National Rent Control?

President Joe Biden has proposed national rent control on apartment units with corporate ownership. His plan would cap rent increases at 5% per year. If owners want to raise rents beyond 5%, they must forgo depreciation expense on their tax return. Yet this proposal doesn’t impact all apartment owners. Only those “corporate” landlords who own 50 units or more are affected.

In a Washington Post article, Jason Furman, President Obama’s top economist, disagrees with this plan. He said, “rent control has been about as disgraced as any economic policy in the tool kit. The idea we’d be reviving and expanding it will ultimately make our housing supply problems worse, not better.” This sums up my opinion on the matter as well.

I don’t believe this is a serious proposal from the Biden Administration. The real solution involves increasing housing supply, which rent control discourages. To me, this is just pandering to younger voters and the progressive base. I once asked a San Francisco politician why he supported rent control when he knew it was a flawed policy. He said, “What am I supposed to do? My constituents are overwhelmingly renters.” He wanted to get elected, and he did. America is not a renter nation. 66% of Americans are homeowners. Congress would need to approve this plan, and there is no bipartisan support for this. That being said, let’s dive into this a bit.

The White House briefing singles out a blog post chastising 6 public REITs for corporate greed. It suggests improved REIT profitability is “off the backs” of rent increases. It even blames REITs for making distributions when that’s what it legally must do to remain a REIT. Unfortunately, REITs do not have an outsized impact on the apartment market. According to data gathered by the NMHC, REITs own 1% of all apartment properties. Also, those 6 REIT stocks are down, on average, -27% since their peak in March 2022. The S&P is up +25% in the same period. If REITs really found a way to take advantage of the renter for massive profits, the market hasn’t rewarded them for it.

Owners with 50 apartment units or more are considered corporate landlords in this plan. Within the bucket of 50+ unit properties, public REITs own just 3%. Another 65% is owned via LLC, LLP, LP, or General Partnership. Any smart landlord, regardless of size, is going to use an LLC or similar entity to shield liability. It’s unknown how many small owners are included in the 65% above. But it seems likely that the “corporate” threshold includes a lot of individual/small owners.

Regardless, the main issue is fairness. In many markets, there are numerous 10-, 20-, and 30-unit buildings. If a 10-unit building is owned by someone considered “corporate”, but the exact same 10-unit building next door is not, why should they operate differently? Under the proposed plan, renters would get a benefit living in one property, but not in the other. Also, who is going to monitor this program? The federal government would need to create an entire national agency devoted to this when even local municipalities struggle with it now.

I believe state governments would like and should have a say in this plan. Some states have outright banned rent control. Even a blue state like Massachusetts has a ban on rent control. That hasn’t stopped the City of Boston and the Governor from trying to overturn it. However, there’s no momentum at the state level, and a ballot initiative for 2024 to repeal the ban fell short. States don’t like to be told what to do. And this type of measure would have a dramatic negative effect on their housing supply. A city like Boston needs more, not less housing. There would be considerable pressure put on individual Senators and Representatives to avoid supporting a measure such as this.

This is why I think this is all political theater in a polarized political climate. This type of policy gets passed in California where one-party controls everything. The homeownership rate in California is 56%, but only 44% in San Francisco. Those big urban voting blocks are renter-focused, and politicians know that. What’s good for San Francisco is rarely good for Bakersfield. The same holds true nationally. This type of policy won’t go over well in Texas.

Proponents of the plan would say, “but new construction is exempt from this plan.” For now. At some point, new construction becomes old and subject to these regulations. Buyers aren’t all dumb. They’ll price that in when they go to acquire a developer’s new building. Developers know this too. They won’t build until it makes absolute sense to do so. Without developer speculation, fewer units get built and rents go up. That’s exactly what happens under rent control and not what the Biden Administration hopes to accomplish.

While it is a noble goal to make housing affordable, rent control is the wrong solution. “President Biden believes the best thing we can do to ease the burden of housing costs is to boost the supply of quality housing” according to this White House brief. He’s right. And every line of government (federal, state, local) should work to reduce many self-imposed barriers towards achieving this goal.