Rent control and the redistribution of wealth

Like removing GST from food, rent control is an idea that has popular appeal, but is almost universally hated by economists. In an extreme example of this dislike for rent control, the Swedish economist Assar Lindbeck wrote, in his 1972 book The Political Economy of the New Left, that "In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing". He may not have been wrong.

The textbook example of rent control does acknowledge that there is a redistribution from landlords to tenants (see my post on that point here). However, aside from the broad category of tenants gaining, and landlords losing, from rent control, the model is not specific about who within each group gains or loses the most. The textbook model is clear that, although tenants as a whole gain, many tenants miss out on those gains because of the excess demand for rental housing. We know from empirical experience that it tends to be low-income and minority tenants who miss out.

I recently read this interesting new working paper on the wealth redistribution of rent control, by Kenneth Ahern and Marco Giacoletti (both University of Southern California). They look changes in property values and the redistribution of wealth caused by the imposition of rent control in St. Paul, Minnesota, in November 2021. Interestingly, they note that:

St. Paul’s rent control law is particularly strict, covering all properties in the city and with no inflation-adjustment for yearly rental increases and no provision to allow rental prices to be reset to market prices upon vacancy. Annual rental growth, for all properties, is capped at 3% year-over-year.

That makes St. Paul's rent control one of the strictest around, far stricter than anything suggested here in New Zealand. Using data on nearly 150,000 property sales in St. Paul and five surrounding counties (excluding Minneapolis), Ahern and Giacoletti find that:

...the introduction of rent control caused an economically and statistically significant decline of 6–7% in the value of real estate in St. Paul.

What caused the decrease in house prices? Thinking about the standard supply and demand model, Ahern and Giacoletti find:

...a statistically significant and large increase in transaction volume in St. Paul following rent control, compared to the adjacent cities. This indicates that the decline in value was caused by a net increase of supply over demand.

In other words, property owners were selling properties at greater rates than before rent control was introduced - presumably because the returns on rental property ownership were now lower. As further evidence of this:

...we find that rental properties experienced an additional 6% decline in value compared to owner-occupied properties, for a total loss of about 12%.

Overall, Ahern and Giacoletti estimate an overall loss of over US$1.5 billion in property value in St. Paul as a result of rent control. So, clearly landlords are worse off. But so are owner-occupiers, because their houses have fallen in value as well.

Ahern and Giacoletti then turn to looking more specifically at the redistribution of wealth. They proxy the characteristics of tenants by the average characteristics of all people in the Census block group they live in (the average Census block group in St. Paul has about 400 households, and about 1100 people living in it). They then use some interesting forensic methods to identify the property owners' addresses, and if the address is residential, they take the characteristics of the property owner as the average characteristics of the Census block group of the address. Of course, this only tends to work for small-scale landlords, since large commercial landlords will have an address for service in a commercial building. They then split each sample (landlords and tenants) into high-income and low-income groups, and compare the change in property values for each combination of tenant and landlord income (high-high, high-low, low-high, and low-low). They focus most attention on what they term the 'high disparity' pairing of high-income landlords and low-income tenants, and the 'low disparity' pairing of low-income landlords and high-income tenants. They find that:

In contrast to the intended transfer from higher-income owners to lower-income renters... the value loss for the high disparity subsample is 0.89%, below the average value loss of 4%. This effect is statistically smaller than the effect for the other three subsamples. In contrast... the statistically largest effect of rent control, at 8.52%, occurs in the low disparity parts of the city where renters have higher incomes and owners have lower incomes. This implies that the impact of rent control is poorly targeted: the largest transfer of wealth is from relatively low income owners to relatively high income renters.

Ouch. However, it is fair to say that this redistribution analysis is based on some fairly heroic assumptions, such as that tenants and landlords have the average income of the area they live in, and that the landlords are correctly identified (as well as bearing in mind that the most affluent corporate landlords are excluded from the sample entirely). 

Rent controls are generally favoured because people believe that it results in a positive redistribution of wealth from landlords to tenants. However, to the extent that this paper provides us with some evidence of redistribution, it doesn't suggest that low-income tenants are strongly benefiting at the expense of high-income landlords.

[HT: Marginal Revolution]

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco