Like most policies that impose prices by regulation, not really. Recent academic research titled “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” which students of the Master of Science in Global Real Assets (MS-GRA) discussed in Spring 2024, shows that rent control reduces the displacement of low-income renters from urban neighborhoods, and especially so for minority renters, which at first might appear like a successful outcome. What the policy overlooks, though, is housing suppliers’ reaction to the incentives rent control produces—what economists call “general equilibrium effects.” Because of artificially low prices, in the medium and long term developers and landlords respond by shifting their focus to exempt housing types, reducing the supply of rent-controlled units, and redeveloping existing multi-family units so that they do not qualify for rent control. Moreover, the investment in renovations and maintenance of rent-controlled units is low. These reactions lead many rent-controlled tenants to leave their units to move outside of urban areas in the long run, and hence to more urban gentrification rather than less.

The Research

To document these dynamics of housing markets under rent control, the authors exploit the unique setting of San Francisco to obtain a clean counterfactual comparison across units that are very similar in all respects except for the imposition of rent control on one group but not the other. Specifically, they build on the fact that San Francisco introduced rent control in 1979 on buildings with five or more apartments with the exception of new constructions and small multi-family units. The rationale for these exceptions was to encourage development and to exempt small-scale ventures without significant rental market influence. However, in 1994 the exemptions were suddenly and unexpectedly lifted based on the buildings’ construction year: those built up to 1979, the year in which rent control was introduced, were affected, whereas those built before 1979 were not. This difference allows a very clean comparison of what happened over time to multi-family units with very similar characteristics built around 1979, only some of which were suddenly imposed rent control in 1994.

The authors use a variety of unique data sources to track over time the location of all the individual residents of all the multi-family units that were suddenly subject to rent control in 1994 and similar units that were not. In the short run, the residents of rent-controlled units were less likely to be displaced by their original address and, when moving out, were more likely to stay in San Francisco. This effect was especially strong for Black and Latino renters, as shown in Figure 1 below. For instance, the rate at which Black renters in suddenly rent-controlled units were more likely to stay than Black renters in non-controlled units was about four times higher than the same difference for white renters.

Figure 1. Effect of Rent Control on Short-Term Renters’ Displacement by Demographics

The plot shows the difference in the likelihood that renters of four racial and ethnic groups that were sudden beneficiaries of rent control in 1994 stayed at their original address (no displacement) relative to renters of the same group in similar units that for which rent control was not imposed in 1994.

If we were stopping here, we would conclude that rent control successfully reduces gentrification and provides affordable housing while at the same time reducing inequalities. The authors show that this conclusion would be misleading. This is because developers and landlords react to rent control and price regulation by reducing the supply of rent-controlled units, redeveloping units so that they do not qualify for rent control anymore, and investing less in the renovation and maintenance of rent-controlled units and amenities in neighborhoods where rent control is prevalent. Already in the early 2000s, many rent-controlled renters had moved out of their original neighborhoods. Several neighborhood-level outcomes (median household income, share of college graduates, share of unemployed) worsened more in high-rent-control neighborhoods than in other neighborhoods. Ultimately, the apparent initial success of rent control was unable to provide sustainable affordable housing in the long run. In contrast, it worsened the conditions of those who stayed.

What do we conclude from this research?

• Limiting market forces and imposing rent increases by regulation produces perverse “general equilibrium effect,” whereby suppliers react by limiting the quantity and quality of affordable housing in the long run;
• Although displacement is reduced at first, especially for minority households, in the long run, rent-controlled multi-family units and their renters face worse outcomes.