Calls for rent-control legislation are growing across the U.S. as apartment tenants endure sharply rising rents and

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Question:

Calls for rent-control legislation are growing across the U.S. as apartment tenants endure sharply rising rents and memories fade of the downsides of price caps.

Price pressures have been increasing since the latest recession. Cities from San Francisco to Boston to Chicago have seen an influx of young, educated workers who are eager to rent apartments near downtown amenities. At the same time, there has been little apartment construction targeted to moderate-income residents, partly because of rising construction costs and tight building regulations.

Wall Street investors, meanwhile, bought thousands of single-family houses out of foreclosure during the housing bust although they continue to own a small percentage of the overall stock and some have been criticized for jacking up rents too aggressively.

California is set to be the largest and most important battleground for rent controls this year. Advocates for low-income residents in less than a month have gathered more than 100,000 signatures out of roughly 365,000 required to put a measure on the ballot in November that would repeal a 20-year-old bill that places statewide limits on rent control.

If that is repealed, California cities would be able to impose rent control on apartments built after 1995 and on single-family rentals, a key issue for advocates who say large private-equity companies bought up homes during the bust and have been raising rents more aggressively than mom and pops.

The current law also gives landlords the right to raise rents to market each time tenants move out.

Landlords plan to oppose the measure by saying the state needs more development, which could help bring down prices. But that may be a tough sell in California, where homeowners and renters alike are often wary of additional density.

The beginnings of rent control date to World War II in New York City, when labor and material shortages because of the war meant little new housing was being built and policy makers sought to avoid a rental affordability crisis. An emergency measure to curb rent increases effectively became permanent, though the number of units it covers has declined over time.

A working paper released in January by Stanford University economists found that from 1995 to 2012 rent control in San Francisco helped residents in rent-controlled apartments, increasing the likelihood that they would stay at their address by nearly 20%.

But the study also found that rent control hurt the city overall by making landlords more likely to convert their apartments to other uses and deplete the housing stock, leading to a permanent citywide rent increase of 5%.

In Washington State, lawmakers in the house and senate have proposed legislation to remove a statewide ban enacted in 1981 that forbids local jurisdictions from enacting rent control. The bills aren’t poised to be voted on this year, but Brett Waller, director of government affairs at the Washington Multifamily Housing Association, said he expects them to come under serious consideration for a vote in the next session.

Questions:

a. Does rent control create an excess demand for housing? Explain.

b. The current law also gives landlords the right to raise rents to market each time tenants move out. What is the effect of rent control, in which rents can be set at market rents when new tenants move in, on the equilibrium rental rates?

c. Suppose some rental housing is rent controlled and other rental housing is not. What is the effect of rent control on the equilibrium rents in non-rent-controlled housing?

d. What is the effect of rent control on the quantity of rental housing? What is the effect of rent control on the quality of rental housing? Does rent control create a deadweight loss in a rental housing market?