As rent control makes a stubborn comeback in America’s bluest cities, the research catching up to it is delivering findings its advocates would prefer to ignore. Last week we covered how rent control impacts the overall housing supply (TLDR: supply goes down more than 10%). Today we dig into how rent control impacts housing values in an MSA and redistributes wealth among owners and renters.¹

Voters in St. Paul, Minnesota, a city with no history of rent control, passed laws in 2021 that capped rent increases at 3%. Those laws, which were not expected to pass initially, were later amended and made slightly more flexible. Even so, St. Paul represented the first major new rent control implementation in the U.S. since the 1990s and a rich research subject as the policy change was abrupt, severe and unanticipated by the market. City-wide, rent control caused a “decline of 4.0% to 5.5% in the value of [residential] real estate in St. Paul over the nine months after the law was enacted.” That includes owner-occupied and rental properties alike.

Some people were better off as a result of the new rent control laws, but not the people you’d expect: “High-income renters received larger absolute benefits than low-income renters.” This is a function of the present value of a renter’s future payments. Research shows that properties in high-income areas see higher rent growth over time, and although the growth cap drove future savings for all renters, those renters in the highest-growth properties received the largest benefits, dollar-wise. This regressive result is exactly the opposite of the law’s progressive intent.

A property’s value, much like a stock’s price, reflects market expectations for the income stream that asset will produce going forward. As those expectations change, the property’s value - considered the capitalized value of future earnings - changes. Rent control severely impacted the value of rental properties in St. Paul, which “experienced an additional 7%–9% decline in value compared to similar owner-occupied properties.” Larger apartment buildings lost more than 13% of their value owing to “large direct capitalization effects.”

That’s not surprising, but this is: “The largest fraction of the total losses were borne by owner-occupants even though they do not directly participate in the rental market.” With smaller percentage losses in value but a much larger total investment base, homeowners saw their wealth decline both because of direct capitalization effects - their houses now are worth less as rentals - and to spillover effects of the policy, including expectations of worsening neighborhood quality and public finances. The paper estimates two-thirds of the value lost in owner-occupied homes resulted from indirect and spillover effects.

Those spillover effects are a big deal, because they produce “deadweight loss” in the market, the value of the economic gains that would happen in a free market but don’t because of an imposed condition that distorts free market activity. Deadweight losses are typically a function of policy. The classic examples are high taxes that lead to fewer purchases or high minimum wages that lead to fewer hires.

It is possible to create economic policies that are neutral to a system although they may benefit or harm certain people within it. One could argue that a cap on rental rate increases simply redistributes or transfers benefits from owners to renters. If there were no indirect or spillover effects, this would be true. But the study demonstrates that rent control generates spillover effects - in this case the perception that economic growth and neighborhood quality (e.g. schools) would not be as strong in St. Paul - which drove down property values and created deadweight loss. Consider the lower incentives developers have to build new housing and the buildings not developed as a result. That’s deadweight loss.

This loss “represents value loss without any transfers” because it reduces the benefits received by all parties. In other words, deadweight losses make everyone - landlords, owner occupants, renters and prospective developers of new housing - worse off. That’s a key contribution from this study.

This research is especially relevant because rent control is getting broader support in many cities, as you can see in the table below.

As supporters promote rent control, it is often framed narrowly, as a benefit to low-income renters. Rents are too high in a city, affordability is too low, rent control will fix it, the logic goes. That message arrives packaged in a psychology of morality and expanded economic opportunity for economically disadvantaged demographics.

But from a wider angle, what sounds appealing about rent control is often a ruse: Research shows there are serious negative consequences for low-income renters, other renters, and homeowners alike, especially over the long term. Last week’s article discussed market-wide impacts of rent regulation and how it diminishes overall housing supply; this study’s unique approach explores the market-wide household wealth effects and the unintended redistribution and net loss of wealth that rent control produces.

These recent studies treat rent control as a policy that has meaningful impacts on everyone in an MSA who “consumes” housing, which is the right frame. The findings are unambiguous: rent control is unhealthy for a city, and “the largest rental cost savings were realized in the neighborhoods with the richest renters.” This paper’s final point may be its most useful: rent control is decided as a political matter, and to optimize outcomes, we need to identify the gaps between supporters’ “perception of the benefits of rent control, and the size of the benefits they actually receive.” The gaps are substantial.

Who: Anori

What: A grand application to make normally chaotic pre-development more efficient.

The Sparkle: Born of Alphabet’s Moonshot incubator, Anori’s job is to radically streamline coordination and iteration in the pre-development phase of a project. Besides the design trades, Anori’s software incorporates local zoning restrictions and even creates documents for government approval. It also streamlines the design work with an advanced AI. The company just partnered with the city of Rio de Janeiro “to modernize its urban licensing process,” and Anori just announced a $26 million funding round led by Prologis.

These places aren’t AI and they aren’t places you could visit either, but they might be found in your house. Australian photographer Charles Brooks has made a career photographing the stunning inner spaces of musical instruments - sometimes famous musical instruments - and presenting them as architecture. The process is painstaking and technical and the results are a mix of imagination and familiarity. (These photos are beautiful. Be sure to click to enlarge.)

Link: architectureinmusic.com

Editor’s Note: The Real Estate Haystack believes in sharing valuable information. If you enjoyed this week's newsletter, subscribe for regular delivery and forward it to a friend or colleague who might find it useful. It's a quick and easy way to spread the word.