Thursday, August 13, 2015

Experts: Rent Control Causes More Problems Than It Solves

Rising rents nationwide are causing rent control to gain traction — but not among economists, real estate analysts and other housing experts.

A whopping 63 percent of experts surveyed for the Zillow Home Price Expectations Survey (ZHPE) said rent control ordinances are “government intrusions into the marketplace that, however well-intentioned, always create more problems than they solve.”

It’s unusual for such a large group to agree on a single answer, according to Terry Loebs, founder of Pulsenomics LLC, which developed the Zillow-sponsored survey.

“To me, that suggests that most panelists view rent control as violating the principles of free enterprise and, however well-meaning, ultimately hurting more lower-income residents in the long run than it helps in the near term,” Loebs said.

The next-largest group, 33 percent, said rent control might be effective in a crisis — but should be a last resort.

“That’s tantamount to saying it’s like applying a tourniquet to a deep flesh wound,” Loebs said, “where ultimately urban planning policies need to be prioritized and carefully implemented so the housing markets can develop in sync with the growth in the local economies.”

There was an even split between experts who believe rent control measures are usually effective (2 percent) and those who think rent control can be a useful, short-term solution in a crisis (2 percent).

Housing prices leveled off during the first half of 2015, but rents continued to climb, outpacing incomes. On average, U.S. renters can expect to spend more than 30 percent of their income on rent. Los Angeles is the least affordable rental market in the country, and renters there can expect to spend nearly 50 percent of their income on the monthly rent.

Incentive killer

Zillow Chief Economist Svenja Gudell agrees with the majority, believing that rent control is a bad long-term solution.

The biggest risk is that it can remove the incentive to build new rental homes, thereby making the underlying issue — too little inventory — even worse.

Rent control can also keep landlords from upgrading their buildings, Gudell said. “They’re not going to update kitchen appliances and install air conditioning if rents are going to stay the same.”

The loudest outcry against rent control is typically for the types that blanket an entire city, which is rare these days.

“People try to use it as a bridging mechanism” until more inventory can be built, she said.

Still, cities such as New York have had rent control for decades, and whatever the drawbacks, there is little political will to withdraw it.

“People love their rent-controlled apartments, even passing them down through generations,” Gudell said.

Inviting payoffs

New York Mayor Bill de Blasio wants to address the underlying inventory issue with regulations that would require developers in rezoned areas to set aside 25 percent to 30 percent of new apartments for people with low and moderate incomes.

Meanwhile, many New York renters fix up their own homes, because they know they can live there and enjoy their upgrades for years to come, said Dean Baker, co-director of the Center for Economic & Policy Research in Washington, DC.

He was among the 2 percent of survey respondents who said rent control can be a useful, short-term solution in an emergency.

In situations where rental inventory remains low, he thinks it makes sense for rent control to even the economic divide between landlords and renters.

Baker distinguishes between rent control that allows landlords to revert to market-rate rents between tenants and those that don’t.

In the latter case, he said, rents fall so far behind the traditional market that “you’re just inviting payoffs” — that is, renters who will offer landlords extra rent money under the table.

He also thinks it’s important that neighborhoods have inhabitants with various incomes — which could mean some form of rent control.

“Subsidies probably make the most sense, but we don’t necessarily live in a world where policies that make the most sense happen,” Baker said. “If subsidies aren’t politically viable, then some number of units could be available to low-income people at a below-market price.”

About the Zillow Home Price Expectations Survey: Zillow sponsors the ZHPE quarterly. The survey is conducted by Pulsenomics LLC, an independent research and consulting firm that specializes in data analytics, new product and index development for institutional clients in the financial and real estate arenas.  The ZHPE asks panelists their expectations for mortgage availability, home values and housing trends. The Q3 2015 survey polled 107 experts between July 27 and Aug. 7. 

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