Maryland REALTORS® Online

When “Stabilization” is Anything but Stable

BY LISA MAY

is the Director of Advocacy and Public Policy for Maryland REALTORS®

If you ask around some of corners of Maryland, “rent stabilization” may well have been the buzzword of the summer.

Rent stabilization is the new, more palatable way of referring to rent control. It limits rental rate increases, whether by a fixed percentage or tied to measures of inflation, implemented in the name of preserving housing affordability.

Following enactment of a temporary rent control measure in Prince George’s County, editorials appeared encouraging Montgomery County and Baltimore to follow suit. While proponents may be right on the issue of addressing affordability, the arguments for rent control are wrong on the facts:

Claim: Rent control benefits low-income tenants.

Fact: It benefits those who already have the housing they need—not those who need it going forward. Rent control generally applies to all rental units in the area, which means that it applies to all tenants: low-, middle- and high-income renters alike. To derive the most value from rent control, you must remain in the unit year after year. In St. Paul, MN, researchers found that higher (not lower) income residents benefitted most from rent control. Higher-income residents tend to live in the most desirable areas and units, which in a free market would have the most upward pressure on rents. An across-the-board rental cap does more to reign in rents in these areas as opposed to areas with lower demand and lower rents.

Claim: This will lower tenant displacement.

Fact: Much of the displacement piece depends on how the ordinance is crafted. A recently released study from Northwestern University showed that eviction filings increased 83% following passage of rent control in San Francisco. That city’s program allowed landlords to reset rental rates at changes of tenancy. In years where costs increased faster than the allowable rental rate, rent control created an incentive for tenant turnover to recapture a property owner’s costs.

Claim: There is no evidence rent control impacts housing supply.

Fact: A common reaction is removal of rental units from the marketplace. As the saying goes, for every action there is an equal and opposite reaction. Independent studies on rent control policies showed substantial decreases in the number of rental units offered in both Takoma Park (-14%) and San Francisco (-15%), among others. If rental units are no longer profitable, they won’t stay in the rental market. Apartments can be converted to condos, while single-family homes can be sold or turned into short-term rentals.

Claim: Landlords won’t be impacted because mortgages are fixed costs.

Fact: Mortgages are only part of what goes into a property owner’s monthly expenses. Ongoing maintenance costs have surged in recent years, with appliances up 12-18% and building materials increasing by as much as 33% since the start of the pandemic. Also, rental properties do not qualify for the same tax exemptions as owner-occupied units. They feel the full impact of property tax assessments and rate increases, the most recent of which was a 20.6% increase for Group 2 properties. Property insurance in Maryland has risen 13.4% since 2017 and continues to increase faster than inflation. All these conditions impact rental rate setting.

Claim: Rent control does not impact future development.

Fact: Rent control adds to our already crisis-level housing shortage. In financing a rental property, you must show sufficient income to cover your expenses plus some margin of profit. Mom and pop investors have a much harder time qualifying for a loan when rents are capped. The same is true of developers seeking to construct new units. Under Montgomery County’s previous rent control experiment, virtually no new multi-family buildings were constructed despite high demand. Likewise, economists in Florida estimated that imposing statewide rent control there would result in the construction of 16,500 fewer apartment units at a total economic loss of $10.4 billion.

If not rent control, then what?

Not to sound like a broken record, but areas that keep housing costs in check without rent control are those that allow new housing to be built. When Auckland, New Zealand (one of the most expensive housing markets in the world) upzoned land within the city, the resulting rent levels were 14% to 35% lower than were projected without zoning reforms. The Pew Charitable Trusts found that four U.S. cities with liberalized zoning policies experienced rent increases of just 7% over 6 years, when the national rent increase over that time averaged 31%.

Rent control is treating a symptom of an undersupplied housing market. If we’re serious about rental affordability, then we need to work on the cure: building enough housing to meet demand.