Amanda Williams
Into Perspective

A Hypothetical Housing Win–Win

By, 05/31/2012

Last month, the Supreme Court declined to hear arguments on rent control’s constitutionality—a shame, in my view, given sound economic reasons rent control is rather misguided. Over and above those economic reasons, though (which I outlined in greater detail on Fisher Investments’ MarketMinder), it’s entirely possible ending rent control would help not only the rental market (renters and landlords alike), but could also incrementally help the housing market as a whole.

Consider: Rent control was intended to keep rent prices low for low-income individuals. A fine goal. However, doing so creates a market distortion. Keeping prices artificially low is not a cost-free decision. Rent control limits supply (since landlords receive typically below-market rents and are therefore less incentivized to rent out properties) and creates more intensive competition among renters, thereby ultimately resulting in higher overall prices for units which come on the market. Lower prices for some (many of whom are not, in fact, low income) and higher prices for many more seems to run counter to the original purpose of rent control—the law of unintended consequences.

But likely less considered is the impact on property quality. If landlords receive artificially low rents for their units, they’re less incentivized to maintain the building’s overall quality. They’re also possibly less financially able to maintain the building since it’s bringing in under-market income, yet they’re paying market costs for maintenance—to the paint store, the painter, the plumber, the electrician, etc. So when the carpet needs to be replaced or the refrigerator goes out or the walls need paint or, or or, chances are they find the most cost-effective (i.e., cheapest) way of patching up the issue. Same goes for overall building maintenance (exterior painting and maintenance, landscaping and gardening, etc.).

And this potential rental property deterioration can have a deleterious impact on the overall housing market. Because in increasing the supply of relatively less well-maintained buildings over time, those neighborhoods likely begin overall declining as well. Maybe the rental property where all the tenants pay controlled rents is on a block of relatively well maintained single-family homes. As the rental property deteriorates, so likely do the values of the single-family homes. Maybe not rapidly, but over time.

And that in turn hurts the local government’s overall revenue because as buildings deteriorate across a city, tax revenues also deteriorate. (None of this will be shocking to New York City or San Francisco residents—they’re no doubt familiar with the impact ill-maintained buildings can ultimately have on property values.)

Housing’s also potentially impacted—albeit in a relatively marginal way—by the fact artificially low rents incentivize people to … rent! If you can rent a relatively cheap studio on the Upper East Side in New York or in San Francisco’s Marina district, how likely are you to try instead to buy something? The incentives can get out of whack.

Which ultimately is another force diminishing demand for purchased homes. Granted, as mentioned, this effect is likely overall pretty small. But there’s little doubt fewer self-imposed market imperfections would put the overall housing market (rented and owned) on  a more even keel—rents would reach an equilibrium price balancing supply and demand, landlords would be incentivized to better maintain buildings and renters would live in overall higher quality properties and would likely pay somewhat lower rents on average. Some might even find the additional push to make a mortgage payment attainable. Which would probably be about as close to a win-win as free market economies get.  

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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