To the Point With Bob: Rent Control Will Deepen the Affordable Housing Crisis

(To the Point with Bob is a periodic blog by MBA President & CEO Bob Broeksmit, CMB. You can view this and past blogs here.)

Millions of our fellow Americans are struggling to afford a decent and safe roof over their heads. Governments at all levels, working with the private sector, have many tools for adding to housing stock and making rental housing more affordable, but rent control is not part of the solution. In fact, it will make the affordable housing crisis worse.

As with most attempts to dictate market dynamics with government-controlled pricing, rent control leads to distortions and unintended consequences. First, rent control discourages the construction of new units of affordable housing.

Developers and landlords are best able to provide decent and safe housing profitable when renters pay what the market will bear. When the chances to recoup costs and make a reasonable profit, fewer housing units will be built, and housing becomes scarcer and more expensive. It is simply a matter of the law of supply and demand.

In a glaring example in recent experience, building permits dropped by nearly 50% in one year after St. Paul, Minnesota adopted rent control. Fewer construction permits today means fewer housing units tomorrow. In neighboring Minneapolis, where rent control is not used, multifamily residential permitting grew by 16% during the same period.

Rent control also leads to a degradation of the quality of rental housing. Landlords rely on rental revenues to pay property taxes and perform basic maintenance, update building systems, renovate interior spaces, and have funds for unanticipated costs. If rent receipts are kept artificially low, landlords are more likely to avoid or postpone such improvements. This adds to the supply of housing units in need of improvements, repair, and rehabilitation.

In addition, studies have shown that rent control can lead to residents occupying spacious apartments they no longer need as their children grow up or spouses die, even as the demand for such housing soars. The result is a skewed distribution of available housing that benefits the few at the expense of the many.

Make no mistake, the lack of affordable housing is real. Even before the COVID pandemic, there were only 37 affordable rental homes for every 100 low-income renter households. Even accounting for substance abuse, mental health problems, economic distress, and other factors, the lack of housing units accounts in no small way for the increase in displaced and unhoused people in so many urban and even suburban communities across the country.

There is no silver bullet to the affordable housing deficit, but building more housing is the best place to start. According to the Housing Solutions Coalition, of which MBA is a member, the U.S. needs to build an average of 328,000 new apartments per year to meet rising demand. Cities can no longer afford to squelch development and then wonder why so many of their citizens cannot afford to live there or end up unhoused. Fortunately, some cities are scrapping restrictive zoning practices that constrain supply.

MBA is engaging with state and local governments in pursuit of solutions that can increase the number of affordable rental housing units, particularly for extremely low-income and homeless individuals and families. This includes advocating for the City of Los Angeles to use a long-term lease structure to convert hotels into interim options for the unhoused and low-income housing. MBA is also creating a resource bank of state-wide tax incentives to help borrowers and lenders produce more affordable rental housing.

MBA also supports federal legislative proposals that create incentives for private investment in affordable housing. They include strengthening and expanding the Low-Income Housing Tax Credit with the Affordable Housing Credit Improvement Act; creating a refurbishment credit for repurposing office, retail, and other commercial properties for affordable housing, as provided for under the Revitalizing Downtown Act; and the so-called Yes in My Back Yard Act or “YIMBY,” which provides the federal government tools to encourage localities to remove harmful land use regulations. In addition, the Biden administration announced the Housing Supply Action Plan, which would, in part, create and preserve thousands of new units for low- and moderate-income families over the next three years.

In addition, the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as well as the Federal Housing Administration (FHA) can play a vital role when it comes to liquidity, affordable supply, and innovative solutions to help individuals and families. For example, FHA recently announced an increase in the dollar amount threshold for large multifamily loans that could be eligible for standard underwriting. FHA could make its Multifamily Accelerated Processing (MAP) program more robust and efficient. Now is the time for the GSEs to serve their countercyclical role and provide much-needed liquidity to the multifamily finance marketplace.

These and other ideas will help close the housing gap and advance MBA’s belief that everyone should have a decent, affordable place to live. The way to perpetuate the housing supply-demand disconnect is rent control. It has never been a solution to inadequate housing supply, and it never will be.