The Biden Administration and Congressional Democrats are wrongly proposing to federalize the rental market. Their proposals will only disincentivize further housing development, reducing the housing supply and making housing exceedingly more expensive for anyone not living in a rent-controlled property.
Democrats are attempting to use the federal government to control rental prices that are normally dictated at the state and local level. The Biden Administration’s ill-conceived “Renters Bill of Rights” discusses imposing price controls by capping rent at no more than “30 percent of household income on housing costs.” In practice, rent caps would only further distort the housing market. Introducing rent control “causes housing shortages that reduce the number of low-income people who can live in a city. Even worse, rent control will raise demand for housing — and therefore, rents — in other areas.” In 2019, The Economist described rent controls as “well-intentioned policy that does not work. They deter the supply of good-quality rental housing.”
The Biden Administration’s housing document also talks about using quasi-governmental mortgage guarantors, Fannie Mae and Freddie Mac (the Enterprises), to condition their mortgages purchases on whether landlords will place limits on rental price increases. Last year, the Federal Housing Finance Agency (FHFA), which regulates and supervises the Enterprises, announced a plan to further backstop the “multifamily rental market” with “loan agreements that restrict rents” commensurate with a certain level of household income. If this policy continues to develop, it will worsen the U.S. housing supply.
Senate and House Democrats sent letters to FHFA advocating for restrictions on rent increases for mortgages backed by the Enterprises. Citing the housing affordability crisis, Congressional Democrats requested the FHFA to address soaring rents “by implementing reasonable limits on rent increases for Enterprise-backed multifamily properties.” If the FHFA were to compel the government-backed Enterprises to condition mortgage guarantees on rent controls, this could stymie regular market operations by incentivizing lending to Enterprise-backed multifamily properties that impose rent controls.
Conditioning mortgage purchases from lenders based on rental price caps could lead to a greater risk of incurring losses, especially in an inflationary environment where interest rates remain elevated. The losses would be backed by taxpayers because the U.S. Treasury owns rights to acquire about 80% of the Enterprises’ common stock. Additionally, as the CPI inflation rate continues to linger around 3.2 percent (above the Fed’s 2 percent target), prices remain 17.1 percent higher than when President Biden took office, and borrowing costs for landlords remain elevated. A freeze on rent would reduce income to landlords, which would make it harder to pay interest on their mortgages and disincentivize investment in new developments and proper maintenance. Ultimately, expanding government intervention in the housing market could lead to a situation where taxpayers are at risk of footing the costs of a 2008-style bailout.
Rent stabilization policies have been nothing short of a disaster in large metropolitan areas such as New York. Well over 40% of New York City’s rental units are rent stabilized, meaning the city’s housing regulators set limits on rent hikes landlords are allowed to impose on tenants. Median rent in the city is $3,650 a month, a figure propped up by distortionary rent regulations that incentivize developers to focus on gathering higher returns by building high rises over single family units or studio apartments. Rent control policies effectively act as a tax on landlords who are unable to raise their rent prices to keep up with the costs of maintaining their units. In a Washington Post opinion piece, George Will explains that “Government-approved rents increase at only half the rate of owners’ increased costs.” New York’s rent control board expropriates the private property of landlords by artificially manipulating rental prices in the housing market imposing lower profits by reducing their ability to set prices to reflect market conditions.
In 1969, New York enacted the Rent Stabilization Law. Prior to 2019, under certain conditions landlords could be exempt from rent controls. In 2019, New York removed these exceptions. The move is indicative of how willing rent control proponents are to punish landlords and subsequently renters in order to achieve their ideal of economic equity. The state should not be in the business of interfering in the housing market. Landlords should be left alone to decide how to best price their units. The New York story is an example of what happens to both buyers and sellers when property rights are infringed by the state.
In Community Housing Improvement Program v. City of New York the Second U.S. Circuit Court of Appeals held that rent controls do not impose invariable “economic harm to landlords.” Although the U.S. Supreme Court denied certiorari and the Second Circuit’s ruling stands, according to one opinion piece published in the Wall Street Journal, the law is detrimental to the New York housing market:
“The onerousness of the taking effected by rent stabilization undermines its stated purpose of increasing the availability of affordable housing units. Owners of buildings with rent-stabilized apartments have begun ‘warehousing’ them—keeping them vacant to prevent permanent occupation by commercially damaging tenants.”
It is worth noting that in Pennell v. City of San Jose, Justices Scalia and O’Connor ruled that a regulation is in fact a taking “where a price regulation designed to cure a social ill encumbers a property whose owner has neither created nor contributed to that ill.” According to an amicus brief filed to the U.S. Supreme Court by the Cato Institute and Manhattan Institute, the New York rent stabilization law “places a public burden on the shoulders of a subset of private property owners in a manner that is entirely inconsistent with the purpose and historical application of the Takings Clause.”
The elimination of rent control in Cambridge, Massachusetts in 1995 contributed to housing valuation increases. According to a paper by the National Bureau for Economic Research (NBER), removing rent controls led “on average to a 12 percent increase in the market valuations of never-controlled houses between 1994 and 2004.” The paper concludes that it is “reasonable to conjecture” that removing the Cambridge rent controls “significantly contributes to Cambridge’s residential price appreciation.” This is based on a seminal paper by Glaeser and Luttmer (2003) arguing that there is an “allocative inefficiency” in New York’s rent control plan.
If policymakers are serious about correcting imbalances in the housing market it is imperative that they address issues on the state and local level underlying the upward movement of urban rental prices. Municipalities and states must stop artificially lowering the price of housing through rent regulations if they wish to spur the creation of additional housing. Cities in states without rent control laws have lower rents on average. Take Florida and Texas for example, two states with large cities like New York. In Houston, the median rent is roughly $1,800 and in Orlando it’s approximately $2,100. If there’s a takeaway for policymakers to acknowledge it’s that incentives matter and they often predict outcomes of policy decisions ahead of time; and good intentions often detract from setting the right incentives.
New York is just one of many cases where good intentions backfire. The city distorted prices in the rental market to improve affordability. As a result, the market signaled landlords and developers to cut down on the supply of available apartments since they were being leased out below market value. The figures verify this assessment as it was reported that New York only added 26,000 apartment units in 2022 to the city’s housing stock, falling well below mayor Eric Adams’ desired benchmark of 50,000.
Given the circumstances faced by homebuilders, residential construction activity could dry up in cities where existing regulations on rent prices are already contributing to severe housing shortages. Local governments cannot idly anticipate this problem will resolve on its own without the removal of rent stabilization laws disincentivizing developers from building in the first place.
Lawmakers should reject efforts to federalize rent controls and instead promote policies that will supercharge housing supply. This will bring down rental prices for all Americans and narrow income gaps in larger cities.