The White House has proposed a national rent control policy, which sounds appealing in theory but would eventually increase costs for renters because it would exacerbate the supply shortage. If the policy were to go into effect now, it would impact some metros in the Northeast and Midwest–like Boston, Washington, D.C., Chicago and Minneapolis–that are seeing rents rapidly rise.
The White House announced a series of new actions aimed at housing affordability today, including:
- Asking Congress to implement a 5% cap on rent increases for corporate landlords for existing units
- Repurposing some public land to build affordable housing units
- Distributing grants to rehabilitate distressed housing, build more affordable housing, and revitalize neighborhoods
Caps on rent hikes are appealing politically to renters in the short term because they limit rent increases. But they only make housing affordability worse in the long term, because they exacerbate the supply shortage.
- The root of the housing affordability issue is a severe shortage of housing units. Estimates range from 1.5 million to 5.5 million or more. The best way to address the lack of affordability in both the for-sale and rental markets is to build more housing units.
- For developers to be incentivized to build more housing, they need to feel like they would make a profit. If rent increases are capped below what supply and demand would otherwise dictate, then builders have little incentive to build more housing units.
- The result of caps on rent increases is lower rent in the short term, but a worse housing shortage in the longer term, which would worsen affordability. Experiences like that of Berlin, Germany should be instructive for the U.S.
- This proposal expressly carves out exceptions for landlords with fewer than 50 units (mom and pops), new construction, and instances where there was “substantial renovation or rehabilitation” to address the disincentive for landlords to invest in building or renovating units. However, it does not specify how long the new construction exception is good for. After the first year, a newly constructed unit becomes an existing unit and is likely to fall under the rent cap rule.
- Some may argue that the cap on rent hikes wouldn’t be binding because nationwide rent growth is largely flat right now. However, that overlooks metro-to-metro variation. Many metros in the Northeast and Midwest–including Boston, Washington, D.C., Chicago and Minneapolis–are experiencing rent growth greater than 5% year over year. And national rent growth vastly exceeded 5% recently during the pandemic.
The other proposals aimed at increasing housing supply in this announcement only nibble at the edges, but are a step in the right direction. President Biden’s other proposals, which include using federal land to build more housing units and giving grants to communities to build them, should help increase supply. But they don’t go far enough to entirely solve the supply problem because they wouldn’t create enough new units. The federal government could make a much bigger difference if it were to pressure localities to allow for denser housing. That pressure can be applied by tying federal funding to local regulation, similar to how the rent cap proposal is structured.
