Reminder: it's January 30th. you know what that means Links down below expiring tonight. Well, we're once again in a place where politics takes over logic. A nationwide rent control is now being debated by individuals close to President Biden and Democrats within the Biden Administration or within Congress.

And there's a lot of pressure given that rents have risen 17.6 percent in 2021 and 3.8 percent in 2022 to potentially commence a series of executive actions that would be designed to protect tenants, at least in the short term. However, there are some massive problems that come with rent Control. While they sound great and it sounds like we're limiting the corporate greedy landlords from extracting more rent from tenants. Well, the idea and success of rent control tends to stop there First, it's worth considering that 70 of rental properties are owned by individuals, many of them being seniors who live off of the rent payments.

And when mortgage rates go up, or property taxes, insurance, and maintenance costs inflate up with inflation, then costs go up for landlords. But this isn't designed to be some form of defense for landlords. it's designed to take a look at rent control from an economic point of view and see if there are any merits to rent Control and potentially Joe Biden's executive actions. So the Brookings Institute actually has a very thorough piece on this, and it's called what economic or what does economic evidence tell us about the effects of rent Control And a lot of this has come from the ideas that states like Illinois Oregon and California would consider repealing laws uh, limit City's abilities to pass or expand on rent control.

This has since happened in California Given that this article is from 2 2018, we've already seen Statewide Rent Control commenced in California limiting rent increases to just five percent of rent and potentially up to an additional Max of five percent depending on what cost of living adjustments are. But this Brookings Institute article really gives us a look into history a little bit and tells us a little bit about what rent control can do for tenants. maybe helping them in the short term, but does it potentially reduce affordability in the long term? And that's what we have to take a look at because see, a lot of rent control policies actually end up motivating individual renters to stay in the property for as long as possible? This is something we typically see in Los Angeles A lot of tenants may choose not to move in the future for giving up control of their rent controlled housing, even if their housing needs change. Now the Brookings Institute claims that this can lead to an empty nest style of household where basically individuals are living in a family-sized apartment and younger families are crammed into smaller Apartments misallocating resources of housing because basically people aren't moving when they should be downsizing or upsizing.

They don't move because they they enjoy their locked in rents which tend to move more slowly than the actual rental prices might that's after all the definition of rent control. It's that. Hey, look, even if rents are rising, rent control is going to provide some kind of limit to Rising rents. So for example, if rent is a thousand dollars a month, we don't want to see rents all of a sudden go to fifteen hundred dollars because that would increase unaffordability for individuals.

However, even if there's a cap of, let's say, a five percent rent increases, One of the issues that you tend to have is a lot of landlords don't necessarily raise rent every year. They actually try to do the nice thing for their tenants. and they don't raise rents. Now, this tends to be a mistake in rent controlled areas because watch this: If you're zero, you're at a thousand bucks and then one, two, three, four five.

For example, you kept rent at one thousand. I'll just write 1K here to simplify. 1K 1K 1K Uh, and then all of a sudden you're looking and going. Wait a minute, You've missed out on potential five years of five percent rate hikes.

Well, then we could simply go a thousand times 1.05 times 1.05 times 1.5 times 1.05 And rent should probably be somewhere around 1276 dollars under the rent Control regime. Well, if a landlord didn't raise rents, and now all of a sudden they realized they're at a thousand bucks. Market Rents are fifteen hundred bucks and they are not able to even get the 1276 which Rent control could have allowed because they forgot or didn't or chose not to raise rents. Well, now, all of a sudden, the tenant has a massive economic Advantage which is great in the short term, right? In the short term, this tenant's like, heck yeah, I'm renting a place that's worth 15 for a thousand bucks and that is fantastic for that tenant.

But what are the long-term implications of such a misallocation of money? Well, one of the biggest is that landlords tend not to actually end up supporting or investing in those sorts of properties anymore. And that's because landlords ultimately might not be able to recoup the costs of those Investments by raising the rents. At least that's what the Brookings Institute as well as the following two studies. a 1988 piece by Downs and Sims in 2007 found that when rent control ends up limiting the potential for landlords to recoup, their Investments landlords are less inclined to actually invest in the upkeep of the property or the building.

If the tenant is renting, let's say, uh, within an apartment building, the entire apartment building may actually end up decaying in value because the owner's ability to improve the property is now limited. and that could be because of rent control. or because maybe rents are rising faster than the rent control limit allows. Or you have this worst case scenario, which is just a bad idea for the landlord.

The landlord's trying to be nice to the tenant by not raising rent. but now they fall so far behind rent control Now they really end up getting screwed and they destroy the market value of the property that they own because the rent is so limited and a tenant is now stuck in that property. Now, tenants can be given money to move, but whatever money they're given to move comes off the valuation for that property. And so if that property goes to sell and an investor or a new homeowner buys the property and the Tenant is only giving up their rent control in exchange for let's say a 50 or 75 000 relocation fee which does happen in California Well now all of a sudden the property is actually selling for less than what it should have, reducing Market values in the entire neighborhood, creating a lower sales comparison.

And so while studies do admit that yes in the short term, absolutely don't get it wrong. Absolutely existing tenants benefit from rent control, the existing tenants win. But the problem is what kind of dislocations happen afterwards? And this is where the Brookings Institute found that rent control has had the effect of reducing an entire neighborhood's desirability that ownership in within neighborhoods that have rent control, whether before having rent control uh, removed or having new rent control limits expanded upon the Brookings Institute along with multiple other Studies have found that desirability of such neighborhoods tends to decline. Take a look at this.

These estimates imply that more than half of the capitalized cost of rent control was borne by the owners of never rent controlled property. So in other words, if a property becomes rent controlled, half of that burden falls on the owner. Rent Control properties create substantial negative externalities on the nearby housing market, lowering amenity value of these neighborhoods and making them less desirable places to live. In short, in this example, in Cambridge, this policy imposed a two billion dollar cost on local Property Owners but only 300 million dollars of that cost was transferred to tenants.

So this is very important because this video is certainly not one to say that tenants don't deserve help who need help with affordability. In fact, we're going to provide some insights into how exactly you could do that. But how does this make economical sense to say hey, Tenants, let's give tenants 300 million dollars And let's take from owners two billion dollars. That doesn't make sense because you would actually be way better off saying hey owners, how about we take 500 million from you and just give tenants 500 million dollars, right? But that's not as direct as rent Control, because it's not like you're going to send a bill to the owners and say time to subsidize your tenant even though that's effectively what Rent Control does.

Rent control itself creates so many distortions because tenants don't want to move landlords, then don't invest in the neighborhoods, and you create a substantially larger amount of distortions in the market than you otherwise would. In fact, the Brookings Institute later says one of the best things that you could actually do instead of rent control is why not just essentially provide a stimulus style check to the tenants? It would be a lot more inexpensive and would allow free market dynamics to continue. So for example, if rent's supposed to be 1500 bucks and uh, the tenant can only afford a thousand dollars, right and the market rent is fifteen hundred dollars, you'd be much better off giving the tenant a five hundred dollar stimulus check because that way, if they need to move to a smaller property or right size what they need maybe even a larger property, they can enter the free market with a little bit of an additional boost to their own income to help them make those payments. So I Want to be clear.

This video is not to say that tenants don't deserve help. Tenants absolutely. And individuals who need help absolutely deserve to get the help that they're looking for from the government. It's it's a social safety net is what it is right in.

America We provide social safety nets to try to elevate people and get them on their feet so they can become very functional members of society. Now, not everyone does. some people get stuck in the system, We know that. but look at this.

Between five to ten years after Rent Control, beneficiaries of Rent Controller 19 less likely to have moved to a new address. They're much less mobile populations. And here's what's worse: Rent control has often been associated with a 15 percent reduction in Rental Supply from multi-family properties in the long run. And that's because oftentimes in rent controlled areas, the only way you can kind of end the rent control is by converting existing rentals into own homeowner occupied condos or homes.

And now you're basically replacing rentals with luxury properties. And so what ultimately happens is you tend to gentrify rent-controlled areas. Look at what happened, what's happened to San Francisco It's become ridiculously unaffordable. You have, uh, other structures, uh, rental rental properties that just end up getting demolished and replaced by new, gentrifying buildings.

And ultimately, after Rent Control, you end up having new construction that caters to higher income individuals with about an 18 higher income. And here's where they talk about that gentrification of San Francisco They They talk about the widening income inequality in cities, and they make the argument that this is literally the opposite of what the point of rent control is. The point of rent control is to make housing more affordable, but it actually, in the long term, makes housing substantially less affordable. And this is where when we go back to the Biden Administration Even remotely considering rent Control, we have to ask.

We have to ask ourselves, why. Where is the economic logic? You would be much better off sending individuals who need housing support subsidy payments, Then you would be essentially capping rents in neighborhoods, creating Market distortions, locking people into properties, and in the future, actually contributing to the gentrification of areas. This is where the Wall Street Journal says Democrats Want the federal Housing Finance Agency which supervises Fannie Mae and Freddie Mac to essentially establish anti-pro price gouging protections and just cause evictions. Now those sound like good things, but what they really are is a guise for rent control.

Here it says these are euphemisms for rent control and eviction bans, but those end up creating not only a a massive uh, you know, over a stretch of Power by the Federal Trade Commission or the Fhfa, but also the fact that rent control, typically, as we just saw studied, achieves the opposite of its intended goal. We end up seeing housing shortages by discouraging new development in the maintenance of existing properties. So big deal, big thing to pay attention to in my opinion. and hopefully the Biden Administration doesn't go through with economic policies that are just not found in logic.