Rent Control Doesn’t Work! So Why Do We Keep Doing It?
You go back to units where rent control was implemented as early as the sixties. They can be way behind market rate.
Speaker 2:There's this wide and deep body of research that pretty conclusively demonstrate that it hurts affordability. Hey, everybody. Welcome to another episode of Landlord Lens. Today, we're going to be talking about something you've probably got opinions about already.
Speaker 1:Yes. It's rent control. Rent control? Rent control?
Speaker 2:Rent control.
Speaker 1:Rent control. We're gonna talk about how it's producing affordability across The United States. Right, John?
Speaker 2:That is exactly the opposite of what we're going to be talking about.
Speaker 1:Oh, interesting. So it doesn't work.
Speaker 2:Yeah, it does not work.
Speaker 1:According to economists. And do we really believe those guys?
Speaker 2:I don't believe economists for the Nike throne.
Speaker 1:I'm not as strong as you, John. I do happen to be a economist believer in a lot of cases, especially when you dig into rent control because we've done some studies, there's been a history of it and the facts feel pretty undisputed. In fact, they haven't been disputed. People just layer on other reasons for rent control, which are not market or affordability based.
Speaker 2:Exactly. There's this wide and deep body of research and studies around places that have implemented rent control that pretty conclusively demonstrate that it hurts affordability, hurts a lot of actually, not not just affordability, but a bunch of lifestyle factors for people that live in an area affected by rent control. I think you've got a couple pulled up. You wanna list them off?
Speaker 1:Rent control, just so that our audience understands, right? Rent control is basically when rent can't go up or at least is capped how much it can go up. And so if you go back to units where rent control was implemented as early as the sixties, they can be way behind market rate, right? Vastly behind market rate. And so what it does is it creates lock in.
Speaker 1:If you're in a rent controlled unit right now, you're not gonna move, right? Because you basically can't move anywhere that is anywhere close to the same price as you. And that lock in really reduces mobility. In a study in San Francisco that they looked at, mobility was actually cut by 20% by implementing new rent control measures.
Speaker 2:Yeah. And that, you know, as you were talking about that, were saying it in terms of the renter, right? That renter in that unit is less mobile, but that also means that stock is off the rental market for that entire period of time, right?
Speaker 1:Yeah, a 100%. So what happens is rental supply then shrinks, right? Because you have a much smaller pool of rentals in a given market where people are coming and going, right? Where opportunities are opening. And so going back to that same study that was done in San Francisco, they actually saw rental supply shrink by 15% through the implementation of primarily rent control.
Speaker 1:And for those of us out there that don't, maybe we do, maybe we don't believe in economists, Supply and demand is a real thing. Right? You shrink supply, demand stays the same or even grows, prices are gonna go up of all units that aren't rent controlled.
Speaker 2:Yes. And that that's another interesting wrinkle of this is I think when the idea of rent control is brought up in a conversation, people imagine that an entire community or an entire market is has the same rent control applied. And that's actually not the case in a lot of the high profile areas.
Speaker 1:Exactly. You have some units that are rent controlled. Right? Those units are very hard to get. As we just said, there's very low mobility.
Speaker 1:So the wait list for these units can be very, very long for everyone else. They're now fishing from a smaller pond. Right? And in San Francisco, they saw rent prices go up five to 7% kind of automatically in all the units that were not rent controlled due to the the imbalance in supply.
Speaker 2:Most of these places, the rent controlled units, or or at least the ones you've referenced so far in New York and in San Francisco, the rent controlled units are actually a fraction of the total. Right?
Speaker 1:Yes.
Speaker 2:But there are some laws being considered right now in California, we did an episode on, where the share of units that would be rent controlled is not a fraction, it's a majority.
Speaker 1:Trying to expand
Speaker 2:That's not going to necessarily create this class of protected renters that will be perma renters, right, in the unit. How will that impact markets like Los Angeles?
Speaker 1:It it's really gonna impact actually real estate investors. Right? Because you're not going to invest in a property where as costs go up, things like insurance and taxes, which we've seen skyrocket in markets across the country, as those go up, your way of adapting to that as a landlord is raising rent, right? It's the number one reason people raise rent. It's because their expenses are going up.
Speaker 1:And so as soon as you cap that, why as a real estate investor, am I going put my money into that market? And it actually creates a lot of incentive for landlords to actually move into those units and become primaries. That's something they also saw in San Francisco where owners basically started occupying a lot of those units. A lot of those units were actually converted to condos and then sold as opposed to being apartments.
Speaker 2:Yeah. And I I think the that that example in San Francisco where they they spun up the condos or or converted their old old house into a condo building and then sold it is a very interesting other outcome of some of these rent control laws where the sale of a property can actually trigger some resets in in in this process. Right? So it it creates this weird lock in period, not just for the renter, but this kind of reverse lock in for the investor where they're punished for having a property.
Speaker 1:If their primary is not rent controlled, might as well move into the rent control unit, right? Because guess what? Rent prices have gone up everywhere else. So their primary can now rent for more, right? So that's a strategy that we're seeing.
Speaker 1:But once again, it solve the problem that rent control is supposed to address, which is broad affordability in the housing market.
Speaker 2:A lot of what you've just been talking about is specific implementations. Right? It's almost it's challenging to tell a story about rent control without saying, in this place, it's like this. Right? And so it's all very state, like specific to an area or a market or a state or something differently implemented, that that creates a a complicated environment for investors and introduces uncertainty in the investment decision.
Speaker 1:Yeah. It absolutely does. And existing investors, it's getting harder for for. Right? Just last night, I was talking to a real estate agent, a TurboTennant user.
Speaker 1:She's got five properties in Colorado here. And I asked her how she likes self managing. Right? And she was talking about, well, the management itself is pretty easy. The increasing liability in Colorado because of the new laws and having to stay up on that, she's like, honestly, it just makes me nervous.
Speaker 1:I'm starting to question whether the risk is worth the reward as it gets more and more complex. And this was somebody, she's a real estate agent. She was showing me actually a house and she is licensed in the state of Colorado and she's gone through all of her continuing education and she's intimidated by it. And I said, you feel that way. Imagine how I feel.
Speaker 1:Right? I'm not a real estate agent. I don't have that continuing education that that you do in this heavy legislation environment.
Speaker 2:At the end of the day, though, she is still she doesn't have a a back office full of lawyers. Right? And I I think that's the other impact of something like rent control and regulations in general in the housing market is it it makes the small landlord nervous, and it makes the large landlord shrug. Because in a in a lot of ways, the institutional investor has the people to figure out the appropriate workarounds and give them the insulation from the the litigation that might result from their actions.
Speaker 1:Yeah. And what figuring it out might mean is just pulling out of a given market. Right? We're just not gonna invest in this space And we see elements of that. I'm very interested to see how big that is felt in like New York, right?
Speaker 1:With Mondani's proposal on rent control and, in fact, rent freeze. Right? Different than a rent control. It'll be interesting to watch the way the money flows.
Speaker 2:Yeah. So we we just talked about all of the issues and and challenges, kinda summarized what economists have been telling us for a while. Why can somebody like Mamdani run on rent control and get elected if all of this evidence exists?
Speaker 1:Yeah. Well, if you're a politician, it gets votes. Right? And if you're a voter, it makes you feel good that in the ballot box, you're potentially doing something to help affordability, right? Or to help your community and people that are struggling to pay rent.
Speaker 1:Yeah, I think it's really just a way to buy votes through policy, which is a lot of what a democracy is, right? So it's not a surprise that it happens, that it remains popular, that even after some of the studies we've cited, which happened in like late '90s, early 2000s, twenty five, twenty six years later, we're still talking about
Speaker 2:Right.
Speaker 1:Talking about it. We're still seeing it come up and be voted on on a regular basis in different markets. It feels good.
Speaker 2:Even though the pros and easier answer when it gets the election, you still have the negotiation with powerful lobbies with the politician. And that's part of what makes the rent control law so complicated afterwards. Right? I mean, the the New York's law in the seventies that passed had a bunch of carve outs for what counted as rent control and what didn't count as rent control. And guess who was probably at the table helping to make those decisions?
Speaker 1:I don't know, John. Who?
Speaker 2:The property owners. Right? The the the institutional investors that had an active role in New York politics recognized, okay. Clearly, they're gonna do this rent control thing. How can we carve out the pieces we need to be successful, oftentimes at the expense of renters or at the expense of the smaller landowner?
Speaker 1:Yeah. And we recently talked about president Trump's announcement that he wants to limit the buying potential of those institutional those corporate landlords. And what's really interesting is if you look at where corporate landlords are participating in the market, no right control. And what's interesting is whether, you know, what would be really interesting to know is whether that's causation because of the lobbying that they're doing, because of the money they're bringing to the table to advocate for their own benefit, or whether they're just picking markets where rent control is not a policy that's on the table. But kind of interesting way of looking at this as well, like we typically do, which is what is helping renters, what's helping the independent DIY landlords that we get to serve at Turbo Tenant, and then what's helping the institutional and corporate landlords.
Speaker 2:Yes. And I think in the rent control case, it's pretty clear that those interests are not aligned.
Speaker 1:Well, think in this one, it's unique in that it helps no one.
Speaker 2:Yeah, that's true.
Speaker 1:Right? Like this if we have our check marks, right, where it's like x, x, x for all three of those categories.
Speaker 2:Yes. Unless you're one of the renters in the in the newly rent controlled unit, and then you won the game of musical chairs and
Speaker 1:Absolutely. Just don't get a job anywhere else. Yeah. And
Speaker 2:Stay put. So if you live in an area that has rent control, a renter, if you're a landlord in an area of rent control, drop your experiences down below. Especially interested if it just happened or recently happened. We're definitely curious to hear your experience.
Speaker 1:Yeah. And I'd love to know from landlords out there how they've seen the cash crunch happen if they have rent control units. Right, with the recent surge in taxes and insurance prices recently.
Speaker 2:Thanks so much for watching. Tune in next week for another episode, and like and subscribe.
