March 20, 2019
By Amy Sorter
In mid-February 2019, lawmakers in the Illinois General Assembly introducedHB 2191. If passed, the bill would repeal an already-in-place rent-control ban and create rent-control boards across the state. And, later in the month, Oregon became the first state to impose statewide rent control.
With housing affordability becoming a huge issue, municipalities and states are grappling with what needs to be done to lower housing costs, especially for renters. Enforcing rent increase caps is one such method to keep escalating housing costs down. However, panelists participating in Marcus & Millichap’s “Illinois Future Development Webcast” on March 20, 2019, didn’t buy it. The overall consensus was that rent control, in the long run, can hurt, more than help, housing affordability.
Moderated by Marcus & Millichap’s John Sebree, the webinar focused on three things: 1) How we got to where we are now; 2) Why rent control is a poor idea for affordable housing; and 3) what can be done about it.
From There to Here
One of the main reasons for the housing affordability crisis is that, quite simply, there isn’t enough housing to go around. “We believe that communities should grow for the benefit of every person,” commented Mike Kingsella with Up for Growth Action, adding that communities haven’t been growing for the benefit of every person. Rather, “Communities that are equally prosperous aren’t building enough housing, which escalates affordability issues, giving rise to policy proposals across the country,” he added.
Kingsella introduced statistics; for one thing, housing underproduction has been the norm from 2011-2018. Furthermore, the cost burden on U.S. renters is increasing. “One in four renters nationally spend 50% or more of their gross income on rent,” Kingsella said.
Another issue is that, development can be difficult to achieve, due to municipal and state regulations. A recent National Multifamily Housing Council survey conducted among the National Association of Home Builders found that 32.1% of all multifamily development costs is due to regulation. “That cost either gets passed down to the renter, or it changes the type of product that is created, or it doesn’t pencil out, and it doesn’t get done,” said NMHC’s Jim Lapides. “When you have numbers that high, you start running into huge issues.”
Third and finally, the lack of affordability is bringing out more demand for rent control from progressives, which are typically found in so-called “blue” states. Mike Mini with the Chicagoland Apartment Association explained that, for example, Illinois now has a Democrat governor, elected in November 2018. The Illinois General Assembly has a higher number of Democrats as well. “The governor has indicated support for so-called progressive initiatives,” Mini said. Nor is Illinois the only state that is moving more toward progressive policies; the 2016 election brought many progressive Democrats into former conservative Republican spots. “We did see that blue wave in the last election,” Mini acknowledged.
Supporting Better Policies
The panel presented examples proving that rent control efforts among municipalities has generally correlated with fewer properties being built. Lack of supply generally means higher prices of the stock that’s available, which defeats the purpose. Furthermore, rent control can mean fewer financial resources to keep properties at a decent level. Said Sebree: “Once you apply rent control, it’s easy to go to a landlord and say ‘fix everything.’ But, if the landlord doesn’t have cash flow, options are limited.”
Another problem is that simply saying “don’t raise rents” isn’t that straightforward without specific guidance. And, putting rent control boards in place, per Illinois’ HB 2191 adds “another level of bureaucracy,” Sebree pointed out.
The panelists agreed that legislative solutions can help, but they should be geared toward reducing upfront costs and impact fees. A bill in Massachusetts is one example of how this can be done. When a municipality falls behind in supplying housing, the bill helps streamline processes which, in turn, allows more housing to be built.
As such, a good way to help alleviate the affordable crisis is not to control rents, but rather, to lower property taxes and reduce burdensome costs to developers (such as up-front and add-ons). Said Kingsella: The bad news is that housing shortage is a self-induced crisis. The good news is, we can roll back the red tape and barriers to housing, to build housing that’s needed and bring about better affordability.”
For comments, questions or concerns, please contact Amy Sorter