Does Rent Control Work? Evidence from San Francisco

Housing affordability has become a hot-button issue in many communities in the United States, particularly in urban neighborhoods, due to rapidly rising rents. In response, some housing activists have advocated for imposing rent control policies in order to protect community members from financial hardship and displacement. For example, in November 2018, Californians voted on a ballot measure that would have repealed a key prohibition against local rent control regulations. Though the measure did not pass, the issue remains contested and additional referenda are likely.

Rent control regulation can take many forms, but often involves a restriction on maximum annual rent hikes. Many economists have criticized these regulations because they predict that, in a competitive market, rent controls will restrict the supply of housing. They argue that capping prices will reduce the number of landlords willing to lease units. However, advocates of rent control argue that such protections are necessary to stop low- and moderate-income households from being priced out of rapidly gentrifying neighborhoods.

A recent paper from economists Rebecca Diamond, Tim McQuade, and Franklin Qian adds key evidence regarding the costs and benefits of rent control to this debate. They investigated the effects of a 1990s-era expansion of rent control in San Francisco. Their results indicate that rent control did help older, more established tenants, especially those from minority backgrounds, stay in their apartments for longer periods. However, it may have had the opposite effect for younger tenants who had more recently moved in. Furthermore, over time the authors found that rent control reduced the overall amount of rental housing and may have accelerated gentrification.

This study examined the effects of a 1994 ballot initiative that expanded San Francisco’s restriction on annual rent increases to small multifamily apartment buildings built before 1980. Buildings of this type built after 1980 were already covered by rent control. This sudden expansion provided a natural experiment, allowing the researchers to compare the behavior of similar groups of tenants and landlords, some of whom were affected by the policy change and some of whom were not.

Diamond et al. find that the policy change caused a 10 to 20 percent increase in the length of time that tenants stayed at their address. However, that effect was concentrated among tenants who were over age 40 and who had lived at their address for four years or more. By contrast, more recent and younger tenants moved more often as a result of the policy change. Additionally, the authors show that tenants living in neighborhoods experiencing the most rapidly rising rents were more likely to move after the expansion of rent control. This result is consistent with the idea that rent controls created an incentive for landlords to encourage tenant turnover (perhaps via buyouts or evictions) because the law allowed them to increase rents to market prices when an apartment changed hands.

Further, the study estimated that the rent control expansion caused a substantial decrease in the supply of rental housing. Specifically, it found a 10 percent increase in conversions of housing from rental to owner-occupied (for example, condominiums), as well as a 25 percent decrease in the number of renters living in rent-controlled apartments. The authors cite this increase in conversions, as well as the increased turnover in neighborhoods with the fastest-growing rents, as evidence that rent control expansion accelerated gentrification in San Francisco.

Finally, the study finds that rent control provided substantial benefits to tenants, but also drove rent increases. The authors estimate that the average benefits to tenants were between $2,300 and $6,600 per person per year between 1995 and 2012, while rents rose by 5.1 percent city-wide. Critically, the authors note the benefits of rent control accrued to incumbent residents unevenly: older, lower-turnover tenants received a larger share than their younger, more mobile counterparts. Meanwhile, all San Francisco renters bore the costs of higher rents.

These results present several important considerations for policymakers contemplating rent control. First, such policies appear to be moderately effective at helping renters stay put when rents rise, but they are not equally effective for all types of tenants. Second, rent control may have significant indirect consequences in the form of reduced supply and higher rents. Third, there are important political and equity implications because the benefits and costs are unevenly distributed. While research on cities beyond San Francisco – an outlier in terms of affordability challenges – would doubtless be beneficial, this study contributes a highly useful, timely set of statistics to inform policymakers.

Article source: Rebecca Diamond, Tim McQuade, and Franklin Qian, “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” NBER Working Paper No. 21841 (2018).

Featured photo: cc/(chameleonseye, photo ID: 1026290882, from iStock by Getty Images)