A mixed-income housing project in San Francisco. Robert Galbraith/Reuters

The eventual drawbacks of rent restriction policies appear to outweigh the benefits to low-income individuals. So, is it time to reform them?

Rent control. Advocates say it really helps low-income tenants keep their homes, especially in places where they’re likely to be priced out, helping maintain economic and cultural diversity. Critics say it’s, at best, a mere Band-Aid. So, which is it?

A new working paper published in the National Bureau for Economic Research provides a complicated answer: While these policies are a boon to many low-income tenants who directly benefit, they worsen the affordability crisis in the longterm. “It’s somewhat of a transfer from future tenants to incumbent tenants,” said Rebecca Diamond, an assistant professor of economics at Stanford University, who authored the paper along with colleagues Timothy McQuade and Franklin Qian.

Rent control policies impose limits on rent increases for the duration of a tenant’s stay. But since landlords have many loopholes for escaping those requirements, the Stanford researchers found that that they ended up pulling properties from the rental market—shrinking the rental housing supply overall.

The researchers examined the impact of a 1994 ballot initiative in San Francisco, extending rent control protections to certain smaller buildings built before 1980. Its passage created a natural opportunity to compare these buildings with similar ones built in the period after that were not rent controlled. Diamond and her colleagues followed the landlords and the tenants in these buildings over time.

What they found was that the tenants who benefited from the law were between 10 and 20 percent more likely to remain at the same address, compared to their counterparts in the non-rent controlled buildings. This was particularly true for the less mobile tenants—elderly folks and those families who’d lived at that address for a long time.

The dollar value of these tenants’ benefits was immense. If what they collectively gained between 1995 and 2012 were given out as a lump sum today, it would amount to $2.9 billion, the researchers calculated. That’s around $2,300 and $6,600 per person per year.

But many other tenants in rent-controlled apartments stayed in their homes for far shorter periods of time than their counterparts in the control group. This is because rent control policies have an impact on landlord behavior. Landlords have many options to elude rent control by changing the status of their buildings and driving tenants out.

The researchers found that rent-controlled properties were 10 percent more likely to be converted into condos or renovated drastically, so that they’d be exempt from rent control. Other landlords avoided the regulations by moving into the property themselves, taking advantage of California’s Ellis Act and saying they were taking the building off the rental market, or buying off the tenants. Landlords probably pursued these tactics more readily in expensive areas, where they had more to gain, according to the paper, and were more successful in cases where tenants put up less resistance.

As a result of these landlord reactions, rent-controlled buildings saw a 15 percent decline in the number of renter residents, and a 25 percent decline in those living in the rent-controlled units, compared to 1994 levels. In other words, rent control had a counterproductive effect.

“It just dramatically limited the supply of rental housing. On top of that, it pushed landlords to supply owner-occupied housing and new housing—both of which are really the types of housing consumed by rich people,” Diamond said. “So we’re creating a policy that tells landlords, ‘It's much more profitable to cater to high-income housing taste than low-income housing tastes.’”

This had a city-wide effect, according to the paper, decreasing rental housing by 6 percent, and increasing rent in San Francisco by 5.1 percent in the time period examined. The rent control policy therefore “likely fueled the gentrification of San Francisco,” the paper concluded, contributing to “a higher level of income inequality in the city overall.”

Further, if the losses as a result of that increase are conveyed in terms of a dollar amount today, they would amount to $2.9 billion—offsetting the $2.9 billion in savings the tenants of rent-controlled buildings gained as a result of the policy. And who ended up paying for that increase? The researchers found that 42 percent were paid by future residents of the city, while the rest of the brunt was borne by the San Franciscans at the time the law change.

Rent control has other benefits besides the monetary gains: The policy can give vulnerable tenants the tools to organize against evictions, for example. But given its significant failures, how should the policy be reformed? According to Diamond, a more effective policy to make rents affordable for low-income renters requires a different type of funding source and more government subsidies.

“If we’re really serious as a society about ensuring that rents remain affordable to tenants, we potentially should share that cost burden,” she said. “You could imagine raising revenue through a tax … and providing rental subsidies in tax credit, but making landlords pay 100 percent of those costs in a world where they can avoid paying those costs really undermines the goals of policy.”

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