LA Rent Control and How it Affects Your Multifamily Property
There is no longer any question that rent control is often counterproductive and ineffective. Study after study has shown profound social and economic consequences of government intervention in the housing markets of the nation over the last quarter of a century. Based on hard-earned experience, local and state jurisdictions from coast to coast have greatly restricted or banned rent control.
There are still some communities that continue to impose rent control. The rationale is to preserve affordable housing for low- or middle-income families. That goal is not being met by rent control. Many communities are finding rent control reduces the quantity and quality of available housing.
The Role of Rent in the Economy of a Market
Advocating rent control ignores the basic economic laws that govern housing markets. Rental property that is privately developed, owned, and operated is treated as a public utility. That philosophy harms not only the providers of housing but the consumers it was intended to serve.
Rent serves two functions in the efficient housing market operation. It compensates existing housing unit providers and new unit developers for the cost incurred to provide shelter to the consumers. Rent also provides economic incentives that attract new rental housing investment. Housing is like other commodities. The supply is related to the market price that prevails.
Providing economic incentives is particularly important in the evaluation of rent control economic implications. When the market is not regulated, rents rise as consumers compete for units that are available. The higher rent encourages new investment in housing rentals. Buildings are constructed, rehabilitated, and converted from nonresidential to residential until there is an elimination of the housing shortage.
Without rent increases, new investment is not attractive. Housing construction is sharply limited. There is no long-term housing shortage solution. When rents fall, the market receives a message that new investments have no room to succeed. Artificially restrained rents by a community send the market a false message. Builders see no need to make new investments and the investments of current providers are reduced. The supply for a housing shortage is reduced rather than expanded.
Economists are practically unanimous in the condemnation of rent control. They point to six principal objections. They are:
Inhibits new construction
Deteriorates existing housing
Reduces property tax revenue
Administrative costs are substantial
Reduces consumer mobility
Hard hit of consumer entry costs.
The poor are most impacted by substantial rent control costs. The costs frequently drop the quality of housing that exists and reduces access to new housing. Rent control is often justified as a strategy that is anti-poverty. Evidence points to higher income households as the principal beneficiaries.
Rent control forces provider of housing to look at credit history and income when choosing from the competing consumer pool. The selection process is biased against young and poor consumers. Rent controls are to supplement consumer income at the rental property provider’s expense. The permissible rate of return is held below market levels of rental property investment.
The solution to the scarce housing problem is not con-induced disinvestment of rent, but an increased housing supply. An affordable housing supply can be stimulated by direct financial assistance to those in need. Increased purchasing power leads to expanded quality and quantity of local market housing. Economists feel rent control is a housing policy failure.