Before he ended his campaign over the weekend, President Joe Biden had recently been touting a plan for nationwide rent control. Under the scheme, landlords with more than 50 residential units would lose tax breaks on depreciation if they increased rents by more than 5 percent. Free market advocates have criticized the proposal, noting it would likely reduce the supply of available housing. In fact, the problem with rent control goes far beyond mere economics.
Biden’s not running anymore, and it’s hard to know whether Vice President Kamala Harris (who has expressed support for rent control in the past) or whomever replaces him will push the same policies, but the idea that a major political party would endorse nationwide rent control is troubling not just for its economic illiteracy, but also for what it says about the current state and prospects of the U.S. housing market. It is a sign of what is to come if the U.S. were to turn into a “nation of renters,” where living in rental accommodation is the norm and not merely something young adults do while saving up for a down payment.
A few different factors are aligning against America’s long tradition of home ownership. Even as the economy has recovered from the pandemic, rates of homeownership have dropped after rising in the years preceding the pandemic. With interest rates for 30-year fixed mortgages still in the neighborhood of 7 percent, that’s not going to change in the near future. Building new housing faces challenges from environmental regulations popular on the left, but also from crackdowns on illegal immigration from the right. Whatever the merits of a stricter border policy, almost one-quarter of construction workers are illegal immigrants, and replacing them with U.S. citizens and legal immigrants would be more expensive.
The first and most dramatic effect of the policy would be that the supply of rental accommodations would crash: Hampering a landlord’s ability to profit from business disincentivizes new development. As someone who comes from a country (Sweden) with nationwide rent control, I can predict what comes next: Local governments will have to step in to fill the supply gap. Currently, only about 1 percent of American households live in public housing. This number will increase drastically, and this will happen at a great cost for taxpayers, who will see taxes increase as local governments struggle to keep up.
Those struggles to keep up with supply create long wait times for housing. In Sweden, wait times to receive accommodation are typically measured in years and, in major cities and in popular areas in Stockholm, even in decades. Proponents of a “nation of renters” argue that renting provides unparalleled flexibility for workers, who will no longer be tied down to their homes and can more easily move to where their skills are needed. In reality, long wait times for accommodation ensure less mobility, as those lucky enough to have accommodation in attractive areas hold on to them even if they are offered work elsewhere, and even if they no longer need all their space (i.e. once their children have moved out).
With far more people suddenly dependent on public housing, there will also be a fight over who gets access to this housing. In Sweden, some local authorities grant preferential access to those living on the street, allowing them to jump the line. Others expedite housing for the disabled, the unemployed, victims of domestic violence, or even for those granted asylum. The more people who rely on the government for housing, the more political the issue of access to that housing becomes.
Rent control by its nature encourages renting, by keeping the cost of rent down artificially. But renting remains a sucker’s game. Money paid in rent does not build equity and renters do not benefit when house values go up. Home equity is the main asset for most Americans, and without it, Americans would be far poorer.
This, in turn, would make Americans more dependent on the government to provide for them: With no house that can be sold or refinanced, Americans facing unemployment, medical debt, or any other major unexpected expense will have to rely on the government to provide for them to a far greater extent than now. Older Americans who do not own homes cannot downsize and, by doing so, cover some of the costs associated with elder care.
Here, one may counter that it is possible to replace home equity with other forms of equity. If rent is low enough, renters may save and invest the difference and build equity much as they would if they did own a home. Reality, however, does not bear that out: Humans are naturally poor at saving, and even worse at investing. Paying a mortgage every month is the easiest way to build assets.
A final and not insignificant factor is psychology. Saving is by and large a learned behavior. Saving up for a down payment is how young adults earn to delay gratification and think about the long-term. In a “nation of renters” far fewer people will ever save for a down payment, and consequently never develop the habit of saving. Beyond saving, home ownership also increases civic engagement, volunteering and investment in the local community. This, too, will go away in a “nation of renters” and create further demand for government services—with the attendant higher taxes.
That doesn’t mean the proposal isn’t politically astute. As the share of renters increase, the political gains from advocating rent control and other anti-landlord policies will increase as well. While increasing supply is the obvious solution to bring down both rents and real estate prices, it may be that Democrats, after years of blaming inflation on “greed,” have come to believe their own myth that increasing supply won’t have any effect on rents and real estate prices. If so, that is certainly a bad omen for the future of American housing policy.
Whatever their motivation, their policy prescription remains a textbook failure. The goal of federal housing policy should be to increase supply, not decrease rents—even at the objection of local governments and neighborhoods who have proven themselves absolutely incapable to resist the lure of NIMBY-ism.
The supply of rental units can be increased through a better tax treatment of rental income, and by making it easier to evict tenants who display antisocial behavior. Crucially, the misconception that the free market provides only expensive, unaffordable accommodation must be tackled head-on. Localities often require that developers set aside a certain number of units for renters making a specified percentage below the area’s average median income but those rules are counterproductive: Increasing supply at any price point, even with fewer “affordable units,” serves to bring down prices.Nobody wants a return to the 2000s subprime mortgage mania that was partially driven by a government desire to increase home ownership. We must, however, recognize the government’s role in artificially limiting the supply of housing and thus the share of Americans who can own a home, something that has served to break the housing market. Only once this role has been recognized will it be possible to have a constructive dialogue about what to do now. The Democrats’ rent control proposal unfortunately represents a step in the wrong direction at a critical time.
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