There is a housing crisis in the Bay State, a fact unlikely to surprise many of the state’s residents. Massachusetts consistently ranks as one of the most expensive places to live in the entire country, right up there with infamously unaffordable places such as New York and California.
The state ranks poorly on several measures of comparative costs, including utilities, groceries, transportation, and healthcare. But the cost that takes up the highest percentage of residents’ income is housing. Rents and the cost of the average home have skyrocketed in the wake of the pandemic, hardly cooling as mortgage rates have risen.
According to Census Bureau survey data, the median rent paid by Massachusetts renters in 2020 was $1336, nearly $500 above the national average. It has likely risen since then.
A separate study found that Boston metro area rents in particular saw exceptional growth in the last few years as it became the second most expensive city in the nation for renters. Statewide, a quarter of renters now spend 50 percent or more of their income on housing and almost half spend in excess of 30 percent on housing. According to Zillow, the median rent for all property types in Massachusetts is $3,100, or nearly 50 percent higher than the national median.
Leaders Move to Address Concerns Over Housing
As this issue has become more salient with voters, state leaders and those campaigning for public office have increasingly made reforms central to their policy platforms. Governor Healey, for example, has proposed creating a cabinet-level position dedicated to housing, streamlining building permit applications, and enforcing the Housing Choice Initiative that supports development around MBTA stations.
Others, like Michelle Wu, have called for more radical solutions such as re-implementing some kind of rent control or stabilization. A task force she established early in 2021 just recently released a preliminary plan to cap rent increases in Boston. The plan would exempt new buildings less than 15 years old and would cap rent increases at 6 percent plus the consumer price index or 10 percent, whichever is lower. While not currently close to becoming law, the idea has some traction with state legislators and a bill by a Cambridge representative was introduced into the House in 2021 to allow localities to decide for themselves.
Rent control is a policy solution with a long history in the Bay State, it was first introduced in the 1970’s in cities like Boston, Cambridge, Brookline, Somerville, and Lynn. While Somerville and Lynn abandoned the policy within a few years, the other municipalities only ended the practice when it was banned by a 51 percent to 49 percent margin in a statewide referendum.
The rent control laws generally applied to dwellings constructed before 1969 and prohibited landlords from raising rents on controlled dwellings without prior approvals from local boards or administrators. Rent control authorities were empowered to increase or decrease rents on controlled units, while supposedly assuring that landlords realized a “fair net operating income.” Landlords also could not evict tenants without first securing certificates of eviction from rent control authorities.
The Negative Externalities of Rent Control
While rent control might make sense at face value – it prohibits landlords from raising rents above a certain cap, theoretically keeping them more affordable and reducing displacement – how it actually plays out is much different.
As with any price control, rent control suffers from an inescapable law of economics: supply and demand. Under free market conditions an equilibrium rent is established as competing renters push prices upward and competing landlords push them downward. When a price control is set below the equilibrium price, it necessarily reduces the supply of rental stock because fewer landlords are willing to rent their units for that price.
In practice, landlords’ reactions typically play out in a few different ways. They either convert their housing to forms such as condominiums to avoid rent control laws, which diminishes supply, or reduce investment in their rental properties, diminishing the quality of housing.
After San Francisco expanded rent control to small multi-family structures through a ballot initiative in 1994, landlords who were subjected to the new laws gradually responded by converting to condos and redeveloping buildings to exempt themselves from rent control. This led not only to a 25 percent decrease in the total rental stock covered by price controls, but also led to gentrification and higher rents in non-rent-controlled housing.
The new law benefited and harmed renters in equal measure. After passage of the new law, from 1995 to 2012, renters covered by rent control benefited, realizing $2.9 billion in savings compared to market rates, while new residents and residents not covered by rent control ended up paying $2.9 billion more than they would have otherwise.
The impact on home values and housing investment was negative. In Cambridge, unlike in San Francisco, the rent control ordinance tightly restricted removal of units from the rental stock while exempting new construction. In this way, the city may have sought to avoid reductions in supply. But the result was a structural disinvestment in housing by landlords. Upon de-control in 1994, price appreciation in the following years was greatest for non-controlled units in neighborhoods that previously had the highest percentage of controlled units. In other words, the properties not covered by rent control saw steep depreciation in value due to their proximity to disinvested rent control properties. These findings imply that rent control policies had negative externalities that reduced the desirability of entire neighborhoods, even for uncontrolled housing.
Finally, rent control laws have been found to lead to a significant misallocation of rental stock. With lower prices and restrictions that limit the tendency of goods to go to the highest bidder, renters who value living in a price-controlled area the most are no longer assured of obtaining housing, as they are in a free housing market. One study on rent control in New York City found that 25.8 percent of renters were living in apartments that were mismatched with the number of people who lived there. For example, a family of six or a single individual living in a three bedroom apartment would both be considered a misallocation of rental stock.
It’s for these reasons that in a 2012 survey of economists, 81 percent disagreed that rent control in New York and San Francisco had a positive impact on the amount and quality of affordable rental housing. Only 2 percent agreed, while 17 percent were uncertain, had no opinion, or did not respond to the survey.
Where to Go from Here?
State legislators can best serve their constituents by resisting the urge to turn back the clock and revisit failed policies. Rent control is a tempting measure to contemplate, as it does provide some relief for renters and shields them from displacement. But the fundamental laws of economics run counter to its propositions, ultimately leading to outcomes that decrease the quality and amount of housing stock while also potentially spurring gentrification and rent increases.
With thousands more residents leaving than migrating into Massachusetts every year, it is of paramount importance that the Commonwealth address its affordability issue. Rent control, or “stabilization,” is not the way to do it.
The legislature should follow Governor Healey’s lead in prioritizing the expansion of available housing stock. Reforms to zoning laws that restrict the types of housing that can be built and eliminating burdensome regulations and permitting processes that needlessly suppress new development are good places to start. The legislature should also consider implementing statewide Accessory Dwelling Unit reform, as local governments have been slow to adopt reforms.
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About the Author
Aidan Enright is Pioneer’s economic research associate, responsible for analyzing data and developing reports on the state’s business climate and economic opportunity. Prior to working at Pioneer, he worked as a tutor and mentor in a Providence city school and was an intern for a U.S. Senator and the RI Department of Administration. Aidan earned a Bachelor of Arts in Political Science and Economics with a concentration in U.S. national politics from the College of Wooster.