Research Examines the Impacts of Rent Regulation and Implications for Inequality

Newswise — With inflation and the cost of housing rising, rent regulation policies aimed at keeping housing affordable are getting a second look from policymakers across the country. Luis Quintero, an assistant professor at Johns Hopkins Carey Business School, recently conducted a study examining the socioeconomic impacts of rent regulation with colleagues from the University of North Texas and George Washington University. Professor Quintero explained some of their findings.

Q: What are rent regulation policies, and how do they work?

Quintero: In general, there are two kinds of rent regulation policies: hard price rent controls and rent stabilization. HPRCs cap or freeze the level of rents, while rent stabilization limits the growth of rents over time. Rent stabilization is also known as the second-generation rent regulation policy, which is the more common policy nowadays. The rent regulation policies in places like New York City, Washington D.C., and, more recently, Oregon are primarily rent stabilization.

Rent stabilization can make rents more affordable for tenants if it can effectively slow down rent growth. For example, let's say a rent stabilization policy caps annual rent increases at 3 percent. If the unregulated rents would have increased by 5 percent on average, tenants would save 2 percent on rents when they renew their leases. In other words, rent stabilization transfers some benefits to tenants, and we call these benefits rent discounts.

Our research examines the rent stabilization policy in New York City. New York City’s rent stabilization policy was put in place in the 1970s, when there was a scarcity of rental units and very low vacancies. Unfortunately, these conditions are not very different today. Whether a rental unit is rent-stabilized depends on several factors. For example, if your apartment building was built before 1974 and has six or more units, your apartment is likely to be rent-stabilized. I say “likely” because the rent growth limit on your apartment can be removed if, for instance, its rent rises above a certain level and your household income is larger than a certain level, or if the tax benefits that a developer received for your apartment building expires.

Q: How do rent stabilization policies differ from other housing programs?

Quintero: A critical aspect of rent stabilization is that it is not means-tested. This means that rent stabilization does not target low-income populations and households of all income levels qualify for rent stabilization. This is very different from other federal assisted housing policies, such as housing vouchers and public housing.

This feature has been promoted as one of the main advantages of the rent stabilization policy because it seems fair and equal for everyone. Well, as we showed in our paper, ex-ante [forecasted] fairness does not always lead to ex-post [based on results] equality.

Q: What did your research examine, and what did you find?

Quintero: In our research, we wanted to understand the total amount of resources devoted to this policy. We also wanted to understand who benefits from this policy and by how much.

Answering these questions is not straightforward, because measuring rent discounts is challenging. The core problem is that we don’t observe the counterfactual rents of rent-stabilized units. By “counterfactual rents,” we mean the rents that rent-stabilized units would have in the market if there were no rent stabilization policy.

To solve this problem, we estimate pricing models for market units and then use them to predict the counterfactual rents of rent-stabilized units. Our methods allow us to account for the quality of the rental units in our estimates. We then calculate the rent discount for each rent-stabilized unit in New York City from 2002 to 2017.

Based on our estimation, the average rent discount in New York City in the last two decades is $410 per month. This amount is roughly 34 percent of the contract rents of stabilized units. We also added up the rent discounts of all the rent-stabilized units in New York City and find the aggregate to be between $4 billion to $5.4 billion per year, which is roughly 10 to 14 percent of the amount the federal government spends on means-tested housing programs.

What’s more, despite rent regulation being frequently promoted as an effective tool for housing affordability and achieving equality and social justice, we find that rent discounts are not progressively distributed. In other words, people with lower incomes do not get larger rent discounts. And many with high incomes get very sizable discounts.

The rent stabilization policy is not means-tested so the policy does not target poorer households. These discounts are, as expected, much larger for tenants who have stayed longer in their units, and who are often higher-income non-minority tenants. We also find that the rent discounts are larger in Manhattan and are increasing over time in gentrifying neighborhoods in Brooklyn and Queens.

Q: In your research, you examined the impact of rent stabilization on racial inequality. Based on your analysis, who benefits most from rent stabilization?

Quintero: We found that the rent stabilization policy in New York City disproportionately benefits white tenants. Not only are white tenants more likely to occupy rent-stabilized units, but they also receive higher discounts. On average, Black tenants in stabilized housing get $150 less, Hispanics $135 less, and Asian American and Pacific Islanders receive $43 less for monthly rent discounts, compared to white tenants in stabilized units. 

However, we found that the racial gap shrank over time. We also found that the racial differences in rent discounts are mainly explained by the distribution of discounts across different neighborhoods in the city and the spatial segregation of different racial and ethnic groups. The main reason why racial and ethnic minorities receive fewer rent discounts is that they tend to live in places where rent discounts are lower.

Q: In your research, you also raised the interesting issue of policy awareness. What is that, and why does it matter?

Quintero: Our novel data allow us to identify whether tenants of rent-stabilized units have actually realized that their units are rent-stabilized. We call this ”policy awareness.” Believe it or not, not everyone knows. In fact, we find that only about a third of the tenants of rent-stabilized units can correctly report that their units are either rent-controlled or rent-stabilized. By contrast, 25 percent of rent-stabilized tenants believe their units are not regulated at all.

Moreover, we find that policy awareness matters for rent discounts. Rent discounts are three times larger for households that are correctly aware of being beneficiaries of the rent stabilization policy.

Q: What should policymakers take away from these findings? Is there something that should change?

Quintero: Our research specifically looked at rent stabilization in New York City, but I think policymakers in other jurisdictions can learn from our findings. New York City offers a wealth of data because 65 to 70 percent of the population are renters, and half of those rental units are rent-stabilized.

I think it is important for policymakers to understand the level of resources devoted to rent regulation, even if the costs do not show on government budgets. There is a hidden cost. For landlords, rent regulation amounts to paying a very high tax which needs to be compared to other policies.

Second, I think policymakers need to realize that rent stabilization measures are not neutral when it comes to income and race, even if they may appear so on paper. In the end, there may be better and more strategic policies that direct resources towards people most vulnerable to high rents and rent increases, although we also recognize that these policy alternatives may be harder to be approved politically. Access to these policies today is unequal, specifically in favor of traditionally privileged groups. This unequal access problem becomes more important in cities dealing with gentrification and displacement.

The study, “Measuring the Value of Rent Stabilization and Understanding its Implications for Racial Inequality: Evidence from New York City,” is available at the Social Science Research Network.