By: José Niño
Oregon made headlines recently by becoming the first state to enact rent control when Senate Bill 608 received Democratic Governor Kate Brown’s signature.
This is an unprecedented move, given that 37 states have banned rent control, and the remaining states that don’t have bans only have rent control at the municipal level. Oregon is now changing the debate, with other states like Colorado, Illinois, and New York considering their own rent control legislation.
SB 608 stipulates that increases in rent be capped at 7 percent a year, plus inflation. This measure also gets rid of no-cause evictions and requires landlords to document their reason(s) for evicting someone. Further, certain eviction cases will mandate that landowners provide tenants 90-days’ notice before eviction and pay them one month’s rent.
Advocates of tenants will declare Oregon’s passage of SB 608 a victory, but any student of rational economics should shake his head in disappointment. As mentioned before, 37 states have banned rent control, and for good reason.
Rent Control Violates Basic Economics
Rent control is a flagrant violation of the foundational principles of economics. In the marketplace, prices function as signals to entrepreneurs on how to allocate their resources. For the housing sector, prices communicate to landowners how they should use their land and buildings. Specifically, these prices tell landowners whether they should be constructing rental housing or focusing more on building commercial real estate.
But when interventions like rent control enter the picture, this price mechanism goes out the window. Government-imposed price ceilings generate a fictitious demand for housing units that eventually exceeds supply. In other words, rent controls and similar price ceilings cause shortages in the long-term.
Basic tenets of economics apply everywhere. We see present-day Venezuela suffering as a result of failing to adhere to this iron law of economics. The country has enacted a maze of price control edicts that are the main culprits behind its scarcity crisis. This same dynamic applies to housing, no matter how hard busybody politicians try to defy the laws of economics.
Other Problems with Rent Control
The concept of rent control is rife with other problems. For starters, it robs a large portion of residential property value from landowners. This value is then redistributed to the current tenants. Naturally, these tenants take advantage of the artificially low rents by extending their stay. Stories abound of tenants staying in rent-controlled apartments for years on end.
Rent control has unpleasant social consequences as well. Due to rent control, apartment owners have little incentive to invest in their properties. Landowners will no long renovate or refurbish their properties, which causes these housing units to deteriorate over time. When rent control is on the books for decades, once-bustling building complexes can and do devolve into veritable urban ghettos.
Government regulations have a proven track record of spurring black market activity. Rent control has been no exception to this rule either. Landowners have circumvented these regulations by conducting under-the-table payments for rental applications and even maintenance operations.
Last but certainly not least, rent control impedes the construction of new affordable housing units. Under extreme circumstances, rent-controlled housing is converted to condos or used for non-housing related purposes to escape the rent control regulatory maze. At the end of the day, rent control constricts housing supply, thus keeping housing prices high.
Oregon Needs a Genuine Free Market in Housing
More government involvement in states like Oregon is not the answer. In fact, states should be scaling back government intervention.
Presently, Oregon restricts housing through its implementation of urban growth boundaries, which designate areas where no development can take place. Furthermore, Oregon has zoning ordinances limiting the number of housing units that can be built on residential land in municipalities across the state.
The city of Houston is arguably the posterchild of affordable housing in large metro areas. Houston’s hands-off approach to zoning has allowed it to become one of the most affordable metro areas in the nation, despite massive economic growth. Nolan Grey has an excellent article for the Foundation for Economic Education detailing Houston’s more market-based approach to housing. Grey notes:
The city famously never implemented use-based zoning, a policy that mandates the
separation of residential, commercial, and industrial activity, and effectively bans traditional urban development and forces automobile dependence on residents. This means that urban land in Houston can naturally shift alongside changing market demands, enhancing the flexibility of housing markets and empowering residents and business owners to collectively determine the right mix of uses in a decentralized process.
By embracing more of a market urbanism approach, Houston has avoided many of the problems contemporary urban centers face in terms of housing affordability and quality. Oregon would be wise to follow in Houston’s footsteps. Rent control and other government intrusions in housing markets make it more difficult for prospective tenants to secure quality housing at an affordable price.
Unfortunately, present-day politics rewards short-term fixes like rent control, instead of bold, long-term policies like economic freedom. Politicians will do whatever it takes to get votes, and don’t care about the unintended consequences their policies will have in the long-term.
For Oregon to tame its housing dilemma, it will need to reverse course by repealing SB 608 and hacking away at its housing regulations.