Cambridge case study: How rent control eats into neighborhoods' value
Margaret Tarrant: Hansel and Gretel. Image by Sofi on Flickr
Economist James Schneider takes to Econlib to recount Cambridge, Massachusetts's foray into rent control—and why it backfired. When landlords must list properties below market value, they often can't afford to stay current on maintenance and upgrades, and this devalues the surrounding community at large. Sound familiar, SJ?
Rent control has numerous negative effects on the housing market. If a landlord is forced to charge below-market rent, it reduces the incentive to improve the property or even perform basic maintenance. Perhaps, even more importantly, it misallocates who lives in a property. Tenants will continue living in an apartment even though someone else has a greater willingness to pay for the same apartment. Rent control can effectively lock people into a location; someone who is enjoying below-market rent in New York City will be disinclined to pursue a job opportunity in another city.
A home’s value is not just determined by its own condition, but also by the attributes of the entire community. If your neighbor’s landlord lets his building fall into disrepair, it might negatively affect you. Over time, rent control can gradually make the neighborhood a less appealing place to live. This impact will be magnified to the extent that higher income neighbors are themselves an amenity. A forthcoming JPE piece quantifies how rent control reduces the property values of not just controlled properties but surrounding properties as well. It does this by studying what happened in Cambridge, Massachusetts, after the state legislature suddenly eliminated rent control in 1995.
When Cambridge enacted its version of rent control, it only applied to non-owner-occupied housing built before 1970. This meant that non-rent-controlled units existed side by side with controlled units. When rent control was eliminated, 37.5 percent of units were controlled. However, the concentration of rent controlled units varied a great deal. Some properties were in areas that were over 80 percent rent controlled. If rent control devalues the surrounding community, then uncontrolled properties in these areas would be impacted more than other uncontrolled properties.
For each property, the researchers calculated what percentage of units were controlled within a radius of 0.2 miles. The researchers then looked at how housing values evolved after the elimination of rent control. As expected, formerly controlled properties appreciated in value compared to the overall market. But rent decontrol also spurred appreciation in houses that were never rent controlled but had merely been located near a lot of rent-controlled units.
When rent control was eliminated, the assessed value of the uncontrolled housing was $2.8 billion. This grew to $7.5 billion by 2003. The researchers estimated that a billion dollars of this appreciation was due to the elimination of rent control.
This article originally appeared in Econlib. Read the whole thing here.
Read more on rent control here.
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