Housing affordability is at crisis levels, with large numbers of both renters and homeowners paying excessive shares of their income for housing. Data from the Census Bureau American Community Survey show that nearly half of all renters spend more than 30% of their income on housing, which is considered “rent burdened” under standard financial benchmarks. This share is up noticeably from just four out of 10 renters in 2001.
The root cause of the housing affordability crisis is clear: lack of housing supply. NAHB Economics estimates a net housing shortfall of about 1 million single-family homes and apartments in the U.S. given current demographics. This deficit of housing has reduced and deferred homeownership, hurt wealth prospects of younger households, and even increased the share of young adults who live with their parents. In fact, two decades ago a little more than 10% of adults aged 25 to 34 were living with their parents. Today that share has doubled to more than 1-in-5 young adults.
What is less clear, at least among policymakers, is what solutions should be enacted to reduce affordability challenges. The situation is made complex in that there is no silver bullet solution that would resolve all of the current challenges. A shortage of skilled labor, rising regulatory costs, tight builder finance access, and trade conflict impacts on building material costs all require different policies.
Unfortunately, policymakers in some high cost markets, such as New York and California, are actively pursuing a “fix” that almost all economists agree never works: rent control. Rent control in practice is self-defeating, providing a Band-Aid that attempts to cure a lack of supply with a demand-side rule that makes the underlying housing supply problem even worse.
There’s an old joke that if you gather three economists, you’ll find four opinions. This joke falls flat with respect to rent control because this is one of the few topics where almost all economists agree. For example, a 2012 University of Chicago Booth School of Business poll of economists found only 2% agreed that local rent control policies had a positive impact on the amount and quality of housing.
Why? The economics are simple. By lowering the rate of return on residential investments, rent control deters new construction, which makes the problem worse. The benefits often fall only to a limited number of qualified residents, discouraging mobility and discriminating against younger and newer residents. For example, older residents benefiting from rent control may stay in larger apartments as empty nesters, while younger households are cramped into smaller units as they look to expand their families.
A 2018 paper by economists at Stanford found that San Francisco rent control policies in the ’90s caused the supply of available rental housing to decline by 15% as some of the housing stock was converted from rent-controlled rental stock to the owner-occupied market. This decline in housing availability raised rents, while providing benefits only for certain incumbent renters.
It’s important to keep in mind that rent control is not just a multifamily issue. Given the rising count of single-family rental units, and the small but growing share of single-family built-for-rent construction, rent control policies are a risk for the single-family market as well. Moreover, by distorting market signals of the relative prices of renting and owning a home, rent control can also negatively affect demand for for-sale housing.
Has any rent control policy ever transformed an unaffordable city into affordable one? I am not aware of a single example. Housing supply is the solution to housing affordability burdens.