Rent Control: Encourage Investment In Multifamily Housing By Reforming Rent Control
April 4, 2011
Rent control not only is a poor housing policy universally decried by economists for market distortions and inefficiencies, but it also significantly erodes and artificially constrains the municipal property tax base. Moreover, rent control creates significant disincentives for property owners to invest in and maintain the existing housing stock, and as such, over time, systematically suppresses the standard of living for those who choose to live in rental housing.
Indeed, the profound impact of rent control on the quality and availability of rental housing is well-documented. Significant academic research exists that rent control simply fails as legitimate housing policy, and is woefully ineffective as social policy. This academic consensus is evidenced by a 1992 American Economic Association study that found 93 percent of economists opposing rent control and agreeing that “ceiling[s] on rents reduce the quality and quantity of housing.”
Over the last decade, rent regulations have generally been abandoned (as in Massachusetts) or significantly curtailed (as in California) in response to evidence that rent controls threaten property conditions, shift property taxes to homeowners, and are in effective in helping those in need. Notably, thirty-five (35) states have preempted local rent control laws, and New Jersey joins only California, Maryland, and New York as the only states that regulate rents (Washington DC also has rent control).
98 of New Jersey’s 566 municipalities continue to have rent control governing rents at multifamily apartments, including some of the state’s most populous cities. Overall, 2 of 3 of the apartments in New Jersey are located in municipalities with rent control.
Vacancy Decontrol: Encouraging Reinvestment While Safeguarding Existing Residents
NJAA advocates for streamlining rent controls following the successful model of permanent vacancy decontrol. Permanent vacancy decontrol would keep rent controls on those units that currently are rent controlled and then permanently decontrol them when the current resident moves out. This change at the local level would incrementally allow markets to set rents for incoming residents, while continuing protections for existing residents. Permanent vacancy decontrol would organically increase the local tax base over time by increasing the value of multi-family properties as owners would be encouraged to invest in their multifamily communities to command higher rents. This is a win for the State, a win for municipalities, a win for taxpayers, and a win for current residents.
New Construction: Rent Control Exemption Encourages New Multifamily Construction
The State Legislature understood the perverse impact of rent control on multifamily housing in 1987 when it passed legislation creating an exemption for newly built rental housing from local rent controls. The bill allowed an exemption for new multifamily housing from rent control during its initial period of mortgage financing (up to 30 years). Though originally a five-year pilot, the legislation was so successful at jumpstarting multifamily construction that the law was renwed in 1992 for a second five-year program. The law was later made permanent in 1997, and was again expanded in 1999 to promote investments by national housing providers, like REITs, by providing the exemption without regard loan financing. During the twelve year process of adopting, renewing, and refining this exemption from rent control, the Legislature and housing policymakers understood the critical need of spurring development of multi-family housing to meet the demands of New Jersey’s growing population. NJAA supports this policy of protecting new construction from the limitations of rent control; it is essential to developers’ project viability planning and ultimately their ability to receive lender financing.
Policies such as vacancy decontrol and exemptions from rent control for newly constructed housing are essential to blunting the perverse effects of rent control in limiting the supply of affordable rental housing and driving up costs for residents and businesses. The New Jersey Apartment Association advocates for such commonsense policies statewide.