President Biden's proposed 5% cap on annual rent increases may seem like a promising solution to rising housing costs, but evidence from California shows that rent control laws are counterproductive, leading to reduced housing supply, increased market rents, and other negative consequences.
President Joe Biden's proposal to cap annual rent increases on residential units at 5% is a shortsighted and ineffective approach to addressing housing affordability. The evidence from California, one of the most rent-controlled states in the country, paints a clear picture of the harmful effects of such policies.
Rent control laws, which limit how much landlords can increase rental rates, have been shown to reduce the supply of rental housing. A study by the American Economic Association found that San Francisco landlords subject to rent control reduced their rental housing supply by selling to owner-occupants and redeveloping buildings, driving up long-run market rents and undermining the intended goals of the city's rent control initiative.
Biden's Rent Control Plan: A Recipe for Housing Disaster
The negative consequences of rent control extend beyond reduced supply. Tenants in rent-controlled apartments may overconsume housing, leading to a misallocation of housing resources. Neighboring housing units may experience negative spillovers, lowering the amenity value and desirability of the area. Landlords may neglect required maintenance due to reduced return on investment.
Berkeley's rent control law in the late 1970s caused a large-scale dislocation as students stayed in their apartments beyond graduation, leading to a shortage of housing for new students in Berkeley and surrounding cities like Oakland.
Biden's Rent Control Plan: A Recipe for Housing Disaster
A two-decade study by California State University, Sacramento and the Sacramento Regional Research Institute found that rent control laws in Berkeley and Santa Monica reduced the supply of rental housing by 7.5% and 8.7%, respectively. This resulted in a decline in Berkeley's college-age student population by nearly 11% and a drop of over 50% in Santa Monica.
In Los Angeles, rent control has skewed the housing market, forcing landlords to offer large sums of money to tenants to incentivize them to move out. The hardship of rent control has led to property owners demolishing their units and using the land for other purposes to avoid continuing losses.
Biden's Rent Control Plan: A Recipe for Housing Disaster
The Legislative Analyst's Office, California's nonpartisan fiscal and policy adviser, has warned against the negative consequences of rent control. In a 2016 report, the office stated that rent-control laws fail to increase housing supply and discourage new construction, which is desperately needed in California.
Economist Milton Friedman, whom Biden has dismissed as no longer "running the show," understood the folly of rent control. Friedman's insights and advice should inform Biden's policy decisions, but instead, the President has chosen to embrace the failed policies of California.
Rent control is not a solution to housing affordability. It is a misguided and harmful policy that will ultimately exacerbate the very problems it claims to solve. Biden's proposed 5% cap on rent increases is a reckless experiment that will further damage the nation's housing market.
