A new article by Rebecca Diamond, Tim McQuade, and Franklin Qian (all Stanford), published in the journal American Economic Review, provides support in the case of San Francisco. The authors looked at what happened to tenants and properties affected by a 1994 change in rent control laws:
Rent control in San Francisco began in 1979, when acting Mayor Dianne Feinstein signed San Francisco’s first rent control law... This law capped annual nominal rent increases to 7 percent and covered all rental units built before June 13, 1979 with one key exemption: owner-occupied buildings containing 4 units or less... These “mom and pop” landlords were cast as being less profit-driven than large-scale, corporate landlords, and more similar to the tenants being protected. These small multi-family structures made up about 44 percent of the rental housing stock in 1990, making this a large exemption to the rent control law.
While this exemption was intended to target “mom and pop” landlords, in practice small multi-families were increasingly purchased by larger businesses who would then sell a small share of the building to a live-in owner so as to satisfy the rent control law exemption. This became fuel for a new ballot initiative in 1994 to remove the small multi-family rent control exemption. This ballot initiative barely passed in November 1994. Suddenly, all multi-family structures with four units or less built in 1979 or earlier were now subject to rent control. These small multi-family structures built prior to 1980 remain rent-controlled today, while all of those built from 1980 or later are still not subject to rent control.Diamond et al. essentially compare properties (and tenants living in properties) before and after the law change, comparing those that were (the treatment group) and were not (the control group) newly subjected to rent control. This 'difference-in-differences' analysis allows them to extract the impact of rent control. They find a number of interesting things, including that:
...on average, in the medium to long term the beneficiaries of rent control are between 10 and 20 percent more likely to remain at their 1994 address relative to the control group and, moreover, are more likely to remain in San Francisco. Further, we find the effects of rent control on tenants are stronger for racial minorities, suggesting rent control helped prevent minority displacement from San Francisco... On the other hand, individuals in areas with quickly rising house prices and with few years at their 1994 address are less likely to remain at their current address, consistent with the idea that landlords try to remove tenants when the reward is high, through either eviction or negotiated payments.On the latter point, they note that there are a number of ways that landlords can subvert rent control, such as:
First, landlords could try to legally evict their tenants by, for example, moving into the properties themselves, known as owner move-in eviction. Alternatively, landlords could evict tenants according to the provisions of the Ellis Act, which allows evictions when an owner wants to remove units from the rental market: for instance, in order to convert the units into condos or a tenancy in common.18 Finally, landlords are legally allowed to negotiate with tenants over a monetary transfer convincing them to leave. In this way, tenants may “bring their rent control with them” in the form of a lump sum tenant buyout.On top of all that, they also found that:
...landlords actively respond to the imposition of rent control by converting their properties to condos and TICs or by redeveloping the building in such as a way as to exempt it from the regulations. In sum, we find that impacted landlords reduced the supply of available rental housing by 15 percent. Further, we find that there was a 25 percent decline in the number of renters living in units protected by rent control, as many buildings were converted to new construction or condos that are exempt from rent control.This is a point that I made in this earlier post. Diamond et al. also note that their results imply interesting effects of rent control on inequality:
In the short run, rent control prevents displacement of the initial 1994 tenants from San Francisco, especially among racial minorities. To the extent that these 1994 tenants are of lower income than those moving into San Francisco over the following years, rent control increases income inequality. However, this short-term effect decays over time. Eight years after the law change, 4.5 percent of the tenants treated by rent control were able to remain in San Francisco because of rent control. However, five years later, this effect had decayed to 3.7 percent, and will likely continue to decline in the future.
In the long run, on the other hand, landlords are able to respond to the rent control policy change by substituting toward types of housing exempt from rent control price caps, upgrading the housing stock, and lowering the supply of rent-controlled housing. Indeed, the prior section showed that as of 2015, the average property treated by rent control has higher income residents than similar market rate properties. The long-term landlord response thus offsets rent control’s initial effect of keeping lower income tenants in the city by replacing them with residents of above-average income. In this way, rent control works to increase income inequality in both the short run and in the long run, but through different means. Rent control’s short-term effects increases the left tail of the income distribution, while the long-term effects increase the right tail.I'm not sure that this is what advocates of rent controls would be expecting. However, it serves as another cautionary point on the effects of rent controls.
[HT: Marginal Revolution]
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