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Statewide Rent Control Will Ultimately Please Nobody

March 25, 2019 in Economics

By Ryan Bourne

Ryan Bourne

Governor Kate Brown recently signed into law the rent-control
control legislation passed by the Oregon House of Representatives.
Unaffordable housing and heart-rending stories of tenants forced to
move after steep rent hikes have triggered another policy response,
including capping statewide rent increases to seven percent per
year above the Consumer Price Index (currently three percent.)

This latest wheeze, though, will ultimately please nobody. It
not only fails to solve for the underlying problems of the Oregon
housing market, but also risks exacerbating them.

Why? In areas where tenants face rent increases above earnings
but below the cap, rent controls will have no effect. Increases
will eat into families’ incomes further, and with
affordability worsening, tenant groups are likely, in time, to
demand tighter controls.

The only way to improve
affordability and prevent abrupt rent spikes is to deliver a
flexible housing supply. That requires abolishing or relaxing
cost-inflating urban growth boundaries around cities.

Yet where market rents really are spiraling, capping them to
prevent so-called “economic eviction” dampens the
incentive for developers to bring new supply to market. Some
tenants will benefit from lower rents. The cost will be worsened
availability of housing precisely where it is needed most.

Liberal and conservative economists both have understood these
impacts of rent control for decades. Practitioners of the dismal science believe prices are
signals of supply and demand. Fixing rents below market levels
gives the false signal that housing is plentiful. That ensures a
shortage, with demand for rental property exceeding supply.
Landlords find converting properties to other uses more attractive
and developers find new rentable accommodations less profitable to
build, compounding this scarcity problem.

A 1994 rent-control expansion in San Francisco, for example,
led
to
landlords converting rental properties to condos for
higher-income families, and market rents increased by over 5
percent. Rent control not only increased the cost of non-controlled
accommodation, but it also accelerated gentrification. On the flip
side, positive effects have been seen when rent controls were
abolished. In Cambridge, Massachusetts, for example, economists found that direct dollar investments in
housing units more than doubled over a few years.

This evidence might prove cold comfort to Oregon families with
crippling rent bills today. But it strongly suggests rent control
will not help.

That’s not to say there is not a problem, or potential
solutions. Demographia calculates affordability measures for U.S.
metropolitan housing markets each year, comparing house prices to
income levels. They find that, of Oregon’s three biggest
cities, two have “severely unaffordable” housing
markets (Eugene and Portland), and Salem is “seriously
unaffordable” too.

As my Cato colleague and Oregon resident Randal O’Toole
has …read more

Source: OP-EDS

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