The D.C. rent control system, set up in 1975, does not fix rent levels but controls the frequency and amount of rent increases. It is a moderate scheme that explicitly seeks to maintain the profitability of rental housing investments.
Findings indicate that D.C. rents have been controlled
(although not altogether equitably), and that rent control has
not eliminated profitability. This suggests that the rental
housing market may have imperfections that make rent
control a legitimate public sector intervention: imperfect
information, high transaction costs, a segmented market, high
entry costs, and barriers to entry.
The D.C. Rent Control System
The D.C. rent control system was established in 1975. About two-thirds of the rental stock is subject to controls, with the following categories exempt: small units, new and substantially renovated units, units in continuously vacant buildings, co-op units, and subsidized units. Even the controlled units do not have fixed rent levels. A complex system regulates both the frequency and amount of rent increases. Properly licensed and registered units can increase rents annually by the Consumer Price Index. When a unit is vacated, its rent can be increased by 12 percent or up to the rent ceiling, whichever is higher. Landlords can petition to increase rent ceilings to reflect certain cost increases. And landlords can negotiate voluntary agreements with tenants to increase rents.
The report is based on an extensive database, including new data collected from seven major sources: telephone interviews with 3,000 D.C. renters and 600 renters in surrounding suburbs, financial statements for 814 controlled rental properties, questionnaires completed by owners and managers of 244 controlled rental properties, inventory of all additions to and losses from the D.C. rental stock between May 1985 and April 1987, one year's history of housing code enforcement activity for controlled rental properties, volume and case-by-case disposition of housing provider and tenant petitions, and application and participation data for the District's Tenant Assistance Program. In addition, data on households and housing conditions were extracted from the American Housing Survey.
D.C. rent control has kept rents lower than they would have been in its absence. The monthly rent for the average unit would be at least $50 higher and possibly $200 higher without rent control.
These benefits are not spread equitably or efficiently. By targeting benefits to long-term stayers, D.C. rent control provides greatest benefits to lower income renters, elderly households, and families with children. But affluent renters also obtain direct benefits if they stay in a unit for an extended period. And poor renters, if they move, pay rents just as high as those that would prevail on the open market.
Rent control has not eliminated profitability. After accounting for appreciation gains and tax benefits, investment in D.C. rental housing today compares favorably with alternative investment opportunities.
Whether rent control is responsible for housing deficiencies in the District's rental stock is unclear. About one in five rental units is physically deficient. Without controls, gross rent revenues would have been 33 percent higher. Landlords say they would have used the increase for better maintenance. But even with rent control the proportion of units that are physically deficient in the District has declined from a total share of 26 percent to one of 20 percent, and the rate of deficiencies is higher among the exempt units.
The size of the rental stock declined precipitously during the period of rent control in the District, but many cities without rent control have witnessed similar declines. The relative attractiveness of home ownership, expansion of suburban housing opportunities for minorities, and the basic costs of rental housing production appear to the critical determinants of the number of units added and lost to the rental housing stock. This conclusion is supported by the fact that the supply of rental housing in the District has begun to respond to renewed demand pressures.
Despite this supply response, the District faces a persistent shortage of units that low- and moderate-income households can afford. A substantial share of the units added to the rental stock in recent years were developed as condominiums and could easily be converted to owner- occupancy if demand swings back in that direction.
The units at greatest risk of being removed from the stock are those with very low rents and chronic code violations. These qualify for hardship rent increases, but applications have not been filed. Presumably the administrative and financial burden of applying for them has been the primary hurdle. Tenants are simply too poor to pay the rent levels necessary to make the buildings profitable. A full solution to the Districts shortage of affordable housing would require a combination of direct subsidies to poor households, systematic efforts to preserve the properties currently occupied by low- and moderate-income renters, and production of additional units set aside for needy households.
Economic theory suggests that, over the long run, any substantial price effect (reduced rents) must yield a supply effect (lower quality/fewer units). Yet this evidence suggests that D.C. rent control has had little or no supply effect despite a decade of moderated rent increases. How can these results be explained in the context of a reasonably competitive market for rental housing?
First, like other rent control programs implemented in U.S. cities in the 1970s -- and unlike those implemented earlier -- the District's system provides incentives for landlords to maintain their existing rental properties and to produce new ones. It is a moderate scheme that explicitly seeks to maintain the profitability of investment in rental housing.
But if the program has in fact moderated rents by at least $50 a month, in the absence of rent control D.C. landlords would have earned excessive profits over an extended period -- as did indeed happen in other markets. This is inconsistent with economic theory, unless there are imperfections in the rental housing market that permit excess profits in the longer run. Our study suggests that there are indeed imperfections that make rent control a legitimate public sector intervention. These include: imperfect information, high transaction costs, a segmented market, high entry costs, and barriers to entry.