Rent Control Re-Explored: What the Past Can Teach the Future

Share on Facebook
Share on Twitter
Share on
LinkedIn
+


Hubwonk Host Joe Selvaggi talks with economist and MIT Professor Chris Palmer about his research and analysis of the effects of rent control in Cambridge during its 25-year implementation and in the aftermath of its repeal.

Guest:

Christopher Palmer is the Albert and Jeanne Clear Career Development Professor and an Assistant Professor of Finance at the MIT Sloan School of Management where he teaches corporate finance. His research focuses on how credit, real estate, and labor markets respond to periods of significant upheaval. Palmer is also a Visiting Scholar at the Federal Reserve Bank of Boston, a Faculty Research Fellow at the National Bureau of Economic Research, and an Affiliate with the Jameel Poverty Action Lab. He previously taught real estate finance at the University of California Berkeley’s Haas School of Business and was a Visiting Scholar at the Federal Reserve Bank of San Francisco. Prior to graduate school, he consulted with Compass-Lexecon. Palmer holds a BA in economics and mathematics from Brigham Young University and a PhD in economics from MIT.

Get new episodes of Hubwonk in your inbox!

Please excuse typos.

Joe Selvaggi:

I’m Joe Selvaggi.

Joe Selvaggi:

Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. Boston is an expensive place to live with average rents of $4,700 per month. Typical rents in Boston are getting dangerously close to equally. The average American family income Boston’s thriving and diverse economy continues to attract new residents who then compete for residential inventory constrained by zoning regulation and the physical limits that come with its 400 year old history. In response to this diminishing housing affordability, some high profile politicians, including one candidate for mayor of Boston have proposed rent control or rent stabilization. Is it sometimes referred as a possible solution to stemming the tide of rapid rent increases? Indeed rent control had in 1970, been adopted in Massachusetts and embraced by many of its most populous cities, including Boston and Cambridge, until it was made illegal by statewide referendum in 1994, this policy enactment and later repeal offers economists and academics.

Joe Selvaggi:

A 25 year experiment rich with data to analyze the effects of rent control on rent, renters, neighborhoods, and cities. This rare opportunity to look to the past offers current policy makers, a foundation for making economically sound decisions for our cities and regions in the future. My guest today is economists and MIT Sloan school of management professor Chris Palmer, professor Palmer is also a visiting scholar at the federal reserve bank of Boston and a faculty research fellow at the national bureau of economic research. Professor Palmer has done substantial research on the effects of rent control in Cambridge, between the years of 1970, when it was first implemented in 1995, when it was proscribed by referendum is analysis utilizes the neighborhood level data to compare those areas with high levels of rent controlled units, with those areas with little rent controlled property beyond the observations made on the 25 years of the policy professor Palmer’s work also examined the effects on Cambridge of de-controlling rents in the aftermath of its repeal. Take it in total professor Palmer’s research offers policymakers a window into the future through a snapshot of the past. When I return, I’ll be joined by economists and MIT professor Chris Palmer. Hubwonk is a production of Pioneer Institute, a Boston-based think tank that seeks to improve the quality of life in Massachusetts and beyond. Pioneer is a 501 C3 organization that relies on your support. Please visit pioneerinstitute.org to make a tax deductible donation today.

Joe Selvaggi:

Okay. We’re back. This is Hubwonk, I’m Joe Selvaggi, and I’m now joined by economist and MIT professor Dr. Chris Palmer. Welcome to Hubwonk, Professor Palmer.

Chris Palmer:

Thanks. Nice to be here.

Joe Selvaggi:

Well, it’s good to have you, and we’re going to talk about our topic today. We’re going to talk about rent control, it’s in the news a bit lately. Largely because here across the river in Boston, we’re having a mayoral race and one of the candidates has included rent control as I’ll just say, a policy aspiration in her campaign. Rent control is not a new concept in the Commonwealth. And it’s been, it’s been studied extensively of course by you as well, but for the benefit of our listeners who are going to hear your research, I want to do a step backward and offer for those in our audience who don’t have a PhD in economics. Me included a little bit of how markets work from the very basic level. Let’s talk about supply and demand. We’ve all heard of those concepts but specifically how does the price of something and an apartment is something it’s produced by a landlord and it’s a demanded by a tenant. How does the price of something influence its supply?

Chris Palmer:

Great question. So we’ve got a Boston centric audience, so indulge me with a red Sox specific analogy that appealed to me talking about price controls. So Mayor Menino was at one point is very populous play railing about how expensive it was to attend a game at Fenway and how expensive it was for a family of four to drive to Fenway and how expensive the food was and the tickets were and everything else. And he proposed that there be a price control where the price of parking at Fenway would be kept, say $20, which by today’s standards seems like a really great deal, right? I’ll take it, I’ll take it. I’ll take it too. And I, as I thought about that, I just thought this is going to be a disaster if this ever happens. And so let me lay out the economic rationale as a primer for, for how we would think about how the price of something affects its supply.

Chris Palmer:

Imagine that you’re considering at the time whether to build a parking garage in the vicinity of Fenway and the neighborhood’s been revitalizing, and there’s lots of demand for parking. And then especially you have 80 some odd home games a year that you’re going to be able to, to sell out as you, as Fenway fills up. And all of a sudden you find out that instead of being able to sell those spots and rent them that night for $40 a spot, it’s only going to be $20 a spot because of the mayor’s new proposal. You might not go through with that parking garage. You might instead sell that land to somebody else who builds medical offices or a new apartment building or something else. Similarly, if you’re one of those people that has a few lots on the corner of their gas station on Boylston, and you normally sell them out, it’s kind of a pain, it interrupts your customers coming in to buy gas and but it’s worth it to you because you can get $40 a spot for it.

Chris Palmer:

And then you can only get dollars a spot you back up and you say, you know what, it’s just not worth it anymore for me to rent this out. And what that means is PRI parking becomes even more scarce at Fenway park. So if you were trying to make it easier to park, what you’ve actually done is you’ve made it harder to park because you put a price control on that means that demand at the price of $20 a spot far outstrips supply. And so that’s what we’re worried about for rent control as a, as a price control from like the Econ 101 perspective. We’re worried that if you put a price control on the price of apartments, then you will make it so that people will choose not to rent their apartments. And there could be a variety of reasons for that, or, or they’ll choose not to develop new housing because it will be so expensive to do so. So from its simplest perspective, that’s how we think about supply and demand in this context where you have a price control, a price ceiling that is below the market price for for rent and that leading to fewer people being willing to supply apartments than would like to rent apartments. So

Joe Selvaggi:

What you’re saying is whereas the demand for a game must, might be somewhat fixed. Everybody wants to go to a ball game and we can only have so many seats. The supply is determined by how much money the supplier can earn. So the supply of, of rental units, if we go from parking spaces to apartments is likely to go up if rents are allowed to be high and likely to either stay the same or perhaps be converted to some other use, if, if prices are artificially constrained low,

Chris Palmer:

Exactly. I might choose to, you know what, I’m just going to convert to condos and sell those condos and just be done with renting as a landlord that decreases the supply of rental housing. I might choose not to build new housing in that case. So I might choose to let my relatives live in the housing instead of renting it out. And all of these things might reduce the stock of rental housing. So

Joe Selvaggi:

If we’re talking about efficient markets and, and left unconstrained rents go up people complained but pay higher rents. If let let’s talk market fundamentals. If people who believe in markets think they’re efficient in their allocation of capital and rents are indeed high. We’ll talk about those numbers. I hope later in our conversation, why in general, our rent so high, if markets are designed to give everybody a fair product at a fair price,

Chris Palmer:

Well beyond just policies that cap the level of rents directly like a price ceiling like rent control. Does we also think that a lot of cities that people are quite anxious to live in, have very constrained supply for other reasons. So that could be because of the limited availability of land. It could be because of a regulation and the difficulty of doing new development in an area. A lot of these things combined to kind of create a perfect storm where we’re building many fewer housing units than job growth in an area. And so then we have this widening where you have job growth in Boston. More people have jobs in Boston, want to live in Boston, and you’re not increasing as quickly, the supply of housing because of the supply constraints that makes it an increasingly complex affordability challenge.

Joe Selvaggi:

So we’re still in the theoretical. We haven’t gotten into any of your observations of what actually happens, but let’s talk about where we would constrain how much a landlord could charge for a unit. In, in Boston, let’s, let’s pick a number like $3,000 and we constrain the amount per month. The landlord can raise the rent and let’s assume he doesn’t convert it to condos and sell it. He’s going to be a landlord, but he’s going to make a little less money than if he had a free hand to raise it to whatever level he’d like. So given the constraint of only being able to raise, you know, let’s pick a number 3% or 5%, what would be the second order effect of that kind of constraint? We know he, he might not decide to buy more units. He might not build more units, but he’s going to be a landlord is to stay landlord what’s, what’s likely to be a second order effect of, of that constraint.

Chris Palmer:

That’s the one thing that the econ 101 analysis always asserts about rent control is that it not only does it lower the quantity, and we can talk about whether modern policies try to mitigate these effects. But it also says that the second order effect of rent control would be to reduce the quality of rental housing. So maybe I’m a landlord and the grudgingly I’m now just accepting smaller increases and lower rents. But I might be much less likely to renovate that housing. I might be much less responsive to fix that housing. And so over time we think that it leads to a decline in housing investment.

Joe Selvaggi:

So I I I make a living as a landlord, but by charging rent and I take some of that rent and I pay my mortgage and I do some maintenance and whatever’s left over I keep as profit. But if that number gets smaller and naturally I perhaps have less money to do the renovation, but also of course, since I can attract a more more rent because I’m constrained, there’s no incentive then to improve the property to make it more attractive to renters, because is that the dynamic? Yes. All right. Now renters themselves in in your model the renters seem to be enjoying though, then below market rent, at least in the short term over the longterm. I would imagine a building that isn’t improved because we’ve constrained the incentive to improve. The renter though. He pays less rent, does seem to suffer in the long-term. I don’t know if you call it secondary or tertiary effects of, of, of of a constraint on, on rent. Say more about that. Yeah.

Chris Palmer:

Maybe it’s a good time to pause and make a couple of caveats with the econ 1 0 1 that we’ve been given that I’ve been giving so far relative to the actual policies that exist. So if kind of the two knocks from the supply and demand analysis against rent controll is that it reduces the quantity and the quality of housing, modern rent control policies do try to take this into account and do, try to allow for new construction, to be exempt from rent control and for capital improvements to the housing to be, to be allowable rent increases. So that’s in the backdrop that that could happen now, turning to your question about, well over time, you know, maybe this is great, cause I have a, a cheaper apartment, but then my maintenance is going down. I’ve actually talked to people who accept said that trade-off sounds fine.

Chris Palmer:

To me, it sounds fine to me in exchange for getting to live in the city and to have slow rent growth, I’m fine to not have updated appliances or countertops and to have kind of peeling wallpaper and, and, and kind of warped floorboards. That all seems like a fine exchange for me. Now, there are other people who would not find it fine. They would much rather be able to pay more for an apartment that didn’t have those problems. And so there’s generally an unregulated sector of new construction, for example, that that is exempt and most policies do this, where they could find something like that. So I would say that in general it’s really just great for the people that get the rent controlled housing. Yes, they might complain that wouldn’t it be better to have housing at cheap prices and have it perfectly maintained and renovated. But for the most part, I think the people who get rent controlled housing feel great about it. And the problem really is about the other people who don’t get rent controlled housing and their rents are higher. And and people in the future.

Joe Selvaggi:

I see. So what perhaps would be a politically viable solution to resistance to rent control might be to say, I’ll control older houses where people are living and I won’t control future houses where perhaps more affluent people who are, who are able to pay market rent for. So you have the controlled and non-controlled very, very different dynamic, but in theory, satisfies both the market for new units and the market for people who would trade maintenance for lower rent. Right,

Chris Palmer:

Right. The Commonwealth of Massachusetts rent control enabling act in 1971, exempted all construction build after January 1st, 1969, as they were trying to say, dear, future developers, we want you to have full incentive to build housing in Massachusetts. We absolutely want there to be more supply, and we don’t want that to be clouded by rent control. And maybe part of that is like you said, it differentiates a little bit. It allows people that want the nicer amenities inside their apartment to be able to have options to do it. But I think one of the core reasons here is to just make sure that there’s still enough of a reason to increase supply.

Joe Selvaggi:

So we’ve jumped from the theoretical to the actual, so let’s take off our economics hat and put it on history, hats. Right. Let’s talk about what in Massachusetts, this was a, you mentioned back in 19 69, 19 70. And I ultimately, I don’t want to jump ahead, but we had roughly 25 years where we could have rent control in the Commonwealth. So let’s go back and talk about the perhaps worthy arguments for rent control back in 1970 and the justification and w ultimately, which parts which cities adopted rent control at that time. So

Chris Palmer:

There was a widespread inflation around 1970. You think of this as like the Nixon era price controls the kind of across the economy, but, but certainly housing was an acute concern. And there was generally, it was deemed to be an emergency shortage of housing. And so what the state did was pass a law that if you wanted to a local town could, or city could enact a rent control ordinance and by local rule. And so Boston Brookline Cambridge were the ones that instituted it and kept it for the longest amount of time. There were many other cities I can’t remember off the top of my head that enacted rent control for a short period of time from like 1970, say to 1978, but by 1994, only Boston Brookline and Cambridge were left with rent control ordinances. Everyone else that had started them in, in, even though they were allowed to in the state of Massachusetts had, had ended their rent control ordinances, and Cambridge Brookline in Boston felt like they had an ongoing shortage and an ongoing affordability crisis and to prevent displacement and to try to preserve housing affordability, they were continuing to have their rent control ordinances.

Joe Selvaggi:

I don’t want to get ahead of ourselves, but ultimately it was a referendum that ended it and made it effectively illegal to have rent control in, in Massachusetts. That was in 1994, the referendum,

Chris Palmer:

Right? Every time the landlords put it on the local ballots, there’s many more renters than owners in Cambridge and, and Cambridge is a progressive place it over Boston. And so they were just defeated handily every time they put it on a local ballot. So they decided to instead attack the rent control, enabling ordinance at the state level. And they put it on the statewide ballot for a statewide referendum in Nove.mber of 94.

Joe Selvaggi:

So it won in, in Massachusetts, but lost in the door of the cities of Brookline, Boston and Cambridge, right?

Chris Palmer:

Not lost fairly overwhelmingly in the actual places that had it, just kind of a funny irony is that you had people all over Massachusetts voting on whether Boston Brookline and teen bridge should be allowed to have rent control. But that was actually part of the argument that the landlords made during the campaign was the small property owners association said, look, there is a redistribution at the state level of state aid to various cities. And by devaluing their housing stock, Boston Brookline and Cambridge are bringing in fewer property taxes and they need more state aid for their schools than they could generate on their own if they didn’t have rent control. And that’s one of the things that appealed to people outside, but it was a very close election. I mean, it was like 51% to 49% voting into to eliminate the rent control, enabling act.

Joe Selvaggi:

So I’m your research. We have 25 years of data. So we just talked about theoretically, what would happen. And we’ve talked about whether people liked what happened, but let’s talk from an economist perspective. You actually focused on Cambridge. What made that the city that was most appealing for your study,

Chris Palmer:

But what was nice about Cambridge is we have really great data from the rent control board as to which properties were rent controlled and which properties weren’t. So that was kind of the biggest benefit was that we could say within a fine geography and there was variation across the city. This neighborhood had 60% rent control. This neighborhood had a 31% rent control. This neighborhood had 11% rent control. We could do that street by street and block by block.

Joe Selvaggi:

That’s great. And as you say earlier in the show, you said it was really binding older properties. It left newer properties alone. So I can assume then if you could go by a neighborhood by neighborhood analysis, you could see the concentration of rent control from one neighbor to another, which, you know, I guess offers a contrast. You can say a neighborhood that had no rent control behaved one way a rent neighborhood was mixed or all rent controlled behaved. Another way.

Chris Palmer:

Exactly the way we approached Cambridge was as if every block was a little laboratory to see what happens if you remove rent control. And so the block where you get rid of rent control, that was a hundred percent rent controls should have very different effects than the block that had 10% rent control. And you can look up and down that radiance to try to understand what were the effects of ending rent control

Joe Selvaggi:

As, as an aside. This is a question I’ve always wondered. How did those who were in rent controlled units? It gets selected where they based on need, or could a, a a, a university professor or someone who you know, it doesn’t make very much money. Are they both, were they both able, I mean, Cambridge is a great question. You know, you know, the guy who sweeps the floor and the, the, the Dean of the college are all in Cambridge,

Chris Palmer:

That’s right. We have a strong sense of who we are trying to prevent, of whom rent control is designed to serve, people who are at risk of being displaced. People who are at risk of not affording to live in the city, too, of not being able to afford their, their rent. But rent control is a blunt instrument in that regard. It’s not what we would say is, is means tested a means tested program is something like snap benefits, food stamps. There is a test based on your income to see if you have the means to pay for your own nutrition. And if you’re below that threshold, then you get those government benefits. Rent controls not means tested. There’s no income check. There’s no verification that you need this. So there’s actually speculation that what a landlord would do in this situation is, well, if I have to run below market, at least I’m going to get someone who’s going to pay their rent every single month.

Chris Palmer:

And it actually opens it up for the landlord to just make that decision. So, one of the things that they did in the campaign in 1994 was to put a billboard on the Pike, but had pictures of famous, wealthy people that were living in rent controlled apartments. And it was like the Supreme court justice of Massachusetts and the mayor of Cambridge and the famous Harvard professor, who is a libertarian interestingly. And these people were living in rent controlled apartments. There was no prohibition on a landlord choosing to rent to whomever they wanted. They just had to rent at these lower limits. And so that did lead to what we’d say is misallocation, where you had the people that were able to find rent, controlled apartments, not necessarily being the type of people we think kind of need rent control apartments.

Joe Selvaggi:

So a, another odor effect would be if I’m a landlord and I am constrained in what I can charge, I’ll choose the billionaire over the barista, because I can’t discriminate with price. I’ll just discriminate based on who I’d prefer to have as my tenant

Chris Palmer:

Potentially. That’s exactly the kind of thing that we would be worried about.

Joe Selvaggi:

Yeah. Now we’re the with the control, where did the state mandate, how much rent could go up each year? Was it a large pretty generous cap or was it fairly, fairly tight?

Chris Palmer:

So that is something that was unique about the Massachusetts experience. Most modern rent control laws, let you start at an unregulated starting point. So if somebody moves out, then you get to rent that mark, that rec mark, that unit out at whatever the market price is. And then it caps the percentage increase from that. So that’s how San Francisco is. That’s how New York is. And so it would be a cap that, you know, this year we’re allowing everyone to raise their rents by 3% or 1%, something like that. And Cambridge was different. There was a book in city hall and it had a list of every single apartment in Cambridge and what the dollar maximum rent was. So I used to live on Audrey street and Cambridge, I could go into that city hall. I could look up Audrey street and I could see 50 Audrey street, what was the rent?

Chris Palmer:

And it was $713. And I knew that my landlord could not pay any more than that. And so that was how it worked in Cambridge. And even if I moved out the, the rent would still say the same, no, you were asking how, how much did it increase? In the beginning during the seventies, during the kind of big era of inflation, it was a very strict policy. Rents didn’t increase very much at all. And then after that, they started to increase them kind of across the board by a few percent a year. Okay.

Joe Selvaggi:

Now your work primarily is studies more. What happened when it was lifted? In 1995, in other words, you’ve got a sort of a, a fairly long-term rent control affects 25 years. And now, now here we are in the brave new world of, you know, market forces coming to bear at the moment before we lifted a rent control. Did you measure the difference between the average rent in a rent control unit to the market rate? In other words, how much over 25 years had rent control, constrained rent below market rates? Sorry,

Chris Palmer:

Our estimates are that rent controlled apartments, we’re renting at a 40% discount to a comparable market rate apartment. So this gap had just grown over time over those 25 years, like you said, and it was quite substantial. Interestingly, there was no gap between rent controlled and market rate apartments where the tenants didn’t know that they were rent controlled. So it was knowing that you had this rent control knowing about the book, knowing about the limit. And if you knew about the limit, then it was like a 40% discount.

Joe Selvaggi:

So it was just a sort of a statutory limit. But I guess this sort of begs the question. Did you make any sort of qualitative observations about the condition of rent controlled units with a non rent control units?

Chris Palmer:

We haven’t done that in our paper, but a former advisor of mine, David Sims at Brigham young, he used the American housing survey data to look at that, and he could see much more likely to have a non-working toilet or a hole in the wall or peeling wallpaper. And these kind of maintenance effects were pretty strong. That was what he could tell it had happened before the end of rent control.

Joe Selvaggi:

So now, okay. We walked through this door and there’s no more rent control. And presumably the, the, those units that are 40% discounted now become market rates. Probably those many of those people living there. Weren’t very happy. But now here we are, they’re living in Cambridge and presumably their rent went up on a high level. I, I were you able to quantify the value of all the property in Cambridge before versus all the property in Cambridge afterward? I, I did read your paper and I do know the answer, but I’ll let you put some skin on the bone.

Chris Palmer:

So then you’ll have to, don’t have to tell me the numbers because I don’t have them off the top of my head, but it was something like the total value of residential real estate in Cambridge went from 7 billion to, from 6 billion to 7 billion because of the under rent control, or maybe it was a $2 billion effect, then a billion of it came from the direct effects and the, a billion of it came from the indirect effect.

Joe Selvaggi:

Well, I’ll say it again. I’ve got the pen and paper. I knew what I was going to ask you. You didn’t have enough, but I’ll just say that the whole value of all the property in Cambridge was 7.7 billion before the the cap was lifted. And as you say, the value of all the property went up in S in several years after the cap was lifted by 2 billion. What I, what I, you know, a 2 billion increase over 7.7 that speaks to your point of the entire state saying, okay, look, if, if Boston, Cambridge Brookline are all, let’s say $2 billion undervalued and therefore collect that much less than taxes. It, it hurts the entire Commonwealth, but more, what I found more interesting was once that cap was lifted and that 2 billion returned into value it actually accelerated not just a maintenance in the controlled units, as you say, the fixing, the toilets P re reapplying the wallpaper, but 1.7 billion went into investment into new units. Because you know, again, this is a second order effect. We now had a an incentive to build more in a better city. Can you say more about this effect?

Chris Palmer:

So we found that fascinating, you know, the typical analysis of a price control, like the mayor Menino parking one that I laid out, doesn’t think about these, what we call externalities, these spillovers into seemingly unaffected, seemingly isolated and independent sectors of the market. But that’s what we found. Say you were a, a two family house or a three family house that was not rent controlled because the owner lived in one of the units that was exempt from rent control. And you were near a building that had deregulated its rents because of the end of rent control. Then your property value went up too. And the sale price that you were able to get for your property, which was a never rent controlled property in Cambridge, but just proximate to a lot of rent control went up. And so part of this seems to be that the maintenance is not just interior maintenance, part of it is exterior maintenance.

Chris Palmer:

And so the neighborhood is upgraded in some sense and becomes nicer. Part of it becomes that the market is now able to express its value for living in a neighborhood. And rents are just going to rise and property values are going to rise for that entire neighborhood. Part of it could be amenities that are changing in the neighborhood. One of the things that we found happens after the end of rent control is that crime fell in neighborhoods that had had the biggest turnover because of rent control. And when we’ve talked to the Cambridge police, that’s not so much that there were criminals and rent control, ending rent control, price them out. It’s at the people that moved in were much more likely to make security investments, to put bars on their first floor windows and get security systems and call the police and have a neighborhood watch and that decreased crime. So there’s a lot of neighborhood change that leads to property values rising in neighborhoods that had had the most rent control.

Joe Selvaggi:

I think you make a good point and you use a sophisticated economics term we’ve used before on hub Hogwan called extra nowadays. These are, these are effects that aren’t captured in the transaction. And I think listeners may be looking at say a morality play where this is a contest between tenants and landlords and the landlords where the black hat and the tenants wear the white hat, but by constraining rents with rent control, there are many negative externalities that are internalized or experienced or paid for by people who are not party to the transaction. These are people who are not connected to rent control units at all. That’s essentially what you’re saying.

Chris Palmer:

So we have to think expansively about who bears the cost of rent control. And it’s not just landlords, it’s also owner occupied housing. That’s nearby.

Joe Selvaggi:

Now you mentioned there’s some turnover naturally when someone’s rent goes up they may decide to live elsewhere. Was there a lot of turnover? Presumably if you’ve got a percent discount you’re going to have to pay do the quick math 60% more to get back to a hundred, I don’t know, on the fly, but you said, you know, some, some, there were Harvard professors and celebrities maybe they stayed, put and pay the higher rent but did a lot of other people were forced to leave.

Chris Palmer:

So, so there was a hardship exemption to the repeal of rent control that if you had low income or a disability, or you were elderly, you could apply to have a two year extension on your rent control and only 7% of Cambridge tenants applied from that, which could be a combination of, there were lots of people that weren’t eligible for that there were lots of people that didn’t need rent control. It also could be that it was people were unaware of it and didn’t know how to apply for it. But we do see an increase in turnover. We do see people to be more likely to move out of a unit and we see new people to be more likely to move in. That’s that absolutely happens. And that was part of the point of rent control was to prevent that kind of displacement from happening. There were cartoons at the time political cartoons that predicted that there was going to be a rash increase in homelessness and a bunch of kind of middle-class families moving out. And, and we didn’t see that we saw an increase in turnover. We didn’t see a big demand for the hardship exemption. And we definitely saw the character of neighborhoods change.

Joe Selvaggi:

So only 7% of the a hundred percent of people living in rent control applied for this hardship exemption, essentially saying we can’t afford to pay the higher rent, and we perhaps can’t even afford to move. We need this. And so theirs was extended for a certain period of time.

Chris Palmer:

That’s right. And landlords probably didn’t snap the rents back up to market by a 60% increase to get all the way up to a hundred percent immediately. You know, they had leases that they had signed and they couldn’t raise the rent within a lease. And probably they value having a long-term tenant relationship is better than rolling the dice on a new tenant. So probably most landlords increase the rent slowly over time. We don’t have great rent data to look at this. But probably that also mitigated some of the like flood of people leaving Cambridge is that it probably, it was a slower process than that.

Joe Selvaggi:

So what we want once we lifted the rent control naturally those units were improved the, a units around them, improved the neighborhood around all of them improved. You mentioned earlier that you did a analysis block by block neighbor, neighborhood by neighborhood. One would guess the communities that had the most rent control were the most dramatically improved. Did that follow with your analysis? Did it, did it map, was there a direct correlation between the degree to which a neighborhood was controlled versus yeah,

Chris Palmer:

That’s exactly it just lined up with what we would predict where by and large, the more rent control you had, the more your neighborhood property values were going up in percentage terms.

Joe Selvaggi:

So I don’t want to make a reason leap from your observations to general trends and or general principles that we talked about early on. I want to get back to this notion that price determines both quantity and quality of units. Was there anything surprising to me is so far your research suggest that our original conversation about the hypothetical effects of rug patrol actually played out in both the effects of implementing rent control and reversing those effects once rent control was lifted. Were there any supply surprises in your analysis?

Chris Palmer:

Well, you know, one thing that we couldn’t quite get at was how much of the new construction in Cambridge, and there’s been a substantial amount of new construction of apartments and particularly east Cambridge or over the last 20, 25 years, if we could attribute any of that to the end of rent control, we were low to do it. We were reluctant to do it is what I should say because the rent control ordinance exempted new construction. So I have talked to developers that are say, I know that new construction is exempted, but I don’t know who will be empower in five years and whether they will try to change the, the a year built exemption date. So there’s possible that it has a chilling effect on development, but that’s just not something we could look at to see whether this was really the, the contributing factor to some of the boom in construction that we’ve had in Cambridge. So that was not necessarily something that was surprising, but something that was harder for us to look at, I think we thought there might be more turnover than there was we, we were, we expected to see a substantial amount of turnover and and we did, but it wasn’t as as dire as was foretold.

Joe Selvaggi:

So you, you can’t, you can guess, but not know what’s in the mind of a potential developer or the marginal developer saying, I might want to build a building in Cambridge, but owing to the fact that rent control might be reinstated. That’s a fear of some future diminishment of their value, but also if there had been rent control and it, even though their building wasn’t effected, you’d be putting a building that was surrounded by rent control, which, you know, inherently lowers its value. And you could put that same building in a city that didn’t have rent control and perhaps enjoy better returns is that

Chris Palmer:

I do think that these extra novelty concerns come into play

Joe Selvaggi:

Control, as you say, is a blunt instrument that doesn’t directly help people who might need help. What do you think could make a property less

Chris Palmer:

Expensive? Great questions. So I’ll, I’ll highlight two things to, in, in response, I think in general, rents appreciate quite rapidly when supply is constrained and we haven’t had rent control in Boston for 25 years, but we have had constrained supply in the sense that you can’t build east of Boston because there’s water. And and Boston is, is there, there are spots where you could probably put in more buildings, but it’s already pretty dead. And on top of that, it’s not a cheap place to buy land. And so if you are going to buy the expensive land and pay for the expensive construction costs and deal with all of the regulation to get your building permits approved, then you probably want to buy, you want to build the highest margin property you can to recoup your initial investment. And so a lot of the new construction that happens has been at the upper end of the distribution of of targeted at higher income folks. And so normally we believe in filtering you build housing at the top of the market. And then over time as that housing becomes older and newer housing is built, that housing eventually becomes workforce housing for the middle-class and Boston has had such intense job growth that that filtering hasn’t quite happened. And so the housing that’s happened recently has kind of been too little too late from the perspective of being able to alleviate the rent burden of someone who’s at the middle of the distribution site.

Joe Selvaggi:

So to use your parking garage analogy, where we to say, we, you know, the, the parking rates are too darn high. If we allowed developers to build even fancier parking spaces that charged more, perhaps, you know, you park your car and they wash and wax, it filled with gas, but it’s 200 bucks for a GameDay spot by allowing that ultimately more garages will be built. And then ultimately each of those parking spaces because of competition would become less valuable because it’d be ultimately a supply that would, would reach the demand and we’d have some market equilibrium,

Chris Palmer:

Right? And that brings up an important point. Sometimes when economists say what we need to supply people say, well, we’ve had supply and we haven’t ever seen rents come down. And so to be clear, we don’t think that the last developer in would build the building that would make rents fall, he would choose, or she would choose to build their housing somewhere else, where rents are still rising. We think that by unconstrained supply in an area and building more housing, we will slow the growth of rents in the future. But in terms of bringing down rent in levels, we think it’s already too high. A supply was probably not the right solution to bring the average rent from 3000 something down to 2000 something that’s just not going to happen with supply. So turning to your question about this, being a blunt instrument means tested rent vouchers for low income families are probably the best way to present, prevent displacement of the people that we’re most worried about.

Chris Palmer:

There’s a pros and cons of these relative to rent control. But the housing choice voucher program that is administered through the Boston housing authority does exactly this. If you qualify for this and you can get one of these vouchers, they’re fairly scarce, then you get to use that to pay some of your market rent, but it makes that rent cheaper for you in subsidize it. And you have to qualify for it by demonstrating your need for it. And so that will be not a blunt instrument. That’s a targeted instrument. That’s more like precision medicine to protect exactly the families that are the most vulnerable.

Joe Selvaggi:

I don’t want to be a Scrooge here. I think that seems far better solution than rent control, but if every a low income person has now, let’s say an extra thousand dollars given to them by the government. But wouldn’t that be captured by landlords who now know that everybody in their market or everyone with demand for their property now has a thousand more dollars to spend on.

Chris Palmer:

Yeah, there is evidence of exactly that happening in the UK, for example, that that rents do go up. If the vouchers become more generous and you’re in an area with high voucher usage, HUD has a bunch of regulations around this to make sure that people are not paying more than fair market rents, fair market rents. It’s a bit circular because they’re determined by the average market rents. And if average market rents go up because the vouchers become more generous than then it’s, it’s hard to get ahead of this. But probably the effect doesn’t happen one for one. So you still are making a substantial benefit to the families that do obtain them.

Joe Selvaggi:

So still not a perfect solution, but a more targeted, tailored solution to the problem. And I think most of all, again I think the most pernicious effects of rent control is that it may constrain supply, which if your goal is to make rent cheaper you have to accept, or maybe you don’t that rent control for those who don’t have rent control units probably play pay more because they’re competing for fewer units. It just seems economically certain that this would happen. Is that your

Chris Palmer:

Yes, there’s good evidence on this at this point, especially from San Francisco, that if you have rent controlled if you have more rent control in an area, that’s going to make the non rent controlled apartments in that area, harder to find and more expensive because people are not moving as much. And they’re going to be fewer units to go around fewer units for people to find everyone’s going to bid up those non rent controlled units, and they’re going to be more expensive. So, so likes supply rent control. Doesn’t really help rents today to become cheaper. So if the worry is that rents are already too high for a particular group of people to afford, there’s nothing about renting modern rent control laws. That’s going to fix that. If they can’t afford it today, they won’t be able to afford it tomorrow. And similarly on, on supply, right? If you build more supply, it’s probably not going to decrease the amount of rent. It’s just going to make the future a little bit more tenable at the same time. As you do that with rent control, you try to slow growth. It does make other housing in the city and other housing in the future, more expensive.

Joe Selvaggi:

So something that might be designed to help people afford rent, ironically has in the long run, the opposite effect,

Chris Palmer:

The law of unintended consequences.

Joe Selvaggi:

Well, we’re getting close to the end of our time together. You, you, you offered some interesting insight as to alternatives to rent control. If you really are trying to help people afford better rent. Many of our legislators and our governor listened to the show, would there be any, you know, legislation that we haven’t covered or any beyond effectively vouchers that you would recommend to help us grow and allow more people to live in this wonderful city or community of Boston and Cambridge?

Chris Palmer:

Sure. There’s, there’s interesting. Policy innovations on the housing side, I’ll just mention a couple of them. One of them is to allow for modular apartment buildings to be built. And so there’s some developers and some architects that have gotten quite adept at this. They can manufacture housing off site, and then they can almost Lincoln log together, apartment buildings with some pretty impressive construction technology that really brings down construction costs. So if you’re hoping to not wait around for filtering to happen and just build housing, that’s immediately affordable, then you can use this technology to do it, this a modular, modular housing. You can also fund a lot of that with the low income housing tax credit. And that subsidizes the the, the landlord and the developer to build this kind of housing provided that they set aside and have inclusionary housing where they means test that some of it goes to a particular income segment.

Chris Palmer:

So that’s another thing that helps on the supply side. There have been efforts in different places to allow accessory dwelling units or secondary dwelling units to change the zoning so that you can renovate your garage and rent it out as a guest house. So that you can build another apartment on top of your house or renovate your, your basement and rent that out. Sometimes this ends up being a kind of a black market for housing and it’s quite substandard housing. And the idea is that if we can bring that out of the shadows and legalize it, then we can regulate it. We can inspect it, and we can increase a lot of supply by making the housing that we have more dense in this way. So Oregon recently eliminated single family zoning by right to be able to promote some more of this density.

Joe Selvaggi:

So allowing people to more efficiently use the property they already have is one solution and sort of mass produced units built offsite can help drive down the cost of production. I would also imagine it would also drive down the cost of permitting if, if you’ve designed something successfully and you’ve gotten approved on lot a why wouldn’t the same exact technique be approved for a lot, B I would think, you know,

Joe Selvaggi:

Right? You don’t have to inspect every car off the line for safety. The first one survived, so you can build a million more just like it. I would imagine. So very, very, very good ideas. Well, you’ve given our list. There’s something to think about. And you’ve helped us understand the nuances and complexity of, of rent control. We’ll see what happens. I’m curious about the you know, the political conversation rarely do we deal so deeply into the issue and really understand it. You’ve helped us a great deal. Thank you very much for your time today. Professor Palmer, my pleasure care, Joe,

Joe Selvaggi:

This has been another episode of Hubwonk podcast of pioneer Institute, a think tank in Boston. If you enjoy today’s show, there are several ways to support us. It would be easier for you and better for us. If you subscribe to hub on your pod, catcher, your iTunes pod catcher, if you want to help others find Hubwonk it would be great if you offer a five star rating or a favorable review. And of course, it’s always welcome for you to share Hubwonk with friends. If you have ideas or comments or suggestions for me for future episodes, you’re welcome to reach out to hubwonk@tpioneerinstitute.org. Please join me next week for a new episode of Hubwonk.

Related Posts:

Chasing Election Integrity: Strict Voter ID Laws’ Impact on Turnout and Fraud

Joe Selvaggi talks with Harvard Business School Professor Vincent Pons about his recently released NBER paper on the effects of strict voter ID laws on voter behavior and fraud across the United States over 10 years, examining the results of the 1.6 billion observation dataset by age, race, gender, and party affiliation.

The Oldest Hatred: Calling Out Antisemitism In Its Many Forms

Hubwonk host Joe Selvaggi talks with Boston Globe opinion writer Jeff Jacoby about the troubling increase in antisemitic incidents, including the recent attack on a Boston rabbi, and how our current political rancor fans the flames of bigotry nationwide.

Court Preserves Privacy: First Amendment Ruling Defends Non-Profits From Modern-Day McCarthyism

Hubwonk Host Joe Selvaggi talks with CATO research fellow and constitutional scholar Trevor Burrus about the recent Supreme Court ruling, Americans For Prosperity Foundation v. Bonta, reaffirming the right to privacy by denying the state of California the right to compel non-profits to disclose their list of donors.

Renters’ Unsung Heroes: Small Landlords Endure Without Income or Relief

Hubwonk host Joe Selvaggi talks with MassLandlords’ Doug Quattrochi about ways landlords faced the challenges of being caught between tenants unable to pay rent during COVID-19 shutdown and having little or no programmatic relief from state and federal agencies.

Alzheimer Breakthrough Disillusionment: Confusion on FDA’s Approval of Expensive and Possibly Ineffective Drug

Hubwonk host Joe Selvaggi talks with precision medicine expert Hannah Mamuszka and Pioneer Institute's Bill Smith about the promises and pitfalls of the newly approved Alzheimer’s drug Aduhelm, and the challenges presented when new, expensive drugs of dubious benefit are introduced to the nation’s formulary.

Unintended Tax Consequences: Modeling the Effects of the Millionaire’s Tax on Massachusetts’ Economic Future

/
Hubwonk host Joe Selvaggi talks with Beacon Hill Institute President Dr. David Tuerck about his recent analysis of the proposed 4% surtax on incomes over $1 million in Massachusetts, and his estimate of the number of individuals who will leave the state as a result. Tuerck, an economist, used STAMP modeling tools comparing the static projections offered by proponents of the so-called "Fair Share Amendment" with a model simulation that accounts for the unintended effects of the tax.