Rent control is bad, stop asking for it

Rent control is blocked by law in Oregon and has been since 1985. More and more Oregonians are clamoring for a repeal of the ban as rent prices rise in the Portland area. Here is the issue: Rent control does not work. It has never worked. It will not work.

Rent control appeals to Portland residents because they believe it means the cost of housing won’t suddenly increase. However, there are several problems to address when believing rent control can fix anything.

The following arguments for rent control were aggregated and summarized from Oregon-based, pro-rent control Facebook groups like Portland Rent Control Now, Anti-Displacement PDX and Portland Renter’s Assembly. The Oregon Community Alliance of Tenants website also provides an overview of organized, pro-tenant activities that focus on government-level advocacy.

I interviewed Portland State University Professor of Economics James Woods to learn more about rent control. Professor Woods’ expertise in economics goes beyond theoretical knowledge in the case of rent control: He also has firsthand experience apartment hunting in Berkeley, California, during the Rent Stabilization and Eviction for Good Cause Ordinance.

The main argument for rent control centers on the fact that there are not enough affordable apartments; therefore, rent should be capped in order to provide opportunities for tenants. This is where we turn to economics.

Affordable apartments will not become easier to find with rent control because rent control itself causes shortages. What does this mean? Let’s say the market dictates that an apartment, and all similar apartments, should rent for $1,000. Rent control caps the rent on that apartment, and every one like it, at $500. Everyone wants that deal except the person who owns the apartment. Suddenly, there are fewer apartments for rent because owners don’t want to rent below market price. Everyone else is competing in the same price bracket for a few apartments.

An important basis for understanding this situation lies in basic economic principles. “The Misallocation of Housing Under Rent Control” by Edward L. Glaeser and Erzo F.P. Luttmer, says, “Economic theory tells us that the market mechanism allocates goods to the consumers who are willing to pay most for them.” Also, “The efficient allocation of goods to consumers is not automatic when demand exceeds supply. When there are shortages, some mechanism for rationing goods, such as queues or lotteries, substitutes for the price system.”

Waiting and chance create an inefficient system for allocation in the market.

Variable prices are good for the market. According to Glaeser, “Prices do not just provide information for producers about how many goods to produce; they also ensure that heterogeneous goods go to the consumers that value them most.”

Fast forward to a rent-controlled city: No one is building apartments, no one is renovating their basement in order to rent it out, apartments are being converted to condos and the apartments that are left certainly aren’t getting rented to just anyone.

In a Business Insider article by Jim Edwards, the author points out that everyone he knows in a rent-controlled apartment in New York is a well-connected, well-off member of the elite. In this anecdotal example, poor people do not benefit from rent control.

Eventually landlords find ways to compensate for the money they are losing. Examples of this given by Professor Woods include key money: “Rent is only $500 a month but you pay $12,000 a year for the key.” Other examples are non-refundable deposits and “furnished apartments.” In a lecture, Woods mentioned that this furniture is usually rented to everyone in the building, meaning it is in unusable condition and is somewhere in a dark basement that no one visits.

As we’ve already established, rent control creates shortages in supply and reduces the motivation to rent out properties. What happens when supply is short and there is no motivation to rent? Properties in rent-controlled areas don’t get advertised. What replaces advertisements, Woods explains, are lists of “potential vacancies” that information aggregators sell to people looking for an apartment.

Finding an apartment in a desirable area is only half the battle for would-be renters. The next hurdle to overcome is the crowd of other hopeful applicants and the impending discriminatory review of the landlord. With ample renters to choose from and few available units, who will the landlord choose? To paraphrase an example from Professor Woods, if the options are a group of unrelated young adults and a small family, “What do you think happens?”

So, where do people usually end up after rent control takes effect? They move to non-rent-controlled areas nearby. In Professor Woods’ experience, a friend of his ended up in Oakland, after hunting for apartments in rent-controlled Berkeley. How far outside Portland would residents have to go to escape rent control?

Displacement is still going to happen; however, displacement increases with rent control. The wait to get an apartment in desirable areas becomes longer and longer—people have waited years on lists for an apartment in the past.

Professor Woods summarized it best when he said, “Rent control tends to be a popular solution because it appears to cost nothing, but it is very expensive.” An alternative he offered is changing the zoning code. Portland section 33 “does not fit a common typology,” and it has not been changed since the ’90s according to Woods.

Section 33 contains Portland’s complex policy controlling property in the city using coded zones to break up the city and control building density. Professor Woods points out that the primary problem with Portland’s zoning is it’s not “strictly Euclidean,” meaning zones are not designated for single use.

In Euclidean zoning–named for Euclid, Ohio–zones are restricted to specific uses such as residential, commercial and industrial, based on location. Changes to zoning have been under review in recent years at the local, state and federal levels.

Increases in rent are a symptom of a housing-density problem in the city, and treating a symptom will not cure the disease. One example of the restrictive zoning problem in Portland comes from an Oregonian article posted on OregonLive by Brad Schmidt. In the article, Schmidt explains that there was an attempt by Mayor Charlie Hales to increase the size of lots in his Eastmoreland neighborhood from R5 to R7, which would decrease housing density at a time when Portland needs to be building more. The proposal died without a second or moving on to voting, but the sentiment is there.

Some residents do not want Portland to build, but building is the only way to increase supply and solve this problem. Not rent control.