American households today are feeling a painful financial pinch, with costs of everything from gas to groceries up significantly over the last year. Inflation is challenging consumers’ ability to make ends meet, for things such as groceries which have raised 13% since last year – the largest spike in 43 years, while other sectors like airlines rising over 33% in one year. Rental costs have risen steeply, also. RealPage reports that new lease trade-out, which measures the change in rent levels over the previous occupant’s price, hit about 19% in June, 2022 - an all-time high. Renewal trade-out, which is the change in price when an occupant renews a lease in the same unit, was at about 11% in June, 2022. That was also a historic peak for an indicator that has continued to grow.
Rent Control Initiatives Gain Traction
Housing affordability is of heightened concern to both consumers and legislators. As a result, new rent control (setting a rent ceiling) and rent stabilization (limiting rent increases) initiatives are on the table in many communities, particularly high-cost coastal cities. As rents continue to rise, advocates propose rent control as a tool to make it easier for lower-income individuals to find and maintain housing they can afford. Some are even lobbying for action to be taken at the federal level. According to Yahoo! News, a coalition of tenant unions, community organizations, and legal groups are calling on the Biden administration to launch an all-out government response to intervene in the rising costs of housing.
Why are housing costs soaring? Blame a lack of supply. Multi-Housing News reports that the U.S. needs to build 4.3 million new apartments by 2035 to address demand, deficit, and affordability. Underbuilding that largely resulted from the 2008 financial crisis can be blamed for an existing 600,000 apartment home deficit, and another 3.7 million units must be built to meet future demand. There simply are not enough apartment homes to accommodate demand.
Unintended Consequences of Rent Control
Rent control is “an appealing quick fix” to stop rising rents, said the Wall Street Journal Editorial Board in an August 19 opinion piece. However, the board asserts that such policies are “deadly for the supply and upkeep of rental properties.” That’s because, according to the National Multifamily Housing Council study titled Rent Control: A Research Review and Synthesis, rent control and rent stabilization laws actually lead to a reduction in the available supply of rental housing in a community. And, rent control policies generally lead to higher rents in the uncontrolled market. It seems counter-intuitive, but according to the NMHC report, “...Economists nearly universally agree that rent ceilings reduce the quantity and quality of housing.”
The National Apartment Association’s published position on rent control states, “Rent control distorts the housing market by acting as a deterrent and disincentive to develop rental housing and expedites the deterioration of housing stock. While done under the guise of preserving affordable housing, the policy hurts the very community it purports to help by limiting accessibility and affordability.”
Rental Housing Trade Associations Speak Out
In an interview with GlobeSt.com, Robert Pinnegar, President and CEO of the National Apartment Association, says that efforts to cap rental rates and increases can have significant negative housing market impacts. “In a rent control environment, you have limited returns, disincentive to invest and reinvest in product, a decline in the overall housing stock, discouragement of new construction and really, over the long term, it diminishes the value of the property and ultimately the local jurisdiction loses in property taxes,” he said. “As time moves on and the economy continues to grow, you really are limiting the options of the local municipality.”
For more details on the impacts of rent control, the National Multifamily Housing Council and National Apartment Association jointly provide this Rent Control Fact Sheet.
What’s the Answer?
The solution to lower rents is more supply, not less. Rent control initiatives, while well-intentioned, have a probable unintended consequence of discouraging construction and investment and further exacerbating the nation’s housing shortage. Capital simply will not flow into new housing development with the government regulating rents. This is basic supply and demand 101.
If we want housing supply to meet demand, rents to stabilize at a level that is affordable for consumers, and a continued investment in the maintenance and upkeep of existing housing supply, there is only one path forward: we need to materially increase the supply of housing. Rent control and stabilization initiatives won’t get us there.
Here’s what will:
The National Multihousing Council and National Apartment Association are leading the conversation on how the industry can meet the strong and growing demand for affordable housing. Together, they have launched the Vision 2030 campaign which outlines both the challenges the industry faces and the recommendations for how to meet the demand.
We all agree this country needs more affordable housing, so let's incentivize the market to build it.