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Rent Control

DEFINITION

Rent control is when the government creates caps for how high landlords are allowed to raise the rent on a yearly basis. This is called a cap, and every city has its own rules.

EXPLANATION

The reason for rent control is to make sure that housing remains affordable. It includes aspects beyond just controlling rent rates. It also sets limits on evictions and will also provide financial assistance in case a renter has to leave their apartment. The laws are so complex that it’s sometimes difficult for most people to navigate, which is why it’s important to stay informed. Rates of rising rent tend to vary, and although the market may experience swings, people with rent-controlled apartments tend to pay much less than people living in buildings without rent control.

Whether a building is rent controlled depends mostly on the time period it was built and what type of building it is, and in some places, is also influenced by the neighborhood as well. Apartment buildings, duplexes, and triplexes tend to be rent controlled most of the time. There are public data bases available for searching through rent-controlled listings online.

It’s common that older buildings usually have rent controlled apartments. This usually happens because of rent freeze taken at one point or another. In the city of Los Angeles, the City Council froze rents in 1978, while they worked what is now the rent control policy, which is called the Rent Stabilization Ordinance. There have been measures taken in the opposite direction as well, like the Costa Hawkins Rental Housing Act. This came into action in 1995 and keeps cities from forcing rent control in newer buildings.

Despite efforts to control rent, rent-controlled apartments can still technically be expensive. A landlord can raise rent every time a renter moves out of a rent-controlled apt., and they can do it to whatever rate they like. This means that passing along good rent rates isn’t possible unless the person you’re passing to is on the lease.

Theory

Despite its best intentions, the economic consensus is that rent control actually creates more problems than it solves. This is due to the fact that while a small percent of the population lives in rent-controlled spaces, the rest of the populace has to compete for living space in the most expensive cities.

Rent in itself used to be a controversial practice. Adam Smith, an economist from the Scottish Enlightenment era, thought that landlords didn’t actually produce anything of real value, and so take rent was exploitative. At the time, the argument was that land tax was enough to take up the uncaptured use value of property. The thought is that rent control ought to protect both landlords and tenants through stabilizing rent amounts so that people can afford to pay consistently.

New studies show that a balanced approach to rent control can be beneficial. If a tenant gets a pay increase, it makes sense for their rent to go up by a small percentage in order to offset market value increase. New rent control regulations tend to be so different from the first wave that they’re almost incomparable. The negative effects of rent control has been quoted to be the most effective way to destroy a city, aside from bombing, according to Assar Lindbeck, an economist from Sweden.

Terms

The term ‘rent control’ actually includes a few different kind of price controls for property.

–              Vacancy Control: In this instance, rent prices are allowed to increase, but only to a certain extent, by law. In other words, a landlord is allowed to raise rent once a tenant moves out, but only to the regulated amount. In this case a new tenant would pay about the same amount as the previous one. This is generally referred to as ‘strong’ rent control.

–              Vacancy Decontrol: This refers to what is known as ‘second-generation’ rent control. The landlord can raise rent here but only to match the current market rate. So, a new tenant’s rent would cover market increases, but be limited from going up too much after that.

–              Strict Price Ceilings: This term is self-explanatory and falls under the first wave of rent controls. Also known as absolute rent controls, these rules don’t allow rent to increase at all. This is also called ‘rent freeze.’

Rent control is especially common in Europe, although there are also cities that have rent regulations in the United States. In the U.S. rent laws differ from state to state. The history of rent control rules has been inconsistent. New York City is a great example of this. In New York, some apartments are rent controlled, while the rest are on the free market and are subjected to market value increases. In the U.S. rent- control isn’t allowed implementation in 37 states. Nine states let their cities utilize rent regulations, but don’t, and four states, (Maryland, New York, California, and New Jersey) have cities that utilize rent control in some capacity.

Eviction

A tenant can still be issued a notice of eviction even if they live in a rent-controlled space, although there will be more legal support for them than someone facing an eviction in a non-rent-controlled area. Although a tenant can be evicted for universally acceptable reasons like not paying rent or breaching their lease, the landlord can also issue an eviction if he or she plans on moving into the apartment themselves, or if there are plans to tear down the building altogether. The in latter instance, because the apartment is rent controlled, the landlord has to pay relocation fees for tenants to find and move into a new apartment, and the fees can be significant, ranging from upwards of $8,000 to $20,000. The amount an evicted tenant receives will depend on factors like their age, occupation and income level.

Occasionally landlords may simply want to get new tenants into their buildings and will actually offer tenants money in exchange for moving out. These kinds of exchanges are called ‘cash for keys’ offers. This is generally legal as long the tenant is aware of their rights and the agreement has been filed with the city. These agreements allow people 30 days to consider the agreement, and if they wish to cancel, they can. They’re not obligated to accept the agreement at all and can choose to continue living in their apartment if they like.

Effects of Rent Control

There’s an ongoing debate as to whether rent control actually makes cities more affordable. Some advocates say that it’s a good practice because it creates stability for people living in the buildings long-term, as well as fiscal support. It also helps those without enough money to buy a home an opportunity to settle down in an area. Critics of rent control believe that the policy actually makes it more difficult for newcomers and younger people to move to rent controlled areas.

In some ways, this has to do with the fact that rent control reduces incentives for developers to build new property because of falling rates of profit. Cities with the highest living costs tend to be cities that offer rent-controlled spaces, ironically. It also affects market values in unpredictable ways, so the distortions can never give an accurate reading as to the real cost of living. Additionally, rent control apparently increases property abandonment. Rent-control forces landlords to keep tenants in their building at significantly lower rates than market value, which mean that there’s not enough funding to cover regular expenses, because inflation creeps up regardless of rent control. This has led to landlords abandoning properties at alarming rates, upwards of 300,000 units between 1974 and 1984 in New York City.

The main reason for the rate of expense is because it makes property unavailable through a lower rate of turnover due to longer occupancy times. This makes sense, considering that tenants don’t want to let a good deal go. So, anyone who isn’t lucky enough to get a rent-controlled apartment has higher competition for a place to live. So even though the intent of rent control is to make living more affordable and egalitarian, in a free market, it actually makes it less so. Those who pay less are only afforded to do so by those who pay more.

The reason that rent control continues to be enforced is because it’s an issue that’s looked at politically rather than economically. Leaders are elected on the basis of its continuation. It’s viewed emotionally rather than logically, and often includes a story of a grandma being forced to leave her home. The reality is that there are plenty of programs in place that are there to provide assistance in cases precisely like this. Senior living arrangements, as well as housing vouchers are available in situations like this, and it doesn’t mean that a program that has been called an economical failure should continue to receive support. People with annual incomes going up to $200,000 qualify to receive rent-controlled apartments. The reality is that rent-control also encourages builders and landlords to cater to the rich more readily in order to counteract the lowered rent rates.

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