Rent control's record from Stockholm to San Francisco is the same story

If you want to know whether an economic idea is any good, ask an economist whether it works. Then ask a second economist, from the other side of the political fence. When the two of them agree, in the same sentence, with the same sigh, you have found something unusual. On rent control, they agree. The surveys that ask professional economists about it come back with a margin that would embarrass a dictator, and the people on the two ends of the political spectrum are, on this one subject, in the same room.

That should interest you, because rent control keeps winning elections. It is among the most popular bad ideas in American politics, and it comes back every time rents rise, which is to say, every few years. So let me walk you through what the record shows, city by city, and do the arithmetic that the ballot measures never print.

What rent control is

Rent control is a limit on how much a landlord may charge, or how much he may raise the rent. The versions vary. A hard freeze fixes the rent at a level. A cap allows increases up to a set percentage a year. Vacancy control limits what the landlord can charge a new tenant after the old one leaves, and vacancy decontrol lets the rent reset between tenants. The versions that economists criticize most are the strict ones, in which the limit is low, applies for a long time and covers existing units, though even the mild versions have costs.

The stated goal is to keep housing affordable for people who live in it now. The idea has an emotional logic: a family in an apartment should not be priced out by a sudden jump. That is a real concern, and nobody sensible mocks a family fearful of losing its home. The question is whether the policy helps the family, and the record says that it helps some families, at the expense of many more.

What the economists say

The most famous line on the subject belongs to Assar Lindbeck, the Swedish economist who chaired the committee that awards the Nobel Prize in economics. In a book from 1971 he wrote, in substance, that rent control appears to be the most efficient technique known for destroying a city, short of bombing it. I paraphrase his verdict, since I want to be exact about what I can quote, but it is the sentence that gets passed around, and it comes from a man who was a Swedish social democrat, not a free-market ideologue.

An earlier shot came in 1946, when two young economists, Milton Friedman and George Stigler, published a pamphlet on the effects of wartime rent ceilings called Roofs or Ceilings? They argued that ceilings would cause a shortage of housing by reducing the incentive to build and maintain it. They were criticized for the argument then, and the economic profession has not found a reason to reject it since.

The mechanism is not subtle. A price tells suppliers how much of something people want. A ceiling below the market price tells suppliers to make less of it. Fewer units get built, more get converted to other uses, and the ones that remain get less upkeep because the owner has no way to recover the cost of improvements.

Stockholm

Sweden is a favorite of American progressives, so let me give them their due and look at it. The Swedish capital has long had a strict regime of rent regulation, in which rents in the standard stock are set by a collective negotiation between landlords' and tenants' organizations and not by the market. The result is a very large gap between the regulated rent and what a unit would fetch at a market price.

What does the gap do? It produces queues. The main municipal housing queue in Stockholm is widely reported to run to many years for a first-hand rental contract in the central city. The exact wait changes from year to year, so check the queue operator's own statistics. People enroll their children in the queue. Others rent out their own lease, sublet it informally, or pay a premium on a second-hand contract. The thing that gets distributed is not an apartment but a place in line, and a place in line goes to the one who has been waiting longest, who is not necessarily the one who needs it most.

The deeper cost is in mobility. Someone who holds a cheap apartment in a good location will not give it up when the family changes or the job changes, because there is nothing as cheap to move to. The housing stock is frozen in place by the people lucky enough to hold it, and the young, the newcomers and the poor are left outside.

New York

New York is the American analog. Rent regulation began in the city during the Second World War and has been through many revisions, so that today the city has a large stock of rent-stabilized apartments, close to a million units by recent counts. The system is complicated, and a full account would need a book. The short version is that regulated units are a large part of the rental stock, that tenants in them tend to stay longer, and that owners have often had an incentive to convert, neglect or leave units vacant when the regulated rent does not cover costs.

The famous result of long-standing rent regulation in New York in the twentieth century was the abandonment of buildings in parts of the city: owners who could not cover taxes and upkeep from capped rents walked away. I do not want to overstate the case, since the abandonment of buildings had many causes in a city that lost population and jobs in that period. But the pattern fits what the economics predicts, and it should make anyone wary of a policy that tells owners they may collect only a sum below their costs.

San Francisco, and the 2019 Stanford study

Now the best evidence, because it is recent and carefully done. In 1994, San Francisco voters expanded rent control to cover small multifamily buildings, those built before 1980. The expansion created a natural experiment: buildings on one side of the line were newly covered, and similar buildings on the other side were not, so researchers could compare them.

Three Stanford economists, Rebecca Diamond, Tim McQuade and Franklin Qian, did exactly that, in a paper published in 2019 in the American Economic Review. They found that the rent control gave tenants who were already in covered units a real benefit: they were more likely to stay at their address. But the landlords of the covered buildings responded. They reduced the supply of rental housing by about fifteen percent, by selling to owner-occupants, converting to condominiums or redeveloping. That reduction in supply, the authors argued, pushed up rents in the rest of the city. In other words, the policy helped the people who had it, harmed the people who came later and made the whole market more expensive.

That is the cleanest evidence for the thesis, and it came from researchers with no ideological axe to grind. Put it on a card in your wallet: a rent-control expansion in San Francisco cut rental supply by about fifteen percent among the covered owners and raised rents elsewhere. For a family choosing between buildings, the tenant already in the covered unit won, and the tenant looking for an apartment lost.

St. Paul

You can see the same pattern play out in real time. In November 2021 the voters of St. Paul, Minnesota, approved a rent cap of three percent a year, which applied to new construction as well as to older buildings and which contained very few exceptions. It was among the strictest in the country.

The response was swift. Reports of building permits in St. Paul showed a steep fall in applications after the vote. Within about a year the city council moved to amend the measure to exempt new construction for a period of twenty years and to loosen other provisions. When a city has to amend a price control because the builders have walked away, it has performed an experiment on itself and learned what its own economists could have told it for free.

The arithmetic of a frozen rent

Here is the part the ballot measures never print. I will use a hypothetical, labeled as such, to show the mechanism.

Say a landlord owns an apartment that rents for one thousand dollars a month, and that his costs for the unit, the property tax, insurance, repairs, utilities he provides and a reasonable reserve, come to seven hundred dollars a month. He earns a margin of three hundred. Now freeze the rent and let his costs rise four percent a year, a plausible figure for a period of ordinary inflation plus rising property taxes and insurance.

Seven hundred dollars growing at four percent a year for ten years is 700 times 1.04 to the tenth power, which is 700 times about 1.4802, or $1,036.17. By year nine the margin is gone, and by year ten the owner loses money on every month the unit is occupied. What does he do? He does the only things he can: skip repairs, find a reason to evict, convert the unit, or sell it. A cap that allows increases of three percent a year when costs grow at four is gentler, and it shows the same drift more slowly. After ten years the rent is $1,000 times 1.03 to the tenth, which is $1,343.92, against a cost of $1,036.17. The margin is $307.75, but as a share of the rent it has fallen from thirty percent to about twenty-three, and it keeps falling every year, because the cost line is climbing faster than the rent line. That margin is what pays for the owner's capital, his risk and his time. Run the two lines for about thirty-seven years in all and they cross.

I make no claim that every landlord is a saint. Some are not. But a policy that works only if the owner is willing to run the building at a loss is a policy that will not work for long.

The numbered argument

1. Price controls reduce supply. This is not a conservative slogan but a finding of professional economics, supported by the evidence from Stockholm, New York, San Francisco and St. Paul.

1. They help the lucky and hurt the rest. The tenant who holds a controlled lease benefits, and the family looking for a home pays more. The winners are visible and the losers are invisible, which is exactly why the policy is popular.

1. They lock people in place. A cheap lease is a reason never to move, and a city of people who cannot move is a city that cannot match workers to jobs.

1. They degrade the stock. When the rent does not cover the upkeep, the upkeep stops.

1. The real cure is more housing. Rents are high where homes are scarce, and homes are scarce where the rules make building hard. The answer is to build, which is the argument of houston has almost no zoning, and its houses cost less to prove it.

The Founding angle

The Constitution's Fifth Amendment says that private property shall not "be taken for public use, without just compensation". A rent ceiling is not a taking in the formal sense, and the courts have generally upheld rent regulation against such challenges, so I will not pretend that it is a clear constitutional violation. But the principle behind the clause, that the cost of a public goal should be borne by the public and not loaded onto a few owners, is worth asking about. If the city wants affordable housing for its residents, then the residents, through their taxes, should pay for it, in the open. Making a few landlords pay, out of sight, is the oldest trick in politics. Madison's essay on property says that government should protect "property of every sort", and a rule that makes the owner subsidize the tenant breaks that bargain.

The coverage

A word about the headlines. Whenever rents rise, the coverage reaches for a villain, the landlord, and seldom for the cause, which is a shortage. The ballot measure is described as "protecting tenants", a phrase that carries the conclusion in its title. You will rarely see a story that asks what happened to permits after the law passed. That is the question that matters, and the answer is on the public record.

For more of the same logic, see a thought experiment where the grocery store gets rent control too, a satire that follows the idea to the supermarket, and Ludwig Erhard ended price controls on a Sunday and launched a miracle for the best-known case of ending price controls. On the broader point that a ceiling creates a shortage, a thought experiment where every price in town is set by a committee makes the case with a laugh.

The case in brief

1. Economists across the political spectrum agree that rent control shrinks and degrades the housing supply, and Assar Lindbeck, a Swedish social democrat, said so in memorable terms.
2. Stockholm's long queues for rental contracts show what a ceiling does: it distributes places in line, not apartments.
3. The 2019 Stanford study of San Francisco's 1994 expansion found that covered landlords cut rental supply by about fifteen percent, and citywide rents rose.
4. St. Paul's 2021 cap sent permit applications down and led the council to exempt new construction within about a year.
5. A frozen rent against costs rising four percent a year erases the owner's margin in nine years, which is why upkeep stops. The cure is to build more homes.

What you can do: look up your city's or state's rules on rent increases and on new-construction exemptions, and ask your council member what happened to building permits in any place that adopted a cap.