Rent control, on the surface, seems like a slam dunk for renters. It caps rent increases, offering stability and a shield against skyrocketing housing costs. But while it helps tenants in the short term, economists and many in the real estate industry argue that rent control has unintended consequences that actually worsen the housing market in the long run. This topic has quickly become quite popular recently given the headlines touting President Biden’s plan to cap rental increases at 5% for landlords that own 50 or more properties.
Why rent control is bad for the real estate market
- Discouraging New Development: Imagine you’re a developer. You see a growing city with a high demand for rentals. Sounds like a great place to build, right? Well, if there’s rent control, it might not be so attractive. Rent control limits how much you can charge, potentially making it difficult to recoup your investment and turn a profit. This disincentivizes developers from building new rental properties, leading to a shortage of housing units and driving up prices across the board.
- Deteriorating Existing Housing: With limited rental income, landlords under rent control may be less inclined to invest in maintaining their properties. This can lead to deferred maintenance, creating safety hazards and lowering the overall quality of rental housing. Tenants may even be hesitant to report issues for fear of losing their rent-controlled apartment.
- Black Markets and Tenant Buyouts: Rent control can create a black market for desirable rent-controlled apartments. Tenants may try to sublet at a much higher price, or landlords might seek buyouts to get the unit out of rent control and charge market rate. This creates an unfair advantage for those who can afford the black market rent or buyout fees.
- Reduced Mobility and Efficiency: Imagine living in a rent-controlled apartment that perfectly suits your needs. Why move? Rent control can lead to tenant inertia, where people stay put long after their circumstances change. This reduces mobility in the housing market, making it harder for people to find the housing that best fits their current needs.
President Biden’s 5% cap on rental increases
Recently, President Biden announced his plan to cap rental price increases at 5% for any landlord that owns 50 or more properties. This plan would essentially remove all tax benefits for any landlord that institutes a rental increase of more than 5% and owns 50 properties or more. In other words, this rule would not impact your typical private real estate investor that may own a few rental properties as part of their investment portfolio. Furthermore, this plan would not apply to any properties built after the rule is implemented. The reason for this is so that this new rule proposal doesn’t disincentivize the building of new rental units. Of course, in order for this new proposed rule to pass, President Biden would need to win re-election and the Democrats would need to gain control of both the House of Representatives and the Senate.
The National Association of REALTORS® (NAR) put out a statement voicing their opposition as follows:
“Price controls may seem appealing, but they have backfired on local governments and harmed the people we need to help the most. Developers are reluctant to build in areas where the government imposes rent controls on new buildings, and these policies actually decrease the supply of low- to mid-range housing units.”
To read the full press release, click here.
Summary
Rent control is a complex issue with good intentions. While it helps some renters in the short term, the long-term effects can be detrimental to the real estate market. By discouraging new development, reducing investment in maintenance, and creating an inefficient market, rent control can exacerbate the very problem it’s meant to solve – a lack of affordable housing. Ultimately, taming the out-of-control inflation will be critical to the health and recovery of the overall economy.
Are you looking to buy or sell real estate in the South Florida area? We can help! Contact Natasha at Live South Florida Realty, Inc. today! Also, be sure to download the free Florida Home Search app for your smartphone or tablet.
