Executive Summary
It wasn’t long ago that state policymakers were worried about falling home prices and the impact the declines were having on the California economy. Today those worries have turned 180 degrees and policymakers are focused on opposite concerns—the rising costs of rental housing and the impact it may be having on low-income families.
This report makes the following findings:
- Beacon Economics did not find strong evidence that rent control helps to reduce the number of low-income households spending 30% or more of their income on rent.
- Rent control can have a negative impact on low-income households not living in rent-controlled units through higher growth in citywide median rents.
- Rent control ordinances are associated with lower growth rates in the supply of rental housing and with higher rental price growth in the broader market.
- Rents are too high because multi-family housing and the state’s housing stock have failed to expand commensurately with the ever-growing population. The solution to this affordability problem is to expand the apartment stock in these cities, not introduce price ceilings.
The growth in housing prices in California has been impressive in recent years. In the City of San Jose, for example, asking rents have risen by 8% per year for the last three years. Some of these gains are being driven by a recovering economy, which is driving job growth and higher incomes. From 2011 to 2014, the share of renting households using over 30% of their income to cover the cost of housing fell modestly due to improved economic circumstances for many renters in the state. Still, the share of the population spending more than 30% of their income on housing in California remains the highest in the nation at just over 54%. This, combined with the still too-slow pace of new home construction, suggests the challenge of rising rents is likely to get worse before it gets better.
Policymakers are struggling to find appropriate responses to the growing problem. At the local level this has led to discussions about the controversial issue of rent control. Such ordinances are certainly well intentioned, but questions remain as to whether they are the most appropriate strategy to combat housing affordability issues among the renter population. Clearly such rules can directly reduce the rental burden of those fortunate enough to live in a stabilized unit. But the transfer of income from the owner of the property to the tenant also has the impact of reducing the overall supply of housing. This ‘winners versus losers’ phenomenon implies that the net impact is, at best, mixed. In Beacon Economics’ analysis, we have reviewed the literature on the subject, which generally indicates mixed opinions over whether rent control laws generate positive impacts in the cities in which they are enacted or not.
Beacon Economics has undertaken an analysis of rent control ordinances in the State of California to better understand the effects these ordinances have on local housing markets. But we start by setting aside the standard rent/supply question often at the core of such debates. Worries about unaffordable housing clearly are aimed at lower income households so rent control policies need to be considered in the context of social assistance and not strictly in the framework of market supply and demand. Our study starts with a more specific question—does rent control specifically help low income families and residents.
Our findings support the view that they do not work as intended, and can actually do more harm than good to the overall rental housing market. In particular, rent control ordinances largely attack the symptoms (high cost of living) of a much broader causal factor, rather than the source of high housing costs. That source is California’s lack of new housing supply commensurate with new population growth – something that continues to drive housing costs higher in the state.
To explore these findings in more depth, Beacon Economics conducted a quantitative analysis using demographic and housing data from the 2000 U.S. Census and the 2013 American Community Survey to assess whether rent control ordinances:
- Provide significant benefits to low-income households
- Affect the rental housing supply
- Affect the median rent
The quantitative analysis found that:
- The presence of rent control was associated with a decrease in the number of middle-income households (those making between $35,000 and $75,000 annually) that spent 30% or more of their income on rent from 2000 to 2013.
- For low-income households, however, there was no statistically significant decrease found, which suggests that rent control policies do not directly benefit the intended recipients.
- The presence of rent control was associated with a decrease in the growth of renter occupied housing in a city from 2000 to 2012, indicating that these policies actually restrict the supply of rental housing, thereby increasing rents throughout the market rather than placing downward pressure on rental prices as intended.
- The presence of rent control was associated with an increase in the growth of median rent in a city from 2000 to 2013.
The findings in Beacon Economics’ review of existing literature, as well as our own analysis of the available data, demonstrates that rent control policies are not an effective way to deal with unaffordable housing. What’s more, rent control policies can have negative consequences for low-income households due to higher growth in rents for units not covered by such policies. In other words, rent control policies can protect some people at the expense of others since residents who do not live in rent-controlled properties face higher rents as well.
At best, the existing literature suggests that rent control laws do not accomplish their goals of increasing diversity, providing affordable housing for low-income residents, or reducing homelessness. At worst, rent control laws actually move cities further away from these goals by making low-income residents in cities with rent control laws worse off or leading them to move elsewhere. In San Jose, for example, 57.1% of low-income households did not live in rent-controlled housing (pre-1980 structures with three units or more) in 2013, which leaves them vulnerable to higher rent growth in housing that is exempt from rent control policies.
Ultimately, prices increase due to high demand, low supply, or a combination of the two. Addressing the larger problem of California’s housing shortage—especially in markets with strong rent growth—is the more economically sound approach to dealing with unaffordable housing.
The following report is divided into three broad sections. The first section outlines the quantitative analysis Beacon Economics undertook to assess the impact of rent control policies on low-income households, rental housing supply, and median rents. The second section provides an overview of rent control ordinances in the state, along with a review of relevant literature on the topic. In the final section, the City of San Jose, where the City Council has recently started to explore ways to reduce further rent growth beyond its current ordinance, is examined along with some of the potential effects of making these changes.