REAL ESTATE NEWS

Rent Control's Impact on Multifamily

While well-meaning, these policies are riddled with unintended consequences.

In the face of high costs and various economic headwinds, rental housing providers continue to experience incredibly narrow margins that cannot sustainably withstand additional strain. In fact, according to the National Apartment Association's (NAA) Dollar of Rent research, 93 cents of every rent dollar pay for things necessary for the operation of rental homes.

Despite these financial constraints, housing providers nationwide are also contending with rent regulations that artificially cap rent increases and exacerbate an operator's cost burden. While well-meaning, these policies are riddled with unintended consequences that harm the rental market and the very residents they intend to help.

NAA recently engaged Capital Policy Analytics to examine the empirical link between rent control policies and the quality of housing. The study examined data on neighborhood and housing quality in the 15 largest metropolitan areas from 2015 to 2021, using data from the U.S. Census American Housing Surveys (AHS). The resulting report suggests that such policies lead to a reduction in housing quality and can trigger a chain reaction that leads to a deterioration in neighborhood quality.

At the highest level, the study showed that when the number of rent-controlled units in an area doubles, there is a correlation of a 16.2% increase in severely inadequate housing units and a nearly 15% increase in moderately inadequate housing.

Let's take a deeper look at the report's findings and the detrimental impacts of rent control.

Housing Deficiencies

Rent control has long been contemplated by policymakers as a potential solution to housing affordability yet in a GlobeSt. article, Ralph Amicucci, Esq., CPM points out that rent control actually hinders property upgrades.

This is particularly concerning given that 43% of the nation's housing stock was built before 1980 and will continue to require renovations and improvements to preserve them. With the U.S. already in the throes of a housing affordability crisis, our nation simply cannot afford policies that jeopardize our critical housing infrastructure and compromise the existing housing stock. It's equally important to remember that this segment of the housing supply accounts for much of the nation's naturally occurring affordable housing and losing it would hurt affordability and offer fewer options for low- and moderate-income renters.

A significant flaw of rent regulation policies is the failure to take a housing provider's financial constraints into account. With the vast majority of rental income already going toward operating expenses, mortgage payments and property taxes, housing providers particularly small, mom-and-pop owners have little room to absorb rising costs while still making ends meet. As a result, recent data shows that 61% of housing providers with rent-regulated properties have or expect to defer nonessential maintenance and improvements.

The inability to properly maintain a rental home can reduce the home's quality and create poorer living conditions. NAA's empirical rent control report found that doubling the number of rent-controlled units in an area leads to increases in several housing deficiencies, including:

  • A 16.2% increase in more severely inadequate housing. This includes critical issues like major plumbing or electrical problems, as well as the presence of health hazards like vermin or significant structural damages
  • A 13% rise in units reporting heating equipment malfunctions
  • A 16.2% increase in units reporting mold problems
  • A 25% increase in units reporting the presence of cockroaches and a 12.8% increase in the number of units reporting mice/rat problems

The only significant exterior deficiency was an 8% increase in exterior water leaks. This could indicate that when faced with rent control, housing providers have to make difficult decisions about which expenses to prioritize given the limited funds available. Since external maintenance and repairs are more critical to the overall structure of the property, they're more likely to be prioritized over internal expenses.

These challenges are further exacerbated by rising insurance premiums, a trend faced by housing providers across the country. The New York Times reports that around one-third of affordable housing providers have experienced at least a 25% increase in insurance costs. "It severely impacts your operating budget," said Francis J. Spinella, an affordable housing consultant whose insurance rose by an alarming 62%. "You can only squeeze a dime so many times."

Neighborhood Deficiencies

The impacts of rent control are not confined solely to housing conditions. With a significant portion eleven cents of every rent dollar going toward property taxes, rent payments play a vital role in communities by financing essential community infrastructure like schools, parks and emergency services. Because property values impact tax rates, these programs and services could face funding challenges as a result. This is further complicated if existing rental housing is lost from the market entirely.

These ripple effects are underscored in NAA's rent control report which found a strong correlation between rent control and increases in neighborhood crime and declines in the perceived quality of schools and neighborhood cleanliness. Doubling the number of rent-controlled units was related to:

  • A 15.9% increase in neighborhood reports of serious crime and a 17.3% increase in reports of petty crime
  • A 15% increase in the number of residents who disagree that the area's schools are "good"
  • A 19.6% increase in reports of large amounts of trash in the street

While there is no reason to believe residents of rent-controlled units are more likely to cause these neighborhood issues, this relationship appears to be driven by a general lack of investment in an area due to limited return on investment.

This is understandable given that, according to a study in the Journal of Housing Economics, "Any factor that reduces the expected rental income of a dwelling inevitably leads to a decrease in its value." A cap on rents disincentivizes potential buyers and investors, resulting in a reduced selling price.

An article in Brookings also reported that removing rent control policies has actually been found to boost market values. For example, Cambridge, Mass., experienced a 45% market value increase in decontrolled properties and even saw a rise in neighboring property values as well.

The Long-Term Impacts

It's important to keep in mind that disincentivizing investment in an area has long-lasting implications. Currently, the U.S. needs to build 4.3 million new apartments by 2035 to meet demand, yet seven in every ten housing providers have reported that rent control has or is expected to impact investment and development plans. A lack of new development, on top of deteriorating housing stock, would prove catastrophic to a nation already dealing with a housing crisis.

Boosting housing affordability is and should be our nation's collective goal, but this can't be accomplished through ineffective and harmful policies like rent control. Rather, sustainable solutions that boost housing supply long-term and better address renter instability in the short term like revitalizing Section 8 will ease affordability challenges for generations of renters to come.

Bob Pinnegar is president and CEO of the National Apartment Association


Source: GlobeSt/ALM