Last week, Oregon became the first state to implement statewide rent control when Democratic Governor Kate Brown signed Senate Bill 608 into law. Rent control has traditionally been conducted at the local level, but now Oregon is changing the conversation.
Under SB 608, increases in rent will be capped at 7 percent a year plus inflation. No-cause evictions have been eliminated and landlords are now required to document the reasons for evicting someone. In certain eviction cases, the landowners must provide tenants 90-days notice before evicting them and then pay tenants one month’s worth of rent.
Although this will be hailed as a victory for tenants, the economic implications are bleak.
For a start, rent control violates basics tenets of economics such as supply and demand. From constructing rental housing to building condos, prices communicate to landowners how to use their land and buildings. However, when interventions like rent control come into the mix, these prices are distorted and result in shortages as artificial demand for housing units outstrips supply.
The laws of economics are basic and universal. The most extreme example of price control failure is modern-day Venezuela and its myriad of price control regulations that have caused widespread shortages throughout its economy. Housing units are no exception to this trend.
Rent control takes a large portion of the value of residential properties from landlords. The value landlords lose is then effectively redistributed to current tenants, who take advantage of this by staying in their current housing units. It is not uncommon to see tenants in cities with rent control stay in the same place for prolonged periods of time.
Not only do price ceilings like rent controls cause shortages in terms of housing units, but they also come with an adverse set of social consequences. Because of the government imposed rent controls, apartment owners have no incentive to invest in their property, i.e renovate it or upgrade the infrastructure such as cooling systems. As a result, these housing units will deteriorate. Within a decade or so, otherwise good housing complexes could turn into ghettos.
Similar to other government regulations, strict rent control causes those affected by it to circumvent the regulations through under-the-table payments to secure housing or even conduct routine maintenance operations. Discrimination among rental applicants also becomes the norm. These are the unintended consequences of governments trying to play god.
Additionally, rent control causes new housing construction to come to a grinding halt. In some cases, rent-controlled housing is converted to condos or repurposed for non-housing related ends in order to escape burdensome rent control regulations. In sum, these schemes reduce overall housing availability, which only exacerbates the previous housing problems.
Oregon currently restricts housing through urban growth boundaries, which designate developable land near cities for natural or agricultural uses, or through zoning restrictions, which limit the number of units that can be built on residential land within cities.
In essence, the best way to tackle the question of housing affordability is through less government, meaning that zoning restrictions and other land use regulations should be reduced as much as possible. This will allow for increases in the overall housing supply.
The city of Houston is arguably the best example of a large metro area that has tackled the housing affordability problem through its relatively hands-off approach to zoning. By allowing urban land to move alongside changing market demands and not having top-down plans for urban development or destructive policies like rent control on the books, Houston has avoided the many housing pitfalls that major urban centers face these days in the U.S.
More cities should follow in Houston’s footsteps. All in all, rent control and other interventionist schemes in the housing market make it more difficult for would-be tenants to acquire quality housing at reasonable prices. However, sound economic policy is not always politically popular, and politicians will do what it takes to get it elected regardless of the unintended consequences of their policies.
Housing markets nationwide are in dire need of some market-based urbanism.