Rent Control Wasn’t Designed to Solve Affordable Housing Shortage


(Bloomberg Opinion)—It’s hard to believe, but rent control is back in vogue. Two states facing shortages of affordable housing, Oregon and New York, have already passed laws that aim to restrain residential rents; other states and cities aren’t far behind. As always, when governments resort to rent control, not everyone thinks it’s such a great idea.

The debate today is framed as a philosophical disagreement about the relative merits of free markets and state regulation. But that obscures the real reason rent control was ever tried in the first place: war.

The first recorded instances of rent control date to the 16th century, when a wartime siege of Paris and other cities prompted the courts to reduce or even abolish rents. Other nations adopted similar measures when war disrupted the ebb and flow of commerce.

These measures were always temporary, though. That changed in 1914, when the “war to end all wars” got underway, rupturing housing markets in all participating countries. People poured into cities to work in war industries at the very same time that new construction slowed to a halt for want of building materials and construction workers.

Britain was the first to confront the housing shortage, in 1915, by limiting rent increases and freezing mortgage interest rates for landlords. Russia, Germany, Italy and almost every other country involved in World War I followed suit. In most cases, these laws were left in place when the war ended to deal with even greater housing shortages caused by the stream of refugees and returning veterans moving into cities.

The U.S., having not entered the war until 1917, was a bit of a laggard. No national rent control was enacted. Instead, the federal Bureau of Industrial Housing and Transportation convened committees drawn from the ranks of tenants, landlords, labor unions and the general public to adjudicate rent prices. As one historian of this effort observed, these committees generally “had no legal powers and acted through arbitration, conciliation and the use of publicity” — which is to say, shaming.

This sort of worked. Committees weren’t shy about recommending tax increases for recalcitrant landlords. But it didn’t amount to rent control as we know it. In fact, the only places where rent control got a foothold in the U.S. were New York City and Washington, DC, both extraordinarily crippled by housing shortages. Two years after the war, vacancy rates in New York dropped below 1%, and “rent strikes” were common.

In the wake of economic downturns from 1918 to 1921 that made building capital scarce, New Yorkers pushed the state government to enact European-style rent-control laws, as the historian Robert Fogelson has chronicled. By 1920, the problem had become so acute, the legislature gave tenants the right to appeal rents they believed failed a new “fair and reasonable” test. In turn, courts were quickly clogged with tens of thousands of landlord-tenant disputes. Eventually, a state appeals court devised a mathematical formula to determine the maximum fair rent: 10% or less of fair market value of the apartment, with the landlord’s net income defined as gross rent minus expenses and depreciation. Rent control had arrived in America.

Congress simultaneously struggled with how to regulate rents in the capital, eventually establishing a commission to determine “fair and reasonable” levels. All these laws were challenged in court, but in 1921 the Supreme Court generally countenanced them. Justice Oliver Wendell Holmes Jr. argued that if the government could regulate building heights, it could rein in rents.

Throughout the world, ending rent control laws proved more difficult than enacting them. Countries that suffered the greatest rates of inflation after the war — Germany was the most extreme case — had the most difficulty dumping rent control. Still, most countries got rid of many of the emergency provisions enacted during the war.

But this took time. Even Britain, which won the war, managed only to gradually chip away at the policy. For some properties, rent-increase caps remained until 1989. In the U.S., landlords and real estate interests were able to dispense with rent controls by the mid-1920s, but only briefly. The Great Depression revived rent control globally, and the renewal of war in the late 1930s prompted country after country to tighten regulations. Most countries kept up the practice well after the war. The U.S. was an exception, in that Congress regulated rents directly only from 1942 to 1945, then left the job to cities and states.

Over time, rent control lost its connection with war, becoming instead a sacred cow for left-leaning politicians, who have viewed it as a symbol of the righteous power of regulation to redress inequality. For those on the right, rent control is a poster child for demonstrating how government can distort the play of the free market.

It’s fine to have that debate. But a good first step would be to recognize that this policy was born of bloodshed and crisis, not contemporary housing woes. That a temporary wartime measure has now become a simplistic solution to the modern shortage of affordable housing in the U.S. — a problem that arises from zoning laws and tax subsidies, not wartime overcrowding — suggests that policymakers ought to try harder to come up with new, more effective strategies.

To contact the author of this story: Stephen Mihm at [email protected]. To contact the editor responsible for this story: Mary Duenwald at [email protected]

© 2019 Bloomberg L.P.

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