rent stabilization

Rent control

Rent control refers to laws or ordinances that set price controls on the renting of residential housing. It functions as a price ceiling.

History of rent controls in America

In the United States during World War I, rents were "controlled" through the efforts of local rent anti-profiteering committees and public pressure. Between 1919 and 1924, a number of cities and states adopted rent and eviction control laws. Modern rent controls were first adopted in response to WWII-era shortages, or following Richard Nixon's 1971 wage and price controls. They remain in effect or have been reintroduced in some cities with large tenant populations, such as New York, San Francisco, Los Angeles, Washington, DC, and Oakland, California. Many smaller communities also have rent control, notably Santa Monica, Berkeley, and West Hollywood, California along with many small towns in New Jersey. In recent years, rent control in some cities, such as Boston, Massachusetts and Cambridge, Massachusetts, has been ended by state referenda.

New York has had the longest experience of rent controls, since 1943, with most residents being unable to remember a time beforehand. The period has been marked by the lack of an "adequate supply of decent... housing". The worsening in the rental market led to the enactment of the Rent Stabilization Law of 1969, which aimed to help increase the number of places put up for rent. The current system is very complicated, which is especially troublesome as most of the protected renters are elderly, and understanding the city's complex rent-control regulations is difficult even for experienced lawyers.

In some regions rent control laws are more commonly adopted for mobile home parks. Reasons given for these laws include residents owning their homes (and renting the land), the high cost of moving mobile homes, and the loss of home value when they are moved. California, for example, has only 13 local apartment rent control laws but over 100 local mobile home rent control laws. No new mobile home parks have been built in California since 1991.

Purpose and scope

Although the political debate over rent control is far-reaching, as described below, the purposes and provisions of such laws are intended to be limited in scope. They define which rental units are affected, and may have only larger or older rental complexes covered by the law. The frequency and degree of rent increases are limited, usually to the rate of inflation defined by the Consumer Price Index or to a fraction thereof. (San Francisco, for example, allows annual rent increases of 60% of the CPI, up to a maximum 7%. )

Unregulated rent increases may be allowed when a tenant moves ("vacancy decontrol"). Rent-control laws that don't include vacancy decontrol are called strong rent-control laws. Such laws were in effect in five California cities (West Hollywood, Santa Monica, Berkeley, East Palo Alto and Cotati) in 1996, when AB 1164 (known as the Costa/Hawkins Bill) made strong rent-control unenforceable in California (except in special cases like mobile home parks).

Arguments In favor

Economic

The rental-accommodation market suffers from information asymmetries and high transaction costs. Typically, a landlord has much more information about a home than a prospective tenant can reasonably detect. Moreover, once the tenant has moved in, the costs of moving again are very high. Unscrupulous landlords can thus conceal defects and, if the tenant complains, threaten to raise the rent at the end of the lease. With rent control, tenants can ensure that hidden defects at least be repaired to comply with building code requirements, without fearing retaliatory rent increases. Rent control may thus compensate somewhat for inefficiencies of the housing market.

Income tax codes often provide benefits for housing, and rent control allows tenants to share in some of those benefits. In the United States, the Internal Revenue Code allows landlords to claim depreciation deductions for rental property even while increasing rents. Homeowners may also deduct property taxes and mortgage interest, and exclude capital gains, from their taxable income. Tenants pay income tax but get none of these housing-related deductions or exclusions. By limiting the extent to which landlords can raise rent on purportedly depreciated property, rent control restores balance to tax benefits that would otherwise become concentrated solely in the hands of landlords.

Although some opponents contend that rent control decreases housing investment, in reality rent control laws often exempt new construction. For example, San Francisco's Rent Stabilization Ordinance exempts all units built after 1979. New York State generally exempts units built after 1974 anywhere in the state (although owners can agree to rent stabilization in exchange for tax benefits). In jurisdictions where rent stabilization has exempted new construction for so long, construction trends in more recent decades must be related to other factors (for example zoning and other regulations related to urban planning).

In older buildings, rent control may actually broaden incentives to renovate individual units: tenants may invest sweat equity and their own money to improve their homes if they are protected from landlords trying to capture the added value, while vacancy decontrol preserves landlords' financial incentive to renovate vacant units because it allows them to re-rent at market value.

The economic arguments against rent control are often based on its oldest versions, i.e. strong rent control applied to virtually the entire rental housing supply. In many jurisdictions, rent control has since been reformed to address these arguments, for example adding vacancy decontrol and exempting new construction. Thus, arguments and surveys based on previous versions of rent control may no longer apply to current versions.

Rent control may influence housing investment either positively or negatively, depending on how it affects the local economy and public services (both of which may benefit from retaining key workers), and tax burden (which can increase if rent instability increases turnover among municipal employees), in addition to myriad other voter-driven regulations. If regulation were the only factor driving investment in housing, and if regulation were a purely negative factor, then investment would be highest in the areas with the least regulation, for example desolate rural areas; in fact, the opposite is true, as the largest and most prosperous municipalities tend to have more regulation, including rent control.

Social

Rent control is considered necessary to protect the public and to prevent landlords from imposing rent increases that cause key workers or vulnerable people to leave an area. Maintaining a supply of affordable housing is believed to be essential to sustaining the local society. Homeowners who support rent control point to the neighborhood instability caused by high or frequent rent increases and the effect on schools, youth groups, and community organizations when tenants move more frequently.

In certain instances the term rent "stabilization" is used instead of rent "control," for example, in some cities in California, such as San Francisco. With rent stabilization and vacancy de-control landlords are free to set prices of vacant units at market prices, but once rented to a tenant, subsequent increases are capped based on the rate of inflation or a regulated percentage. This is considered a basic form of consumer protection: once tenants move into a vacant unit at market rents they can afford and establish lives in these homes, they won't have to renegotiate. (Without rent regulation, landlords can demand any amount and tenants must either pay or move. Thus, tenants can become vulnerable to arbitrary and extortionate increases above market value. For example, elderly or disabled tenants may be unable to move, and families risk disrupting children's educations by moving in the middle of a school year.) Advocates insist that finding a new home is not a trivial matter, and tenants should have some assurance that they can maintain some stability in their housing situation.

Some property tax measures also promote the societal goals of community stability and allowing people to remain in their homes even in times of inflation. In California, Proposition 13 generally caps real estate tax increases at 2% per year. Leading the campaign to enact Proposition 13, California politician Howard Jarvis claimed that landlords would pass tax savings along to tenants; when most failed to do so, it became an argument for rent control, to allow tenants to share in the benefit of the property tax control.

Moral

It has been contended that housing is a positive human right that equals or exceeds the property rights of landlords. Therefore the needs of the tenant should equal or override the needs of the landlord.

Without rent control, even tenants paying full rent can be forced unexpectedly from their homes through no fault of their own; for example, if their landlords mortgaged excessively and the property goes into foreclosure, tenants may be evicted even in the middle of a lease. However, the new "bailout" bill recently passed by Congress would prohibit renters from being evicted even if the house they occupy is foreclosed.

Arguments against

Speaking in 1989, Vietnam's Foreign Minister Nguyen Co Thach said: "The Americans couldn't destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.

Writing in 1946, Milton Friedman and George J. Stigler said: "Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building."

Economic

Most economists believe that a ceiling on rents reduces the quality and quantity of housing available. This view is based on analysis of empirical evidence as well as the understanding generated by theoretical models. Even liberal economists as Paul Krugman have cited rent regulation as poor economics which despite its good intentions leads to the creation of less housing, raises prices, and increases urban blight.

Price ceilings can create shortages and reduce quality. By capping the price of accommodation, rent control may increase demand and reduce available supply, causing a shortage. It is argued that rent control also reduces the quality of available housing, deters investment, and raises rents on tenants who are excluded from its protections (for example, in jurisdictions with vacancy decontrol, tenants who move or arrive later).

If a price is forcibly kept low, there will be higher demand. When demand outpaces supply, there is a shortage. However, where builders are restricted in the rents they may charge, they are less willing to construct more housing. Since supply is perpetually low, landlords also do not have to worry about tenants leaving, and there is little or no incentive to maintain the property. For example, unless owners can reasonably expect that punitive action will be taken against them, they might let building maintenance deteriorate in order to mitigate the lower rental income. People moving into the city would have difficulty finding housing because of the shortage created by rent control.

By preventing redevelopment, rent controls reduce property values, preventing communities from enjoying the increased revenue for educational and safety, thus contributing to declining schools. This problem is particularly acute in California, where Proposition 13 limits the ability of localities to reassess value.

Social

Libertarians, such as William Tucker of the Cato Institute, have argued that rent control laws are a textbook example of the problems that arise in trying to artificially reduce prices. The natural consequence in a free-market economy is a reduction in supply and consequent shortages. Tucker has argued that rent control has the perverse effect of creating less affordable housing. By artificially lowering rents on some units with long term tenants, even in some cases forcing landlords to maintain that at a loss, rent control forces landlords to recoup this lost income on newly vacated units, thus increasing rent for new tenants beyond what is necessary. They also argue that, by creating a disincentive to move from units where they enjoy artificially low rent, such rent regulation will actually limit individuals’ mobility, and thus either prevent them from taking advantage of employment opportunities that may require relocation, or force them into longer commute times, with all of the financial, environmental, and personal impacts thus created. Such economists point to policies such as housing vouchers as both more equitable and more successful in ensuring housing for poorer renters, without many of the damaging externalities created by imposing price regulation on landlords.

Furthermore, rent control may not be effective at lowering rents in the area under control. A rent control board or regulatory agency may be captured or politically influenced by the land owners or "landlords", and may be able to influence the regulatory process or "game the system" to the extent that the rent-controlled increases are more than what they would have been in the free market without the rent control law.

Areas with rent-controlled housing are blamed for difficulty of finding vacant housing and the resulting power imbalance between landlords and tenants as tenants may "game the system" to impose onerous conditions on the landlord, forcing long cycles of judicial action, leading to considerable economic hardship for the landlord. Likewise, new tenants have serious difficulty finding housing, so they are seriously disadvantaged if they must move. As a result, landlords can impose numerous conditions and requirements.

In the case of mobile home rent control, that state is actually transferring the value of the property from the owner of the land to the owner of the mobile home. Thus, mobile homes in certain highly desirable locations in California sell for an excess of a million dollars, even as the owner of the site which allows for that high price enjoys none of that increase in value as it is realized entirely by the owner of the mobile home.

In jurisdictions that do not already have rent control, introducing it may reduce the resale value of affected property. The benefits of rent control can accrue disproportionately to wealthy and well-connected tenants. Affordable housing can be more efficiently made available to the poor and middle income through rent subsidies (see affordable housing) making use of the free market for distribution. Such programs allow the community to better target those requiring assistance, have a less distorting effect on rents and development, and distribute affordable housing cost over the community instead of unfairly burdening property owners in the effort to achieve a social good (see externality).

Moral

Moreover, it is argued that rent control violates the property rights of the property owners as it limits what they may do with their property.

When housing is limited it must be rationed in some way. After the San Francisco earthquake of 1906, the number of houses relative to the amount of people who needed housing fell by 40%, but a shortage was avoided because the price mechanism effectively rationed housing and provided an incentive for new housing to be built. In 1946 however, a far less extreme situation was dealt with via chance and favouritehood.

Enforcement issues

Some landlords use extralegal means to evade rent controls and attempt to take advantage of housing conditions. Some landlords may step up discrimination against any group they dislike if they believe there is a surplus of prospective tenants. Jurisdictions that implement rent controls may have to pass laws in response such as those forbidding landlords from compelling new tenants to hire the landlord's moving company. In some areas with especially strict rent controls, landlords may require "key money" (a non-refundable deposit). Demanding key money is illegal in most of North America, but since the landlord will invariably demand it in cash, it is very difficult to trace and nearly impossible to prove in court. Rent control enforcement may likewise create considerable bureaucratic hurdles for the repair and improvement of properties, creating a disincentive for landlords to carry out such actions.

References

See also

Further reading

  • Baar, Kenneth K. (1983). "Guidelines for Drafting Rent Control Laws: Lessons of a Decade." Rutgers Law Review, Vol. 35 No. 4 (Summer 1983).
  • Baar, Kenneth K. (1992). "The Right to Sell the “Im”mobile Manufactured Home in Its Rent Controlled Space in the “Im”mobile Home Park: Valid Regulation or Unconstitutional Taking?" The Urban Lawyer, Vol. 24 pp. 157-221.
  • Downs, Anthony (1996). A Reevaluation of Residential Rent Controls. Washington, D.C. : Urban Land Institute, ISBN 0874208017.
  • Friedman, Milton, and George J. Stigler (1946). Roofs or Ceilings? The Current Housing Problem. Irvington-on-Hudson, N.Y.: Foundation for Economic Education.
  • Gilderbloom, John I., editor (1981). Rent Control: A Source Book. Center for Policy Alternatives; 3rd edition, June 1, 1981. ISBN 0-938806-01-7.
  • Keating, Dennis, editor (1998). Rent Control: Regulation and the Housing Market. Center for Urban Policy Research, ISBN 0-88285-159-4.
  • McDonough, Cristina (2007). "Rent Control and Rent Stabilization as Forms of Regulatory and Physical Taking." Boston College Environmental Affairs Law Review, Vol. 34 pp. 361-85.
  • Niebanck, Paul L., editor (1986). The Rent Control Debate. University of North Carolina Press, ISBN 0-8078-1670-1.
  • Tucker, William (1991). Zoning, Rent Control and Affordable Housing. ISBN 0-932790-78-X.
  • Turner, Margery Austin (1990). Housing Market Impacts of Rent Control. Washington, D.C.: Urban Institute Press, ISBN 0877664439.

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