ECONOMY
RON THROUPE
Unintended Consequences of Rent Control
I
heard on the TV on April 22 a
reporter saying there is a debate
today in the state senate on rent
control and the soaring rents
in Denver, with the average rent now
approaching $1,500 per month! That is
close to this report’s number of $1,480.74
per month average, but rents are soaring?
Does that mean all pay the average or that
there is such a thing as an average unit?
Not really. Higher priced units drive up
the averages. They are higher priced due
to land costs, materials, labor, and demand.
There are price point choices, although
maybe more are needed as in most cities.
Does that mean a so called “toolbox” is
needed with rent control? How about more
affordable programs, and less “opt out” fee
type deals? The real question is how much
to think before action is warranted, and
what are the unintended consequences of
various actions?
We hear of anecdotal evidence saying
that rent-control policies give tenants
stability and lessens the impacts of
gentrification, preventing displacement.
Ok, maybe for that generation, but how
about the long-term viability of the
neighborhood? Does it change or lead to
unintended consequences? Those who cite
rent control as detrimental are sometimes
considered to be just one opinion among
many. However, it is a historical economic
reality that these policies have previously
led to some detrimental long-term effects!
So what are we going to do differently to
prevent the past? One of the first to address
these economics were Nobel Lauriat’s
Milton Freidman and George Stigler,
“Roofs or Ceilings”.
Let’s look at the actual rent changes
(right) for more insight.
Note from the table that rents over the
time period have fluctuated and the annual
change for the eleven years is 5.1% for the
average rent and 5.25% for the median
rent. These increases are greater than
overall inflation but far from soaring. Truth
is, Denver has become an attractive place
to locate and demand for housing followed.
There were some spike years in 2014- 2016
as housing supply needed time to catch up
with demand, but since then, Denver has
gone back to historical rent escalations and
may be on the verge of rents flattening as
housing supply catches up to demand, and
wages increases also follow suit.
The historic studies by economists
show that rent control over time has a
diminishing effect on the availability, cost
and quality of housing. A research piece
out of Stanford states that a benefit of rent
control is that more current inhabitants
stay locally if rent control is implemented.
Who would leave if they have no inflation
in housing costs? This reduces availability
of units. As a real life case study, a friend
of mine is 69 and lives in Manhattan, and
has not moved for 40 years. Moving would
be crazy. He is an art broker now worth
millions. Unintended consequence?
A developer will construct a for rent
project with a non-growth pro forma, what
does that do to the future sales price? That
is partially what “tax credit” programs are
created to resolve. Truth is, projects get built
because there is demand at a particular
price range. If not, then developers do
something else. Has anyone thought what
a capital market bias could create by a
‘stay out of Denver” mentality from the
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