Rent Control Effects Through The Lens Of Empirical Research - An Almost Complete Review Of The Literature
8th June 2024
Rent controls such as the SNP cap on rents gives respite for some tenants but what is not mentioned are the adverse affects and where the pressure goes on other properties not controlled. The main problem is of course a shortage of suitable housing in he UK.
Research by Konstantin A. Kholodilin published in Science Direct has drawn together all the information from previous research into one essay. As you would expect with an academic research the paper is lengthy so the following are just excerpts. A link to the full article is at the bottom of this page.
Highlights
• This study examines a large number of empirical studies on the effects of rent control.
• It identifies a wide range of effects covered in the empirical literature.
• For the most relevant effects, their direction and degree of consensus of researchers are analyzed.
bstract
Rent control is a highly debated social policy that has been omnipresent since World War I. Since the 2010s, it is experiencing a true renaissance, for many cities and countries facing chronic housing shortages are desperately looking for solutions, directing their attention to controlling housing rents and other restrictive policies. Is rent control useful or does it create more damage than utility? To answer this question, we need to identify the effects of rent control. This study reviews a large empirical literature investigating the impact of rent controls on various socioeconomic and demographic aspects.
Rent controls appear to be quite effective in terms of slowing the growth of rents paid for dwellings subject to control. However, this policy also leads to a wide range of adverse effects affecting the whole society.
1. Introduction
Housing is an important basic good. Unfortunately, urban areas are often characterized by a lack of affordable housing, meaning that some households face rental housing costs that are too high relative to their income. Therefore, governments are asked to intervene in order to alleviate the situation of households experiencing hardships. The main purpose of housing policy is to deliver affordable, decent, and sustainable housing (Ballesteros et al., 2022). Housing policy has at its disposal a wide set of tools, including both restrictive policies (rent control, protection from eviction, and housing rationing) and stimulating policies (support of social housing, housing allowances, and tax benefits to homeowners). Rent control occupies a prominent place among these regulations, attracting a lion's share of attention from both the general public and scholars.
Rent control, like any other governmental policy, has its intended and unintended effects. Its intended effect is to ensure affordable housing, meaning that tenants face a reasonable rental burden. Typically, the rental burden — defined as the share of the rental costs in the total income of the household — is considered reasonable if it does not exceed 30 %.1 The exact threshold and the definition of rental expenditure and income may be a matter of discussion (Ballesteros et al., 2022), but the fact is that a too high rental burden can have devastating effects. When the rental burden is excessive, it prevents households from buying other goods and services, thus negatively affecting the quality of life. In extreme cases, it can lead to poverty and malnutrition. Therefore, it is important to guarantee the affordability of housing.
While rent control appears to alleviate the situation of tenants living in the regulated dwellings, multiple other effects emerge. Rent control leads to the redistribution of income. Apart from an evident and sometimes intended effect of reducing the revenues of landlords, it can also lead to rent increases for dwellings that are not subject to control. Thus, tenants living in such dwellings pay more, which reduces their welfare. However, even tenants in the controlled dwellings can suffer from rent control, as maintenance of such dwellings can be reduced, leading to a decreased housing quality. Rent control can also negatively affect the overall supply of housing or, in particular, the supply of rental housing, which can adversely affect many market participants: both tenants and homeowners. Other effects, for example, higher homeownership rates or lower inequality, cannot be treated as positive or negative from a normative perspective. Therefore, it is important to be conscious of the effects of rent control. Ideally, policy makers should take into account all possible relevant effects, evaluating the inherent costs and benefits. The decision to introduce rent control and its design must rest upon an objective and comprehensive cost-benefit analysis. Only when the net benefit is positive is the policy sensible; otherwise, it produces more damage than utility.
Such cost-benefit analysis can draw upon the rich literature that investigates potential effects of rent control using a robust scientific methodology and reliable data. Here, I provide a comprehensive overview of this literature.2 My objective is to summarize the evidence on the effects of rent control accumulated over the years. Although this study is far from delivering a complete picture of the net effects of rent control, it can still provide useful guidance for making decisions regarding the introduction or reformation of rent control.
To find the relevant studies I not only used the previous literature reviews, but I also searched five online research paper databases (Google Scholar, IDEAS/RePEc, JSTOR, Social Science Research Network, and Web of Science) using the keyword "rent control." I tried to make the sample of rent control studies as exhaustive as possible. However, I cannot guarantee that it is complete. Some studies, especially older and unpublished, could not be found or accessed. Those studies written in languages other than English are also underrepresented in the sample.
Overall, I could find 206 works on the effects of rent control, among them 112 empirical published studies. The latter are the main focus of this study. A list of all these studies is contained in Table 2 in Appendix. This is perhaps the most comprehensive review of the rent control literature encompassing the period between 1967 and 2023.
In online appendix, various relevant characteristics of the studies considered here, like rent control policy design, econometric methodology, and the distribution of studies by year of publication and by publication outlets, are analyzed.
In the next section, I present the predictions concerning the effects of rent control made in the theoretical literature. The consequent section summarizes all potential effects of rent control identified in the empirical literature. Then, the most relevant effects are considered in more detail, with a particular emphasis on the sign of these effects. After that, the methodology and data used in these studies are examined. Finally, the last section contains some general concluding remarks.
The most prominent effect of rent control is, unsurprisingly, its impact on controlled rents; that is, on rents paid by the tenants of those dwellings subject to rent control. The picture is rather unambiguous: 36 out of 41 published studies (53 out of 60 published and unpublished studies) point to a statistically significant negative effect. Thus, rent control is quite effective in capping rents. The published studies that find no effect of rent control on controlled rents are Gilderbloom (1986), Malard and Poulhes (2020), Oni (2008), and Oust (2018a). Most of these studies finding no effect use linear regressions. In addition, Malard and Poulhes (2020) use logit regression, while Oni (2008) uses ANOVA. The majority of the studies investigating the impact of rent control on controlled rents take advantage of microdata. Further, half of these consider first-generation rent controls, while the remainder analyze second-generation rent controls. Thus, no big differences are observed in terms of methods, data, and policy design between these studies and those that find negative effects. However, the studies finding no effects cover a wide variety of countries: France, Nigeria, Norway, and the USA.
By contrast, according to the studies examined here, as a rule, rent control leads to higher rents for uncontrolled dwellings. The imposition of rent ceilings amplifies the shortage of housing. Therefore, the waiting queues become longer and would-be tenants must spend more time looking for a dwelling. If they are impatient or have no place to stay (e.g., in the houses of their friends or relatives) while looking for their own dwelling, they turn to the segment that is not subject to regulations. The demand for unregulated housing increases and so do the rents. Only one published study — Bonneval et al. (2021) — finds no statistically significant of rent control on uncontrolled rents. The study uses real estate property manager's accounting books data for Lyon between 1890 and 1968 and applies difference-in-differences regression for panel data.
The estimated effects of rent control on rental prices exhibit considerable variation across diverse studies. For controlled rents the range is between -57 % and -1 %, whereas for uncontrolled rents it is between -2 % and 14.8 %. The reason for such a variation lies in the different research setups. Certain studies focus on immediate, short-term effects, while others delve into the cumulative, long-term consequences of rent control measures. The average effect of rent control on controlled rents is -9.4 %, while that on uncontrolled rents is 4.8 %. Unfortunately, only based on these results it is virtually impossible to evaluate the overall effect of rent control on housing rents. To do this, a careful analysis of the distribution of housing units across the controlled and uncontrolled sectors is needed. This distribution will depend on a number of factors, including the design of rent control policy.4 Moreover, the price effects can die out or increase over time. This evolution can be different for controlled and uncontrolled dwellings.
The impact on residential mobility appears to be quite clear: nearly all studies indicate a negative effect of rent control on mobility. Two potential reasons for this phenomenon are put forward. Initially, residents living in controlled dwellings have limited motivation to relocate. They possess concerns that finding a residence of similar quality at such a low rental cost might be challenging. This situation can yield unfavorable outcomes for the job market, as reduced residential mobility translates to less adaptable responses to shifts in the labor market. When economic conditions worsen in their city, tenants in controlled dwellings are less inclined to move to areas with more promising employment prospects. Secondly, diminished residential mobility could be attributed to heightened tenure stability. Through rent regulation, this policy alleviates the financial strain of tenant households, consequently reducing the likelihood of eviction. Additionally, rent control legislation is often adopted simultaneously with rules protecting tenants from arbitrary removals. As a result, tenants remain in their residences for longer time, thereby boosting their satisfaction. None of these studies find positive effects; only two studies find statistically insignificant effects: Lambie-Hanson (2008) and Linneman (1987). Both studies concentrate on the USA, use microdata, and consider second-generation rent control. Lambie-Hanson (2008) applies a purely descriptive analysis, which is a rather unconvincing as an estimation technique, while Linneman (1987) takes advantage of hedonic regression.
Read the full detailed research HERE
