ATR Op-Ed in RealClearMarkets: “How Rent Controls and Subsidies Distort U.S. Housing”

On August 15, 2023, RealClearMarkets published an op-ed by ATR’s Director of Financial Policy, Bryan Bashur. The article discusses how efforts to impose rent controls and enact new government subsidies restricts housing supply and increases overall rental prices.

The op-ed begins by stating how rent controls and government subsidies reduce housing supply, increase rental prices, and contribute to gentrification and income inequality in cities across the U.S. The piece talks about how Democrats in Congress are pursuing these policies.

One recent letter from Senate Democrats is pressuring the Federal Housing Finance Agency to require rent controls as a caveat for Fannie Mae and Freddie Mac-backed mortgages:

At the federal level, seventeen Democrats led by Sen. Sherrod Brown (D-Ohio) sent a letter to the Federal Housing Finance Agency (FHFA) asking that it “condition” Fannie Mae and Freddie Mac-backed mortgages based on a litany of different caveats, including limits on “egregious rent hikes.” This could put taxpayer dollars at risk because the suppressed rental income could force landlords to miss payments or default on Fannie and Freddie-backed mortgages resulting in losses to the taxpayer-backed government-sponsored enterprises.

Democrats have also unveiled a housing subsidy package that will crowd out private investment and waste taxpayer dollars:

House Democrats reintroduced a legislative package composed of three bills expanding the federal government’s foothold in the U.S. housing market. The package appropriates more than $250 billion in grants for first-time homebuyers and public housing on top of a blank check for the Housing Choice Voucher program. Democrats are committing essentially unlimited amounts of taxpayer dollars to nationalize the U.S. housing market, which will ultimately lead to higher taxes to fund these expensive projects. If enacted, the package’s inordinate amount of fiscal irresponsibility will disincentivize private investment in housing.

They also introduced a bill to remove tax benefits for certain owners of single-family homes:

Senate Democrats have also introduced legislation to choke off private investment in single family housing. One partisan bill would prohibit owners of 50 or more single family homes from applying a tax deduction to depreciation or interest paid or received on the properties. While institutional investor ownership of single-family rentals is growing, mom-and-pop investors still own the vast majority “of all small rental properties.”

Some of the biggest investors in private equity or real estate investment trusts are state pension funds. Workers’ retirement money is being invested to build out housing projects. To crowd out this investment using government intervention would not only constrain supply, but it would also harm returns to pension funds that must remain fully funded. A shortfall in funding would lead to a taxpayer bailout to ensure the funds have enough cash to make pension payouts to firefighters, teachers, and police officers when they retire.

Local governments have also imposed rent controls resulting in higher rental prices overall and income inequality:

Local governments have also restricted housing supply and exacerbated income inequality by using rent controls. According to one paper studying the effects of rent controls in San Francisco, a 6 percent reduction in housing supply resulted in a “5.1% increase in rental prices.” In San Francisco, rent control forced landlords to develop condominiums and redevelop buildings to “exempt them from rent control.” However, this has gentrified the City by the Bay and benefited high income residents at the expense of others, leading to “a higher level of income inequality in the city overall.” Additionally, rent control expansion in San Francisco “led to an increase of roughly 20 eviction notices and 7 wrongful eviction claims per 1,000 buildings treated with rent control.”

Other cities in the U.S. that implemented rent controls observed similar effects to their housing markets. A study of the District of Columbia pointed out that rent controls led “to a decline in the quality of housing stock and eventual decreases in available housing.” In New York, rent regulations have made it difficult to reinvest in properties and keep them properly maintained. The Manhattan Institute found that “rent control’s restrictions on housing harm low-income, minority, and immigrant Americans most of all.”

Fortunately, some city councilmembers see the detrimental effects of rent controls:

Some cities are starting to see the ill effects of rent controls and are voting down proposals to expand the policy. For example, the Seattle City Council recently rejected an attempt to cap residential rental price increases arguing that “controlling rent increases would disincentivize developers from building new housing.”

The article concludes by stating that:

Congress and state and local governments should oppose any legislative or regulatory efforts to strengthen or introduce new rent control policies that would distort the U.S. housing market and reduce living standards for Americans.

Click here to read the full op-ed.