Pasadena Voted for the Economically Reckless Policy of Rent Control

Although the midterm elections were a month ago, I still reflect on the results, particularly those of ballot initiatives. This election cycle, I covered Massachusetts' millionaire tax and prison labor reform, as well as a hodgepodge of ballot initiatives covering multiple topics, including marijuana, minimum wage, and sports betting. Another ballot result caught my eye, this time from the City of Pasadena, California. One of the initiatives in Pasadena that was up for a vote was Measure H. Pasadena's Measure H included a mechanism to impose rent control, specifically that rent increases would be limited to 75 percent of inflation every year after tenancy is established. This Measure passed with 53.8 percent of the vote. 

According to proponents of Measure H, the purpose of such rent control is to prevent "massive year after year increases in rent for tenants who already are living in a home, while guaranteeing a fair return to landlords as required by state law." I can understand and emphasize with the fact that the increases in housing prices are real and painful. At the same time, rent control is a terrible way of trying to help out those struggling with housing prices. 

In 2014, I explained the economics of rent control. You can also read what the libertarian Cato Institute wrote about the economic of rent control in 2018 here. In economic terms, rent control is a form of a price ceiling. What happens in the housing market when such a price ceiling is imposed? 

For one, the demand for rent-controlled units will outstrip the supply. This puts pressure on the non-controlled units by decreasing supply, which not only decreases the number of overall units but also increases prices for non-controlled units. This is not merely economic theory. In San Francisco, rent control ended up decreasing rental housing supply by 15 percent, which caused a city-wide rental increase of 5.1 percent  (Diamond et al., 2019). Here are some other examples of where rent control backfired:

• Economists found that removing rent control in Cambridge, Massachusetts reduced crime by 16 percent, which brought an annual benefit of $10 million to the City (Autor et al., 2019). Removing rent control also accounted for a quarter of the property value appreciation between 1995 and 2005 (Autor et al., 2014). As the Left-leaning Brookings Institution points out, these findings suggest that one of the outcomes of rent control is that it reduces the neighborhood's desirability. 
• In Minneapolis, rent control did not fare better (Ahern and Giacoletti, 2022). For one, rent control caused property value to decline 6 to 7 percent. Two, the tenants that gained the most from Minneapolis' rent control was higher-income, economically advantaged households. The goal of this rent control was to help out lower-income households. Imagine that rent control had the opposite effect!
• Rent control is a cap on the amount of money that a landlord can make, which minimizes profit. This disincentives landlords to do upkeep on the property. Ultimately, this does not help the tenant because improper maintenance and poor repairs do nothing to improve the living conditions of the tenants under rent control. One study measured how deterioration of the rental units was a cost of rent control in Massachusetts (Sims, 2007; Pollakowski, 2003).
• In the long-term, poor rental quality has the potential to reduce supply further in part because landlords are then incentivized to invest elsewhere. Going back to San Francisco, rent control accelerated the conversion of rental units to condominiums (Diamond et al., 2019). A similar shift away from rental units occurred with the Massachusetts case study (Sims, 2007).
• When rent control was removed in Cambridge, building permits rose 20 percent and construction spending doubled over the proceeding decade (Autor et al., 2012). This serves an example of how rent control constricts housing supply and discourages new units to be brought to market.
• In the Los Angeles case, rent increased for noncontrolled units at two to three times the rate that controlled units (Murray et al., 1991). Similarly, New York City's 1968 rental market found that noncontrolled units were 22 to 25 percent higher than they would have been without rent control (Caudill, 1993).

There is substantial economic research to point out the multiple negative effects of rent control. It is no wonder that economists are near unanimous in their opposition to rent control. Even Montgomery County in the state of Maryland, which is quite Left-leaning, provided a scathing, unflattering prognosis in its Economic Assessment. Not only does rent control drive up the cost of housing in the long-term (something that Left-leaning economist Paul Krugman pointed out in 2000), but it erodes the quality of living for rent-controlled tenants and the surrounding neighborhood alike. 

In practice, rent control is self-defeating because it does the opposite of what it intends to do: help out renters struggling with housing. The economics behind rent control are so staggering that it makes me wonder how rent control remains popular. Rather than help out the citizens of Pasadena, all Measure H is going to do is add another example to the evidence base showing the folly of rent control.