“Rent Control as a Tool for Redistribution” by Jaume Vives

What can we learn from rent control in Massachusetts and California?

Rent control led to a significant reduction in the supply of rental housing and encouraged the conversion and reconstruction of buildings for sale.

I recently moved from Cambridge, Massachusetts, to the Bay Area, California, to begin a postdoctoral fellowship. Although the two areas are very different, they share the fact that both have implemented—and modified—versions of rent control over time, and that several academic articles have been written evaluating the impact in each case. In San Francisco, a 1994 law imposed rent control on certain buildings constructed before 1980, creating a quasi-experiment, since the law did not apply to similar buildings built after 1980.

Rebecca Diamond, a professor at Stanford, and her co-authors use this change in the law to study the causal impact of rent control. The results are mixed. On the one hand, rent control helped keep tenants from leaving the city, especially those who had been renting for a long time. On the other hand, the law led to a significant reduction in the supply of rental housing and encouraged the conversion and reconstruction of buildings for sale. Over time, this resulted in a rise in rental prices for these new homes and the influx of tenants with greater purchasing power. In Cambridge, researchers from MIT and BYU studied the end of rent control in 1995 and concluded that ending rent control greatly increased the supply of homes for sale and the quality of housing, but also drove up prices.

How do you think a similar situation might affect Barcelona?

It is important to understand whether we are being consistent over time, and whether we are willing to benefit one young person today at the expense of another 10 years from now.

The experiences of San Francisco and Cambridge can help us understand the pros and cons of rent control. Like Barcelona, both cities have seen a significant increase in housing demand over the years, driven in the Bay Area by investment in technology (Silicon Valley). Rather than viewing rent control as a definitive solution to the housing shortage, academic articles position public policy as a tool for redistribution, among other possibilities. Rent control benefits some tenants today, but harms others, especially future tenants. The questions we must therefore ask ourselves are: (1) whom do we want to benefit, (2) what price are we willing to pay to achieve this, and (3) whether rent control is the right tool to do so. These are not easy questions to answer.

There are reasons why it might be beneficial to favor one group today—for example, to address negative externalities (such as short-term tourism), promote positive externalities like long-term investment in neighborhoods, or resolve financial frictions. But it is also important to consider whether we are being consistent over time, and whether, for instance, we are willing to benefit one young person today but disadvantage a different young person 10 years from now. The debate should focus on this discussion: understanding what we want as a city and then considering whether rent control can help us achieve it or not.

Read the full article here.

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