cull to recoup some of their losses by converting to condo or redeveloping their building to exempt information technology from rent command. However, other landlords may choose to accept the rent control regulation, and no longer perform maintenance on the edifice and allow it to disuse. In the hire control expansion instance, ane would see an increase in condo conversions and upgrades, driven by the landlords that chose to respond in this style. All the same, when rent control is removed, the landlords who ain the rent controlled buildings are the ones who didn't cull to catechumen to condo or redevelop in response to the initial passage of rent control. Indeed, ane would await this subset of landlords to choose to upgrade and invest in their properties once the rent command regulation is removed.

Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood. These results highlight that forcing landlords to provide insurance to tenants confronting rent increases tin can ultimately be counterproductive. If club desires to provide social insurance against rent increases, it may be less distortionary to offer this subsidy in the form of a authorities subsidy or taxation credit. This would remove landlords' incentives to subtract the housing supply and could provide households with the insurance they desire. A point of time to come inquiry would be to design an optimal social insurance program to insure renters against big rent increases.

The authors did non receive any fiscal support from whatsoever firm or person for this commodity or from whatever firm or person with a financial or political interest in this article. They are currently not an officer, managing director, or board member of any organization with an involvement in this article.