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Rent Control – Unraveling the impacts on housing markets and investors

Author: MJ Vukovich, Executive Vice President

Rent Control is a big topic for all owners of residential real estate. It has become a popular tool for some state and local governments trying to ease the burden of housing costs on their constituents. But what exactly is Rent Control? Does it work, and what does it mean for property owners?

Rent Control goes by many names. Price Stabilization, Anti-Gouging, Housing Cost Controls, and others all describe the same thing: when a government controls and regulates the amounts charged for rental housing. There are a number of areas in the country that have tried to use legislative methods to control housing costs, including California, New York, Minnesota (specifically in Minneapolis and Saint Paul,) and Oregon, among others. Steadily rising rental costs for housing is putting stress on people who live in these areas. Most Rent Control provisions are implemented on a city-by-city basis. For example, Minneapolis and Saint Paul both have different guidance on controlling rents, and there are no other areas in Minnesota that have government rental restrictions. However, in New York and Oregon, there are statewide controls in place. In all cases, whatever governing body is driving the process typically sets a maximum amount of rental rate increase – usually by a percentage – that landlords can impose per year. Sometimes, these maximums can be exceeded if certain costs, such as capital improvements or tax increases, are allowed to be considered as part of the Rent Control law. All in all, the whole goal is to try to create a more stable housing environment for renters by controlling costs.

But does it? Does Rent Control actually help curb housing costs in the areas where it is employed? In the short term, it helps residents who are already in low-cost housing keep their costs low and predictable. However, it doesn’t address the issue of generating more housing at the lower price points, nor does it create the incentive to do so. Consequently, the creation of low-cost housing tends to slow down, leading to a greater overall housing shortage and driving up prices for those not already in the current low-cost units. In addition, the inability for owners to raise their rents to keep up with market demand also discourages capital investment into their properties, leading to an overall decrease in the quality of the housing stock. Lastly, the presence of Rent Control creates a strong incentive for owners to find ways to evict current tenants who are protected by the regulation, as those units would be opened up to market pricing. That creates a very negative relationship between owners and tenants and often creates higher turnover rates than areas that do not have these pricing controls.

Consider San Francisco as an example, which expanded its rent control laws in 1995, saw major increases in evictions post that expansion. A study from Northwestern University found that eviction notices increased 83 percent, and wrongful eviction claims went up 125 percent. This contradicts the notion that rent control creates stability for tenants in those units. Furthermore, a stark contrast can be seen in the rent control measures voted for in St. Paul and Minneapolis, MN. While Saint Paul introduced one of the strictest rent control measures in the country (3% cap and restrictions on newly built units), Minneapolis adopted a "wait and see" approach. The result was that Minneapolis had building permits rise 65% while in St. Paul, they fell by 61%. Now, there is legislation to undo the rent control measures in state congress in Minnesota, and the Mayor of Minneapolis will be vetoing the proposals on rent control and is looking for other solutions to help renters.

Rent Control continues to be a divisive issue across the country. Many people struggling to make ends meet in high-cost areas see it as a solution to ease their housing cost burdens, and some in political positions champion its use as a solution to housing stabilization. However, there is debate as to its effectiveness and some serious concern that it treats only one symptom of a housing imbalance without taking the whole of the issue into account. For owners and investors in rental real estate, Rent Control poses a real challenge in convincing partners to invest and can make it prohibitive to do so. That can cause even more issues within a market’s housing crunch. If you are considering making an investment in real estate, it’s important to know if there are Rent Control laws in place where you are investing and how those will impact your property. Furthermore, it’s important to understand if local legislature is considering adding Rent Control measures to the market that you’re considering investing in.

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