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Rent Control

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Atlanta Marriott Marquis, A601
Hosted By: American Economic Association
  • Chair: Richard Arnott, University of California-Riverside

The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco

Rebecca Diamond
,
Stanford University
Timothy James McQuade
,
Stanford University
Franklin Quian
,
Stanford University

Abstract

In this paper, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants, landlords, and the rental market
as a whole. Leveraging new micro data which tracks an individual’s migration over
time, we find that rent control increased the probability a renter stayed at their address
by close to 20 percent. At the same time, we find that landlords whose properties were
endogenously covered by rent control reduced their supply of available rental housing by
15%, by either converting to condos/TICs, selling to owner occupied, or redeveloping
buildings. This led to a city-wide rent increase of 7% and caused $5 billion of welfare
losses to all renters. We develop a dynamic, structural model of neighborhood choice
to evaluate the welfare impacts of our reduced form effects. We find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging
between $2300 and $6600 per person each year, with aggregate benefits totaling over
$390 million annually. The substantial welfare losses due to decreased housing supply
could be mitigated if insurance against large rent increases was provided as a form of
government social insurance, instead of a regulated mandate on landlords.

Gentrification and the Amenity Value of Crime Reductions: Evidence from Rent Deregulation

David Autor
,
Massachusetts Institute of Technology
Christopher Palmer
,
Massachusetts Institute of Technology
Parag Pathak
,
Massachusetts Institute of Technology

Abstract

In this paper, we study whether and how much public safety improvements are capitalized by the housing market after an exogenous shock to the gentrification process. We use variation induced by the sudden end of rent control in Cambridge, Massachusetts in 1995 to examine within-Cambridge variation in reported crime across neighborhoods with different rent-control levels, abstracting from the prevailing city-wide decline in criminal activity. Using detailed location-specific incident-level criminal activity data assembled from Cambridge Police Department archives for the years 1992 through 2005, we find robust evidence that rent decontrol caused overall crime to fall by 16 percent—approximately 1,200 reported crimes annually—with the majority of the effect accruing through reduced property crime. By applying external estimates of criminal victimization’s economic costs, we calculate that the crime reduction due to rent deregulation generated approximately $10 million (in 2008 dollars) of annual direct benefit to potential victims. Capitalizing this benefit into property values, this crime reduction accounts for 15 percent of the contemporaneous growth in the Cambridge residential property values that is attributable to rent decontrol. Our findings establish that reductions in crime are an important part of gentrification and generate substantial economic value. They also show that standard cost-of-crime estimates are within the bounds imposed by the aggregate price appreciation due to rent decontrol.

Empirics on the Causal Effects of Rent Control in Germany

Andreas Mense
,
University of Erlangen-Nuremberg
Claus Michelsen
,
DIW Berlin
Konstantin Kholodilin
,
DIW Berlin

Abstract

This paper analyzes empirically the effects of second-generation rent control. We investigate the consequences of a large-scale policy intervention in the German housing market in 2015. We rely on a difference-in-differences setup, augmented with elements of a discontinuity-in-time design, to identify the causal impact of rent control on controlled and uncontrolled prices, land values, and the short-run supply of (rental) housing. We exploit an exemption of newly built units and compare these units to regulated units in order to measure the relative effect of the regulation on these groups. We then decompose this total effect into a negative effect on regulated and a positive effect on unregulated units, by exploiting spatio-temporal variation in treatment and the fine-grained temporal resolution of the data.

Since intra-market variation is not available for identifying effects on land values and supply, we use propensity score weighting and trimming for selecting comparable treated and non-treated municipalities. We find a robust positive impact of the regulation on land values that is qualitatively and quantitatively in line with the results for rents. We then document that the rent control regime led to an increase in demolitions of small residential units (single- and two-family homes demolished with the purpose of making room for a new residential building), but we do not find an effect for larger buildings. We interpret this as a first sign of positive long-run supply effects, because it indicates that developers responded to the increased profitability of newly built units. We also provide evidence that landlords reduced maintenance effort under rent control.

An Urban Equilibrium Model with Rent Controls Applied to Paris Urban Area

Guillaume Chapelle
,
University of Barcelona
Etienne Wasmer
,
NYU Abu Dhabi

Abstract

Housing markets are regulated in most large urban areas. In particular, rents are controlled
to a large extent, either directly or from the existence of social housing. This reduces sorting by income but reduces the efficiency of spatial allocation of households. This segregation/efficiency trade-off is developed in this paper. We build a tractable model featuring the co-existence of a housing market where prices fully adjust (called the ’flexible rent sector’) and a sector in the housing markets where prices do not adjust (called the ’controlled rent sector’). The model predicts that public transportation investments, if they reduce the cost of commuting, shifts the trade-off by raising allocative efficiency without raising segregation. It acts either through a decline in the rent gradient or through an increase in employment depending on the degree population can adjust to changes (hence, ultimately, how the construction sector adjusts). As a side product, the model predicts that a higher degree of rent controls may have either a positive or a negative employment impact, although a realistic calibration and various robustness checks based on the Larger Paris area indicate that the negative effect dominates.

Rent Control's Achilles Heel: Profit-Seeking and Market Exit through Economic Eviction

Brian Asquith
,
W.E. Upjohn Institute for Employment Research

Abstract

Rent control tries to balance tenant security and landlord profitability, but landlords may circumvent rent control by evicting tenants on exaggerated grounds (at-fault) or exit the controlled market by evicting all tenants (no-fault). I use San Francisco data to test for economic eviction using an identification strategy that proxies for rent increases via the transit amenity generated by Google's, Apple's, Facebook's, and Electronic Arts' privately-provided commuter shuttle systems, and instruments for shuttle stop location with exogenous placement constraints. Shuttle-induced rent increases reduced uncontrolled landlords' monthly at-fault probability by 6.25%, but only by 1.45% for controlled landlords. However, the no-fault probability increased overall by 0.03%, yielding an extra 313 unit withdrawals annually.
Discussant(s)
Richard Green
,
University of Southern California
Edward L. Glaeser
,
Harvard University
Jakob Munch
,
University of Copenhagen
Bernard Salanié
,
Columbia University
JEL Classifications
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
  • H7 - State and Local Government; Intergovernmental Relations