California's Plan To Cap Rent Increases Could Drive Up Prices In The Long Run

Is rent control a tool to help fight a housing crisis? California is taking steps to enact a state-wide cap on rent increases. But, recent studies show that rent control may actually drive up rents in the long run.

MARY LOUISE KELLY, HOST:

In California, lawmakers have approved a bill that would cap rent increases across the state. The move, which could affect millions of tenants, is the latest attempt to fix the state's dire housing shortage. But many economists say rent control can backfire. Well, let's find out what Darius Rafieyan says. He is with NPR's daily economics podcast The Indicator from Planet Money.

Hey, Darius.

DARIUS RAFIEYAN, BYLINE: Hi, Mary Louise.

KELLY: So what exactly does this bill do? And why are lawmakers taking it up now?

RAFIEYAN: So this bill is pretty remarkable. This bill would place a cap on rent increases of 5% per year, plus inflation, across the entire state - so not just one city here or there.

KELLY: OK. So no discretion left to landlords. That's the most you can hike it - 5%.

RAFIEYAN: Right. And it's aimed at preventing these large, sudden rent increases. And this comes as California is struggling with a statewide housing crisis. Lots of people have been moving there for job opportunities; housing construction hasn't kept up. That means that housing prices have really skyrocketed. Homelessness is way up. Everyone across the political spectrum agrees that something needs to be done about housing in California.

KELLY: I'm remembering Oregon passed something similar this year, right? How many states have a rent control law in the books?

RAFIEYAN: Yeah, rent control is relatively rare in the U.S. As you mentioned, in February, Oregon became the first state to have statewide rent control. Other than that, you have three states - Maryland, New York and New Jersey, plus the District of Columbia - where there are any cities with any kind of rent control at all. So in the vast majority of states, this is still just left up to the market.

KELLY: And I mentioned a lot of economists are skeptical about rent control and whether it does, in fact, work. What does the research say?

RAFIEYAN: Many economists say that rent control actually ignores the main problem, which is not enough houses being built, and that rent control can actually discourage building. So there's a study by Rebecca Diamond, an economist at Stanford. She looked at the case of San Francisco, which put in place rent control policies back in the '90s. And what she found was because rent controls make it less profitable for a landlord to lease a building, many landlords were deciding to get out of the rental market, entirely, you know, by converting to condos or just bulldozing a building. She found that it actually resulted in a 25% drop in the number of rental units in the city. So basically, it can help renters in the short run. But in the long run, it can have some pretty severe unintended consequences.

KELLY: Yeah, it sounds like it can have the unintended consequence of the exact opposite effect that legislators were trying to bring around. I mean, are there other policies out there that economists think might be worth trying if the goal is to bring down housing costs?

RAFIEYAN: So if you ask economists, they agree that if you want to solve a housing shortage, you need to build more housing. So earlier this year, there was a bill working its way through the state legislature in California that would've forced cities to do more high-density construction. That ultimately died in committee. The governor, Gavin Newsom, has made this a central policy. Using the combination of grants and the threat of lawsuits, he's tried to encourage cities to do more building. That's had mixed results. There are some economists who say rather than using rent controls, which distort the housing market, the government could do something like fund rent insurance, which would compensate tenants who see sudden rent increases.

KELLY: So given all that research you just shared - that rent control maybe has the opposite effect than what was intended - why does this seem to be a growing thing with Oregon and California bringing it back?

RAFIEYAN: It can have very positive effects for a very narrow group of people. So if you are the kind of person who's going to be staying in your apartment for years and years and years, rent control is undeniably a good thing. And so the benefits are very easy to see, very easy to understand. It's a very clear, simple story. Some of the costs are more diffuse, a little more abstract and more in the long-term. So for a politician trying to sell a policy, something like a complicated rent insurance scheme or high-density zoning can be a tough sell. But capping rents - that's an easy sell.

KELLY: Thank you, Darius.

RAFIEYAN: Thank you, Mary Louise.

KELLY: Darius Rafieyan - he's a producer on NPR's short daily podcast about economic issues that affect our lives. It's called The Indicator from Planet Money.

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