As I explained in yesterday’s post, DC has a rent control system made up of price stabilization and just cause eviction, which prevents landlords from kicking tenants out willy-nilly. However, parts of the District’s regulations are no longer up to date, and it’s also easy for landlords to exploit.
That isn’t to say rent control isn’t important. The usual (conservative) economic argument against rent control is that by limiting landlord returns, you discourage investment in new housing or better housing. It’s reasonably compelling to a first-year economics student: limit prices below the “natural” equilibrium point and you force a suboptimal, lower quantity equilibrium.
However, in the real world things are not always as they seem in Econ 101.
Don’t economists say rent control makes things worse?
First, our city has a fairly stark rent-buy disparity, meaning it’s far more expensive to rent than to buy. This means people can effectively buy properties at prices others are currently willing to sell, and make an immediate return.
This transaction also implies that a developer made a profit at some point to bother building or rehabilitating that home beforehand. In other words, the market is currently supporting an “equilibrium price” that is quite a bit higher than what’s needed to the input costs to build or maintain housing.
One might ask why this matters; surely profit is a fine thing? What it means is that there is not enough competition to make landlords cut prices to just above their costs — if they were, that rent-buy disparity would not exist. Without that competition, those increased prices don’t represent a free market equilibrium, but rather the result of a distorted market that needs regulation.
We can validate this by remembering rent control doesn’t apply to landlords with fewer than five units. If rent control were a problem, larger landlords would convert their buildings to condos and sell them to individual landlords who could set whatever rent level they liked. Existing large landlords could set sale prices that factored this in.
That this shift hasn’t happened suggests that there isn’t a need to do so. Large landlords are happy to own the properties themselves, and are obviously making money even when subject to rent control.
Why is our housing market distorted?
First, we should realize that all housing markets function poorly in terms of economic theory because it’s hard to make more land, not all neighborhoods are equally appealing, and most houses are a bit different from each other. In other words, houses don’t behave like corn or aluminum. You can’t just make more if there’s more need, and it’s not all the same from the buyer’s perspective.
However, DC’s housing market is distorted even by real estate standards. Partly it’s that we still aren’t building anywhere near as many units as we are getting new residents. That fact is usually used to explain price increases, but we should look at this another way. We have high demand and lots of money on offer to build homes for these people, and it’s still not happening. Our zoning code prevents homes from being built — that’s the distortion.
Once we realize that DC’s housing market is distorted and that there’s plenty of money in leasing houses out, both of the primary economic arguments against rent control fall. People will build what they can under our system because there’s a huge amount of unmet demand, regardless of the rent control regime. That bottled up demand is establishing a price level that’s well above what the sale price of units goes for — meaning rent control isn’t close to making real estate unprofitable.
Why rent control isn't working
Initially, rent control was limited to buildings constructed before 1976, and that’s never been extended. As new buildings replace old ones, fewer and fewer units in this city are protected by our “rent control,” the rent stabilization the law still provides for. This phenomenon is more pronounced in lower-income neighborhoods in DC, since zoning and historic preservation restrictions are more likely to protect rent-stabilized buildings in historically wealthy areas.
Further, landlords and developers have become adept at exploiting certain provisions in DC’s law. One is a provision that is supposed to allow landowners to recoup the costs of rehabilitation and capital investment, meant to improve housing quality in rent controlled buildings. Over the years, a landlord might defer maintenance until a large investment is needed. It has become common to use this practice of sudden expensive upgrades to force out poorer tenants in favor of the wealthy.
Another provision is meant to defray hardships faced by some landlords for whom the system may have somehow placed in a financially ruinous position. However, as the law is currently drafted, a landlord who isn’t making a 12 percent return on operating costs can use the hardship petition process to increase rents potentially far above rent control limits. Manipulating 12 months of operating expenses is simply too easy.
Rent control needs reform
Both of these provisions cause problems even before DC reviews them. Landlords routinely use the threat of rent adjustment petitions to get tenants to sign “voluntary agreements” that fix their rents but legally allow the landlord to radically increase the rent on vacant units and future tenants after the current residents move out — thus defeating the affordable housing mission of our rent control system.
There are efforts to reform rent control, though most that have been enacted only nibble around the edges of various problems the system has at present. A number of bills were considered a year ago by the DC Council, and while five bills passed, none addressed the core issues with our rent control system. The one with the most impact, DC 21-239, included some additional protection for elderly tenants.
An organized effort by tenants and advocates will be needed to change the trajectory of this critical but threatened policy in DC.