NAHB-Commissioned Study Finds Reduced Rent Control Means More Housing

A recently completed study from NAHB found that — even after accounting for employment growth, density, rent growth and local place-specific factors — the supply of housing grew faster when rent-control restrictions were loosened in California's rent-controlled cities.

The study, titled "The Effect of Rent Control on New Housing Supply: A Bay Area Case Study," was commissioned by NAHB and produced by Rosen Consulting Group, a well-known economic consulting firm led by Ken Rosen, professor emeritus and chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

The study examined six jurisdictions in California's Bay Area that had enacted some form of rent control in the 1980s. These jurisdictions were all impacted when California passed the Costa-Hawkins Rental Housing Act (Costa-Hawkins) in 1995, limiting the severity of rent control that local governments in the state could impose. Rosen Consulting looked at residential building permits in the six jurisdictions before and after Costa-Hawkins, using a statistical procedure carefully reviewed and approved by NAHB economists to control for other factors that influence housing supply as thoroughly as possible.

The study found that, even after controlling for these factors, the loosening of rent control accounted for 13.4% of the increase in total multifamily permits that occurred after Costa-Hawkins in the city of Berkeley, 9.7% of the increase in Oakland, 19.1% in San Jose and 19.6% in San Francisco. These effects were all statistically significant.

Results were not conclusive for the other two rent-controlled jurisdictions in the study: Hayward and Los Gatos. However, this result was largely anticipated because of the particularly weak forms of rent control in these jurisdictions prior to Costa-Hawkins.

The study applied a similar analysis to total housing permits, rather than just multifamily, and again found statistically significant increases attributable to Costa-Hawkins. In total, across the six rent-controlled places in the study, the analysis found that the easing of rent control resulted in more than 11,400 additional homes, including more than 3,900 additional single-family homes, built in the post-Costa-Hawkins period.

The authors conclude that the easing of rent-control restrictions that occurred because of the Costa-Hawkins legislation provided greater certainty for developers, investors and lenders — bolstering housing construction in rent-controlled cities in the ensuing years.

Why This Matters

As noted in the introduction to the study regarding the effects of rent control, the vast majority of economists agree that artificially controlling apartment rents acts as a price ceiling that effectively reduces the supply of housing. In doing so, rent control has several adverse effects on the housing market:

• Affects rent levels in both the short and long run;
• Extends the tenure of those in rent-controlled units beyond when they otherwise would move, creating inefficiencies in the use of the housing stock;
• Encourages conversion of existing rental units into ownership units; and
• Discourages the construction of new rental units over time, though this may depend heavily on the specific nature of the rent controls.

Reduced housing supply exacerbates the housing affordability crisis, which NAHB has been actively working to combat through various advocacy initiatives.

Instead of rent control, NAHB advocates that housing affordability needs to be addressed by:

• Creating more and better housing by allowing more high-density housing,
• Reducing regulations and lawsuits that slow or stall housing development,
• Encouraging public/private financing and partnerships to encourage the development of affordable housing, and
• Offering direct public subsidies to help those that need it.

For more information on the impact of rent control, including a copy of this study and other NAHB resources, visit nahb.org/rentcontrol.