Summary: Rent control has been in force in a number
of major American cities for many decades. The best-known example
is New York, which still retains rent controls leftover from the temporary
price controls imposed during World War II. But this policy, meant
to assist poorer residents, harms far more citizens than it helps,
benefits the well-connected and the better-off, and limits the freedom
of all citizens.
A look at the classified ads in rent-controlled cities reveals that
very few moderately priced rental units are actually available. Most
advertised units are priced well above the actual median rent. Yet
in cities without controls, such as Chicago, moderately priced units
are universally available.
In many cities, policymakers understand that controls drive out residents
and businesses. Thus many exempt significant portions of housing from
controls, creating shadow markets. Yet as controls hold down rents
for some units, costs for all other rental housing skyrockets. And
tenants in rent-controlled units fear moving to more desirable neighborhoods
since the only units available for rent are very high-priced. Rent
fraud and intra-tenant litigation is rampant.
But the trend in recent years has been toward removal of rent control.
The repeal of controls in Massachusetts, for example, did not lead
to the widespread evictions and hardships that self-interested parties
predicted. The lesson for the rest of the country is that rent control
is a policy that was never empirically justified and should be scrapped.
The Rush to Rent Control
Rent control has been in force in a number of major American cities
for many decades. The best known example is New York, which still
retains rent controls leftover from the temporary wartime price controls
imposed during World War II.
During the 1970s it appeared that rent control might
be the wave of the future. Boston and several of its
surrounding suburbs imposed rent control during the
inflationary years of 1969 to 1971. President Richard
Nixon imposed wage and price controls in 1971 on the
entire country, freezing all rents in the process. Many
cities retained rent controls, eventually making them
permanent, after wage and price controls expired.
Washington, D.C., still 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. Yet in
the midst of an inflationary period, 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 control 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 control ordinances. One
major California city, San Diego, bucked the trend,
rejecting rent control by a 2-to-1 vote in a 1985
referendum.
By the mid-1980s, more than 200 separate
municipalities nationwide, encompassing about 20 percent
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 sensibly immune from the rent control temptation.
Chicago, with one of the largest proportions of renters in any American
city, has always been wary of the coasts and is generally immune to
their real estate frenzies. Philadelphia, Baltimore, Cleveland, and
other eastern cities outside the Boston-New York-Washington axis have
never experimented with this policy. In the major cities of the South
and Southwest--Atlanta, New Orleans, Dallas, Houston, Phoenix--rent
control is simply not open for discussion. During the 1980s, a counter-reaction
set in among southern, western, and rural states. Some 31 states as
diverse as Idaho, Florida, Texas, and Vermont actually adopted laws
and constitutional amendments forbidding rent control.
Once in place, however, rent control usually proves extremely difficult
to undo. London and Paris still have rent controls that started as
temporary measures during World War I. "Nelson's Third Law,"
the contention by the late 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. Not surprisingly, these interest groups tend to be
lawyers and "politically correct" classes. 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. This is true even where the group most
certain to enjoy the benefit of rent control elimination would be
the tenants themselves.
Recent Rollbacks
Nevertheless, rent control is proving vulnerable. On
January 1, 1997, Boston, Cambridge, and Brookline 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, soon agreed to a two-year
extension of controls for hardship cases.
The property owners during the referendum argued that
the costs of rent control were being borne by other
taxpayers. When landlords start losing money because of
low rents, they are usually 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 cities with
low bases. 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 2-to-1 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 also begun for the first time in 25 years. This
new-housing starts statistic underscores the counterproductive effect
of rent control. No builder in his right mind would put capital into
a losing and irreversible investment such as an apartment building.
Market forces are always more palatable than oppressive government
regulations. Since the overwhelming majority of rental units were
deregulated by 1995, and the rest by January 1, 1997, the distribution
curve of area rents has broadened enormously. As an interesting side-effect,
many tenants are free to relocate where before, they had been trapped
in the same depressing apartment for decades by the fear of losing
a "good deal."
To be sure, there have been individual cases of
hardship that tend to attract a great deal of media
attention. Almost without exception, these incidents
involve tenants who have suffered a loss of income but
still have been able to afford their apartments because
of rent control. In one case, featured prominently in
many newspapers, an elderly diabetic who had been unable
to work for 10 years was losing his apartment in the
Fenway district of Boston because the landlord was
tripling the rent. [1] But
tenants frequently are forced to move when they suffer
loss of income. Rent control only delays the process and
its abolition cannot be held responsible for every
instance of tenant displacement. Boston property owners
have alleviated the situation considerably by setting up
a bank of 200 apartments around the city that are
immediately available for such emergencies.
Rent control is now under attack in New York as well.
In December 1996, State Senate Republican majority leader
Joseph Bruno announced that he intended to end "rent
control as we know it" in New York City within the
next few years. Bruno, a successful Rensselaer County
businessman and free market advocate, says he is
philosophically opposed to rent control and believes it
is doing enormous harm to New York City.
His vow to overturn the system is no idle boast. Under
New York State's arcane legislative proceedings, the
majority leader wields enormous power, virtually
controlling the entire legislative agenda. Because New
York's rent control ordinance is still only
"temporary," it must be renewed every two
years. Bruno has said that if the Democratic Assembly
does not agree to a two-to-four-year phase-out, the
Senate will simply fail to renew the statute and rent
regulations will expire on June 15. Bruno's effort has
set off a firestorm among New York City's regulated
tenant population.
Shadow Markets
Although the battle over rent control is routinely
portrayed as a contest of
"tenants-versus-landlords," in fact the
situation is far more complex. Even in New York, which
has some of the strictest rent control in the country,
only 1.1 million of the city's 1.7 million
apartments--about 63 percent--are regulated. This
produces a tenant population of about two million
individuals, one of the most formidable political
constituencies in the city, with a direct interest in
retaining rent control. But since New York City has seven
million inhabitants, what are the interests of the other
five million? And what are the effects of rent control on
those among New York State's eighteen million inhabitants
who do not live under rent control, or on individuals in
other parts of the country who want to move to New York?
It is useful to analyze this issue in terms of the
concept of "shadow markets." This concept was
developed by Denton Marks in a paper in the Journal of
Urban Economics in 1984, [2]
and also suggested by George Horwich and David Leo Weimer
that same year in the context of oil price controls. [3] Standard supply-and-demand
theory predicts that any price controls, including rent
controls, will produce an excess of demand over
supply--an economic "shortage." There is
virtually no disagreement on this premise. In a survey of
75 of the world's outstanding economists, J. R. Kearl and
his colleagues found nearly unanimous agreement on the
proposition: "A ceiling on rents will reduce the
quality and quantity of housing." [4] Of 30 propositions presented
for review, only one other received the same level of
support. Further, a poll by the American Economic
Association of its members in 1992 produced a similar
result. [5]
Yet as Marks pointed out in his 1984 paper, rent
control, or any other price control, rarely works in a
straightforward fashion. It is virtually impossible for a
government to control and regulate the entire supply of a
commodity. Once a shortage appears, alternative markets
and black markets will arise. The government can react in
a variety of ways. Often, it will criminalize these
markets and prosecute suppliers in draconian fashion. In
Iran, merchants who sell above the government prices have
their feet burned with hot irons in the public
marketplace.
More often than not, however, governments may tolerate
these markets as a way of relieving shortages. In many
instances, governments will deliberately leave a portion
of the market untouched by regulation in order to serve
as a safety valve for excess demand. This unregulated
portion of a regulated market becomes the "shadow
market."
The question posed by Marks and by Horwich and Weimer
is "What happens to prices in this shadow
market?" Using standard supply-and-demand theory,
they predicted that prices in the unregulated portion of
the market will be forced higher than their normal market
value. This is because the limited supply in the shadow
market must absorb the shortage, the excess of demand
over supply, in the regulated part of the market. Because
prices are pushed too low in the regulated sector, they
are forced above what would otherwise be the market price
in the unregulated sector. The result is that average
prices in both sectors are likely to end up about as high
as their free-market level. They could end up higher
because of maldistributions and diseconomies in the
regulated sector of the market.
Few Low-Rent Units with Rent
Control
The concept of shadow markets offers a reasonable explanation of
why the results of rent controls are so perverse and why they lead
to a sense of helplessness and panic in a rent-controlled population.
Although rent controls are widely believed to lower rents, data collected
from eighteen North American cities show that the advertised rents
of available apartments in rent-regulated cities are dramatically
higher than they are in cities without rent control. In cities without
rent control, the available units are almost evenly distributed above
and below the census median. In rent-controlled cities most available
units are priced well above the median. In other words, inhabitants
in cities without rent control have a far easier time finding moderately
priced rental units than do inhabitants in rent-controlled cities.
This is because tenants in the regulated sector tend
to hoard their apartments, forcing everyone else to shop
only in the shadow market. Thus, rent control is the
cause of the widely perceived "housing crisis"
in rent-controlled cities.
Price Controls and Commodity
Shortages
Standard supply-and-demand theory shows that when the
government fixes prices, a gap opens up between supply
and demand. This is usually illustrated by two opposing
curves, representing the "marginal propensity to
sell" (supply) and the "marginal propensity to
buy" (demand). Consumers, of course, are inclined to
buy more as prices fall and less as prices rise. Sellers
act in an opposite manner, offering more as prices rise
and less as prices fall. At one point--and one point
only--the interests of buyers and sellers will intersect.
This is the "market-clearing price," the point
at which, given current economic circumstances, the
desires of both groups are optimized. Prices, of course,
do not automatically come to rest at some market-clearing
level. A continuing discovery process occurs. Either
buyers or sellers may achieve a temporary monopoly due to
geography or other circumstances. Lack of information may
cause either buyers or sellers to accept a price that is
unfavorable to them. But, lacking government
interference, the actions of buyers and sellers always
push prices toward a market-clearing level.
The effect of price regulation is to keep supply and
demand permanently separated. If the government holds
prices above market value, usually in an attempt to
appease suppliers, the result is an economic surplus. For
instance, since the 1920s the federal government has
maintained price supports for many agricultural
commodities. The result has been chronic farm surpluses.
Price controls, designed to benefit consumers, are much
more common. The oil price controls from 1971 to 1981
that resulted in a decade-long "energy crisis"
provide insights into the rent control issue.
Oil price controls had led to gas lines and rationing
at the pump during two brief episodes in 1973 and 1979.
But for the most part, there was no visible shortage and
supplies continued uninterrupted for most of the decade.
What happened to the shortages that should have been
produced by price controls? In retrospect, the answer was
simple. As Horwich and Weimer noted, the federal
government was able to impose price controls only on
domestic sources of supply. This created a shortage of
domestic oil. But the country continually filled this gap
by importing more oil. Imports constituted only 25
percent of the nation's supply when Nixon imposed price
controls in 1971. In two short years, this portion
climbed to nearly 33 percent. OPEC countries were
emboldened to interrupt supplies briefly in 1973 and then
quadruple the price.
Unfortunately, Congress responded in 1976 by
"punishing" the oil companies, dramatically
reducing the price and extending price controls
indefinitely. As a result, imports rose to more than 50
percent by 1979, despite an extensive government
publicity campaign against purchasing importing oil.
Congress even abetted the process surreptitiously by
expanding "oil entitlements," a program that
supplied small refineries with subsidized imported crude
oil, supposedly to help them compete against the major
oil refiners.
By 1979, America's excess demand had stretched world
supplies so tight that a small interruption of supplies,
caused by the outbreak of the Iran-Iraq War, was enough
to set off another "gas shortage." When
President Ronald Reagan removed domestic price controls
in 1981, the resulting surge of supply was enough to send
world oil prices into a free fall. The "energy
crisis" vanished almost overnight.
Horwich and Weimer show that the shadow market concept
explains these events. Prices of only part of the oil
supply, that produced domestically, were controlled. To
make up for the resulting shortages, consumers had to
turn to foreign-produced oil. Because of the excess
demand, world oil prices rose rapidly. Only when domestic
supplies were restored did world oil prices tumble. Over
a decade, oil price controls accomplished almost nothing
in lowering prices to consumers, but they did cause havoc
by creating rapid shifts in the world market.
Shortages and Hoarding
One reason the disadvantages of oil price controls soon became apparent
was that the hoarding of this commodity was only partially feasible.
Hoarding occurs when consumers buy supplies for future use as well
as present consumption. When uncertainty about future supplies becomes
general, consumers will begin to stockpile. During the 1979 "gas
shortage," for example, the late entertainer John Denver was
reported to be building two 100-gallon gas tanks on his Colorado estate.
Ordinary motorists reacted the same way by "topping off"
their tanks at gas stations. The U.S. government hoarded oil with
the Strategic Petroleum Reserve. Although hoarding may benefit individuals
or countries, it also puts upward pressure on prices. When people
buy for future use as well as present consumption, supplies will be
tighter and prices on the shadow market will be driven even higher.
Or, in the case of oil, if rationing-by-waiting is already in effect,
gas lines will stretch even longer.
But the ability to hoard depends on the logistics and
durability of a product. Oil is consumed only once and
must be stored in facilities that are not easily or
inexpensively obtainable. During a famine, food can be
hoarded, but it must be stored under special conditions
to avoid spoilage.
Housing is one of the most durable commodities. A
well-constructed building can last more than 100 years;
many buildings in Europe are centuries old. Housing can
be consumed today and still be consumed 10 or 20 years
later. And with government holding prices low through
rent control, a tenant who holds a rent-controlled
apartment has a strong incentive to stay in it his or her
entire life, even passing it on to descendants. Hoarding
of housing is not only possible, it can become the
natural order of things.
Of course if the laws allow a landlord to charge a higher rent to a
new tenant, the landlord may want to evict a low-paying tenant.
But this only leads to strong anti-eviction laws, a staple in all
rent-controlled communities that soon makes it difficult or impossible
to get rid of even the most destructive or delinquent tenants.
As a commodity, then, rental housing makes an ideal
target for conveying certain benefits to a portion of the
population. Because of durability of housing, rent
control can go on bestowing benefits to the same
minority--or even a majority of a municipality--for a
very long period of time. It is the individuals who are
forced into the shadow market--usually newcomers or
people who want to change apartments--who suffer the
consequences.
Rent Control and Vacancy Rates
There can be no doubt that rent control creates
housing shortages. For almost 20 years, national vacancy
rates have been at or above 7 percent--a figure generally
considered normal. Cities such as Dallas, Houston, and
Phoenix, where development is welcomed, have often had
vacancy rates above 15 percent. In these areas of the
country, there usually is a surplus of housing rather
than a shortage. Landlords commonly advertise
"move-in specials," where rent is reduced for
the first month or even where they pay moving expenses.
In rent-controlled cities, on the other hand, vacancy rates have
been uniformly below normal. New York City has not had a vacancy rate
above 5 percent since World War II. (The state's rent control law,
supposedly temporary, would automatically expire if it did.) Before
giving up rent control, Boston's vacancy rate was below 4 percent.
In rent-controlled San Francisco, the vacancy rate is generally around
2 percent, and in San Jose the rate is 1 percent, the nation's lowest.
Meanwhile, comparable nonrent-controlled cities, such as Chicago,
Philadelphia, San Diego, and Seattle have normal vacancy rates at
or above 7 percent.
Rent-controlled cities absorb these shortages in a variety of ways.
Higher rates of homelessness are a manifestation of rent control.
[6] Another is the traditional difficulty
individuals have in finding a new apartment in these cities. An article
in New York magazine entitled, "Finding an Apartment (Seriously),"
recommended such techniques as "joining a church or synagogue"
as a useful technique in meeting people who might provide good leads
on an apartment. The article went on to offer advice on ways to minimize
the bribes paid to blackmarketeers. Such concerns are simply not a
part of other free market societies (cities.) [7]
Young people who migrate to New York or San Francisco usually must
settle for paying $900 a month to share a two-bedroom apartment with
several other people or commuting from a nearby city. Crowding is
a manifestation of rent control.
Excluding Outsiders
The exclusion of newcomers may even emerge as the main purpose of rent
control, particularly in small, self-identified cities. Many of
the small New Jersey municipalities with rent control are close-knit
ethnic communities that do not particularly welcome newcomers. One
of their major fears is apartment complexes that will bring in large
numbers of outsiders and "change the character of the community."
Rent control has proved an effective tool for making sure that small,
exclusionary-minded communities do not have to undergo change.
Santa Monica is a beach community near Los Angeles that was discovered
by urban professionals after the construction of the Santa Monica
Freeway in 1972. These newcomers, many originally from New York, immediately
set about trying to limit new construction, pulling up the ladder
to keep out those that would follow them. In particular, they opposed
a series of high-rise apartments proposed for the beachfront. The
newcomers soon discovered that imposing rent control not only guaranteed
themselves cheap apartments but hampered further development as well.
Once again, local, self-interested parties harmed the general population.
The result has been a virtually closed community. It
is almost impossible for newcomers to find apartments in
Santa Monica. As Mark Kann, a Los Angeles newspaper
columnist, reported in Middle Class Radicalism in
Santa Monica, a book that celebrated rent control,
"I knew one professional woman who tried to get a
Santa Monica apartment for more than a year without
success, but she broke into the city, finally, by
marrying someone who already had an apartment
there." [8] The city is
also famous for its homeless population and is often
called "The Homeless Capital of the West."
Generational Subsidies
Berkeley, California, and Cambridge, Massachusetts,
have similar housing markets. Small college communities,
they originally adopted rent control with the help of
large student-voter populations that felt a town-gown
rivalry with their landlords. But like many socialist
programs, rent control turned out to be a one-generation
wonder. Students who were in place when rent control was
adopted often remained in their apartments all through
their professional lives. Ken Reeves, the mayor of
Cambridge until 1994, who used to advertise his
rent-controlled status on his campaign literature, was
still living in the apartment he rented as a Harvard law
student in 1973. He finally bought a home when rent
control was abolished.
In Berkeley, Floyd and Eva Floystrup are a carpenter and his wife,
and also landlords, who were once forced to pay $70,000 to their tenants
in "back rent" because they had refused to register with
the rent control board. "We believe in free enterprise,"
they explained. They noted that their low-paying tenants are all high-salaried
professionals who arrived as students in the 1970s. "I have Berkeley
students come up to me on the street now (2001) and say, `How come
I can't find a place to live in this city?'" said Eva Floystrup.
"I tell them, `Look, we're still taking care of the Class of
1979. As soon as they leave, we'll have room for you.'" [9]
Studies in both cities showed that rent-controlled apartments have
tended to fall into the hands of middle class professionals. A 2000
study of Cambridge by housing consultant Rolfe Goetze showed that
rent-controlled apartments were concentrated among highly educated
professionals, while the poor, the elderly, and students were generally
excluded. [10] Michael St. John, a Berkeley
sociologist, found similar results in California. "Rent control
has actually accelerated gentrification in Berkeley and Santa Monica,"
said St. John. "Poor and working class people have been forced
out of those communities faster than in surrounding municipalities."
[11]
In small cities such as Cambridge, Berkeley, and Santa
Monica, the housing shortages created by rent control can
be pushed onto neighboring communities. Most Berkeley
students now search for housing in Oakland and Richmond,
significantly increasing their commuting time.
Shadow-Market Housing
In large metropolises a housing shortage can severely
damage the city's economy. Experience shows that when
such cities adopt rent control, they usually try to avoid
outright housing shortages by leaving segments of the
market unregulated. Unsatisfied demand is diverted into
this unregulated sector. Because of the shadow-market
effect, people in this sector pay higher-than-market
prices. Still, they are rarely conscious of the
causation. Instead, they simply regard the city as
"an expensive place to live" and often become a
constituency for extending rent control to their own
apartments.
It should be recognized that not all cities enforce rent control
with the same enthusiasm. Both the city and county of Los Angeles
adopted rent control in 1979, but the county dropped it shortly
thereafter. The city government exempted new construction and allowed
sizable rent increases. It also adopted a form of vacancy decontrol
that allows rents to rise to market value each time a new tenant
moves in. A 1999 study by the Rand Corporation found rent control
costing tenants an additional $28 a month. Since then the city has
depopulated and vacancies rose close to 10 percent. "We can't
even get the rent the rent board will allows us," said Dan
Fellar, director of the Apartment Owners Association of Southern
California. As a result, there is little shadow-market effect. Washington,
DC, is also depopulating and its rent control ordinance has little
impact. Toronto has regulated all rental housing down to single-family
homes since 1979, but allows generous 8 percent annual rent increases.
The regulation seems to have only small impact.
New York and San Francisco, on the other hand, enforce two of the
strictest sets of rent control ordinances in North America. (In many
European countries, regulation has destroyed private rentals to the
point that there is little left but public welfare housing...all other
housing is owned.) Both cities allow only small rent increases and
neither has vacancy decontrol, although San Francisco will soon be
adopting it according to a state law. Neither city is depopulating
and both experience a high demand for housing. As a result, both have
developed strong shadow markets.
New York City split its housing market at the outset
in 1947 by exempting all future construction. Toronto
exempted all new construction when controls were adopted
in 1979. San Francisco did the same. Thus, while Santa
Monica and New Jersey communities used rent control
intentionally to prevent new housing construction, these
other cities worried that no new housing would ever be
built.
Unfortunately, the strategy of exempting new units often backfires.
Sooner or later, tenants in the new buildings will realize their position
relative to rent-controlled neighbors and seek controls on the rents
of their own dwellings. This happened in New York in 1969, when Mayor
John Lindsay was forced to adopt "rent stabilization" to
cope with the excessive rent in "post-war" housing, that
is, housing built after 1947 that was originally exempt from regulation.
Lindsay promised that all post-1969 housing would remain outside rent
stabilization. But inflationary pressures forced the New York State
Legislature to break this pledge within five years with the Emergency
Tenant Protection Act of 1974. Since then, builders have learned that,
sooner or later, any new housing in New York risks being "recaptured,"
the term used by city officials, that is, brought under regulations.
Consequently, new rental housing starts in New York since 1974 is
the lowest in the United States of America.
Toronto also repealed a new-construction exemption in 1989 and now
"recaptures" all new housing after five years. Thus, nearly
nothing new is built. And San Francisco continues to exempt new housing,
but does so much to discourage construction through zoning and no-growth
ordinances that, with a 1 percent vacancy rate, the city adds less
than 500 residential units a year. The Chicago area on the other hand,
with no rent control, has had an average annual new housing start
rate of nearly 10,000 units per year since 1980.
New housing thus makes up a stable--if somewhat
uncertain--segment of the shadow market. Another common
sector is smaller buildings, particularly those that are
owner-occupied. Cambridge exempted two- and three-unit
owner-occupied buildings. San Jose exempts duplexes and
single-family homes, but regulates the 10,000 mobile
homes in its jurisdiction. Berkeley does not regulate
duplex apartments when the owner occupies one unit. San
Francisco originally exempted buildings with four units
or fewer, but this was overturned in a popular referendum
in 1994. Now the city even regulates rented single-family
homes. New York's rent stabilization does not apply to
buildings with fewer than six units, although the old
rent control regulations from 1947 can still govern
smaller units.
Finally, rented condominiums and cooperative
apartments are commonly exempted--although this is an
extremely controversial policy in most rent-controlled
cities. The problem is that once apartment houses fall
under rent control, many owners will attempt to escape
the regulation by selling off the apartments to
individual owners. This frustrates rent control officials
because it diminishes the supply of rental housing. In
New York, condominiums and cooperatives are treated as
single units and thus exempted under the smallowner rule.
In Washington, however, an apartment building under
cooperative or condominium ownership is regulated as
multi-family housing, even though it has multiple owners.
Most cities with rent control usually end up adopting
strong laws to discourage conversion to condominium and
cooperative ownership, in order to close an escape hatch
from the regulated market. In 1989, Cambridge adopted a
law actually making it illegal for owners of converted
condominiums to live in their own apartments. Instead,
owners were to be forced to rent out their apartments as
rent-controlled units, in order not to "diminish the
supply of rental housing." Active enforcement of
this law that would evict individuals from their own
property was begun in earnest in 1992. The prosecution of
these "condo criminals" swelled the ranks of
rent-control opponents and played a large role in passage
of the statewide referendum that in 1994 ended this
regulation.
In major cities, then, these three exempted sectors--
new construction, smaller buildings, rented
condominiums-- generally form the shadow market. Even in
the strictest rent controlled environment, this shadow
market may grow to considerable size. In New York, the
unregulated sector now makes up 36 percent of the
1.7-million-unit rental market. In San Francisco and San
Jose it makes up about half. Only in Berkeley and Santa
Monica does the shadow market make up less than 20
percent of all rental housing.
Shortages under Rent Control: The
New Evidence
What happens to price and availability of unregulated housing in
a rent-controlled market? To determine this, this author collected
data on all the available apartments advertised in eighteen major
cities around North America. The advertised prices were taken from
a single Sunday edition of the largest paper in each city during
the month of April 2002. The advertised price of every listed apartment
was recorded. (Three newspapers were used for New York.) Rented
houses were also included. Some older urban areas--Chicago, Cleveland,
New York, Philadelphia--have very few rental houses, while in Sunbelt
cities such as Dallas, Houston, Phoenix, and San Diego, they make
up a large portion of the rental market. To make sure this regional
phenomenon was not distorting the figures, rental houses were omitted
in two cities, Atlanta and Phoenix. Six of the surveyed cities have
rent control--Los Angeles, New York, San Francisco, San Jose, Toronto,
and Washington. In addition, Boston ended rent control in January
1997. The median rent shown on each graph is based on the 2000 US
Census. [12]
The most striking observation is that the graphs of
rents in free-market cities follow a standard bell curve.
The vast majority of advertised rents cluster around the
median, with between 33 percent and 40 percent below the
census median. The median advertised rent is rarely more
than $50 above the census median. This may be because the
very cheapest apartments are not likely to be advertised
in the newspaper and because landlords often raise rents
when apartments become vacant. The mode - the number
where the graph peaks - usually occurs below both
medians. Characteristically, there is a steep climb on
the low-rent side of the curve, followed by a long tail
toward the "luxury" end of the market.
Figure 1
