Joe Biden by Gage Skidmore is licensed under CC BY-SA 2.0
President Biden’s latest housing proposal to cap rent increases at 5 percent for larger landlords, under the threat of losing depreciation write-offs, is yet another severely misguided attempt to intervene in the U.S. housing market. This economically unsound policy threatens to worsen the very crisis it aims to solve.
Economists have consistently pointed out that rent controls fail to fix exorbitant housing costs and create more problems than they fix. By capping rent increases, Biden’s proposal ignores the basic principles of supply and demand. It discourages landlords from maintaining and improving their properties and deters new investments in rental housing. The result is a significant reduction in the quality and availability of rental units, particularly hurting those it purports to help—lower-income renters.
Economists studied the effect of San Francisco’s rent control laws. They found a “6 percent reduction in housing supply resulted in a ‘5.1% increase in rental prices.’ In San Francisco, rent control forced landlords to develop condominiums and redevelop buildings to ‘exempt them from rent control.’” More renters will be priced out of the market in the long run if this plan goes into effect.
Federal preemption in favor of rent controls is a major cause for concern. Using Congress or Fannie Mae and Freddie Mac (the GSEs) to impose rent controls would worsen the U.S. housing supply situation. Intervention from GSEs is a significant contributor to increased housing prices. According to one analysis, GSE “interventions have led to higher prices by increasing demand through easy access to mortgage credit, which may have adversely affected poor and low-income groups.” When the government subsidizes demand it creates a disequilibrium with supply thus resulting in housing shortages and increased prices.
Large institutional landlords play a crucial role in providing rental housing. Albeit “large investors (ie, those owning more than 1,000 homes) never purchased more than 2 percent of homes in a given quarter.” While they are crucial component in the U.S. housing market, larger landlords are not buying up all the homes in the U.S., contrary to some baseless claims. The Pinpoint Policy Institute points out that “[a] recent estimate from the Urban Institute finds that institutional ownership of single-family rental homes stood at 3.8 percent in 2022 nationwide.” These statistics dispel claims asserted by opponents of institutional landlords purchasing homes. Proof of larger landlords crowding out single-family homeownership is few and far between.
President Biden cannot claim his policies will alleviate chronic urban housing shortages when they go after those who manage the housing supply. Biden’s proposal to withhold tax breaks from landlords who do not comply with the rent cap will only serve to drive these investors away. Capped rent increases will not keep pace with rising maintenance costs, property taxes, and inflation, which means landlords are more likely to sell off properties or convert them into condos, reducing the rental housing supply further. New York and San Francisco have some of the highest rents not only in the United States, but the entire world. This proposal would only serve to spread these failed policies to more communities.
States with fewer regulations, like Texas and Florida, are experiencing housing booms because they encourage investment and development. More government intervention in the form of rent caps will only stifle the housing market, making it harder for everyone, especially low-income families, to find affordable housing.
Instead of punitive measures that scare away investors, we need policies that encourage the construction of new housing and make it easier for developers to build. This includes reducing onerous regulations and speeding up the approval process for new developments. By increasing the supply of rental units through market-based incentives the housing market would naturally correct itself.
To truly address housing affordability, we need to focus on increasing supply through deregulation and encouraging private investment, not by imposing counterproductive rent controls. The path to affordable housing lies in the free market, not in heavy-handed government intervention. Lawmakers need to reject Biden’s rent cap proposal.