Why Rent Controls Would be Detrimental to Montgomery County.

Special interest groups in Montgomery County (MC) have been lobbying county government to enact rent controls.  It is always tempting for politicians to enact subsidies for voting constituents, especially when they outnumber those paying for them (landlords). Fortunately, County Executive Isaiah Leggett and most councilmembers recognize 1) the great harm that rent controls would inflict on the county, 2) the social benefits from letting competitive market forces determine rents, and 3) that there are better ways to target rent relief to those that are truly needy in MC.

Rent is the price paid for the use of a dwelling (a type of asset) owned by someone else.  As in other markets where the price is determined by competitive forces, the equilibrium rent is that amount that balances the value of a dwelling unit to the renter and the cost of building and operating such units by the owners.  Rent controls, a legal limit or ceiling on the maximum rent a landlord may charge a user of his property over a period of time, distort this balance, and, like other forms of price controls — agricultural subsidies, for example —inflict great harm not only on the affected market (the MC housing market), but the general economy (the people of MC).  A binding rent control ceiling would reduce both the quantity and quality of rental housing. With rents below market clearing levels, and thus below  the cost of owning a home and other forms of shelter, and with reduced rents in MC compared to neighboring counties, the demand for rental units in MC would increase above the equilibrium quantity supplied resulting in apartment shortages.  Over time, below market rents, which represent the return of capital invested in rental housing, encourages conversions to condominiums and uncontrolled luxury apartments, and reduces the incentive to invest in the construction of new apartment buildings. This gap between supply and demand widens and the apartment shortage worsens.  There is consensus among economists over these effects and the evidence is overwhelming. Even the Washington Post reported (May 7, 2010, “Low Rents in D.C. Vanish as Downscale Goes Upscale”) that in Washington, D.C., which has had rent controls since 1975, the supply of rental apartments between 2000 and 2010 declined by 50%.  This harms the very people that rent controls are intended to help.

Rent controls also worsen the quality of the existing stock of rental units. With rents below market levels —sometimes 50% or more below market rents —and with the rate the return on their investments less than the required rate of, and below the competitive cost of capital, less revenue is generated for maintenance and upgrades. But with renters also benefitting from the below-market rent, (which is a significant subsidy) they would be less inclined to move out of a low-rent apartment, which would encourage overstaying and reduce mobility.  Both of these effects would tend to reduce the quality of the existing stock of apartments. In New York City, for example, which has had rent controls since 1969 (in their present form), the tenants in rent-controlled apartments have lifetime tenure with rights of succession, which means that the landlords cannot generally even reclaim the apartment for their own use, thus losing their own property rights. Over time this quality problem worsens, potentially creating urban blight in some areas, particularly in the older areas of the county. 

The shortage created by rent controls intensifies consumer demand and makes the available stock of rental units more valuable.  This would engender a variety of non-price means by property managers, landlords, and renters (those lucky enough to find a rent-controlled apartment) to deal with the shortage, which would further distort the housing market. For example, as vacancies decline and the waiting lists get longer, property managers could impose arbitrary and discriminatory restrictions on the type of renters and their behaviors.  Also because space is scarce, and more valuable, those renters lucky enough to get a rent-controlled place have the incentive to sublet at the even higher willingness-to-pay (which is driven up by the shortage). In such cases rents would not really be lower; the original renter, in effect, earns the rent that would otherwise go to the landlord.  It is also likely, that side payments could be made by those whose willingness to pay (because they value the apartment more) is greater than the controlled price, thus encouraging a type of black-market in apartments.  Rent controls would also distort the balance between the price of rented and owned dwelling units, between the housing markets in MC and those in neighboring uncontrolled regions, and between types of apartments (e.g., luxury and non-luxury units).  While the authorities could find ways of addressing these distortions, it would not be able to do so without additional, and more complex, government regulation of the housing market, which would require a larger bureaucracy and increased spending, and cause an even more distorted and dysfunctional housing market.  

Finally, rent controls fail to address the real underlying causes of high rents in MC:  1) on the supply side, the cost of building and operating rental housing is high due to high labor and regulatory costs, and high taxes, particularly income, property, and energy taxes; and 2) on the demand side, population growth and high incomes.

Despite the general harm caused by rent controls, proponents justifiably claim that high rents are particularly burdensome for the poor elderly and disabled, many of whom 1) are on fixed incomes, 2) spend a disproportionate share of that income on housing, and 3) would find it difficult to move in response to excessive rent increases.  But, general rent controls are too blunt an instrument — and a poorly targeted instrument at that—to deal with this legitimate problem. General rent controls would subsidize all renters, rich and poor alike, when in fact not all renters are poor, elderly, or infirm, and not all landlords are young, rich, and healthy.  In New York City, one finds wealthy people among those living in rent controlled apartments (former Mayor Ed Koch, and Woody Allen, among others).