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Rent control and the supply of housing services: the Brookline Massachusetts experience
American Journal of Economics and Sociology, The, Oct, 1993 by Raymond Jackson
I
Introduction
AN IMPORTANT PUBLIC POLICY CONSIDERATION regarding rent control is the economic disincentive faced by real estate investors to maintain and improve their property. Using an asset valuation model, Smith (1988) shows that rent control provides landlords with the incentive to either allow their properties to deteriorate or to convert them to alternative noncontrolled uses. The Smith approach, however, is incomplete since it fails to recognize the expectations and reactions of the tenant. While a landlord can cut or delay spending on a varied list of amenities, the tenant who benefits from the monetary gain of a controlled unit may be willing to make up for this deficiency to some extent. In this case the supply of housing services, meaning the provision of services by the property owner at the rent set by the regulating agency, is supplemented by services supplied by the tenant.
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The total supply of housing services is, therefore, correctly measured by the sum of those provided by the tenant and the landlord. A 1990 study by the Cambridge Rent Control Board found that in virtually all of the 200 poorly maintained controlled units examined, tenants have made improvements ranging from painting and plastering to major electrical system repairs and kitchen renovations. In some buildings, tenants have assumed total responsibility for maintaining the common areas as well as their own apartments.
While Smith's model demonstrates that rent control depresses capital values, it does not follow that it also leads to a reduction in spending essential to the maintenance of the quality of the housing stock. While investors who purchased property before the imposition of controls suffer capital losses due to lower expected revenues, later investors buy at reduced prices. Such recent investors may be able to achieve a normal rate of return on an investment without allowing the property to deteriorate simply because the asset is acquired at a price which reflects a substantial capital loss to the previous owner.
The above debate over the impact of rent control on housing services cannot be settled entirely on theoretical grounds. The nature of these controls varies so widely from community to community that no single set of conclusions is generally applicable (Olsen, 1988). This paper takes its cue from Olsen and focuses on the impact of rent control on the supply of housing services in Brookline, an affluent, mainly residential town of 53,000 adjacent to Boston. Brookline's rent control by-laws have been in place since 1971.
II
Methodology
THE INITIAL SECTION of this study examines the number of residential code violations originating from controlled units in relation to the number originating from market rate units. The number of health code violations derived from rent controlled units relative to total violations from both rent controlled and market units is compared to the number of rent controlled units relative to the total units of rental housing. If the number of code violations due to rent controlled units as a fraction of total violations is disproportionately higher than the number of controlled units as a fraction of the total number of rental units, this would provide evidence that property owners attempt to increase real rents and, correspondingly, the rate of return on their investments, by reducing the quality of housing services. It would also show that many tenants refuse to bear a major financial responsibility for creating an acceptable set of living conditions in lieu of paying the market rental rate. An over-representation of rent controlled units cited for health code violations would call into question the hypothesis that the total supply of housing services is undiminished if tenant-supplied services are included. Though tenants of rent controlled units may spend more on repairs, maintenance and other services than tenants of market rate units, the analysis of code violations should indicate whether the combined expenditures of the tenant and the landlord result in a total supply of services equivalent to that enjoyed by those renting at market rates.
Data are also developed on the distribution of building permits issued for renovation to compare the extent of renovations of rent controlled units to renovations of market units. If the number of permits issued to renovate controlled units is relatively low, this indicates rent control in Brookline results in below normal returns on new capital investment and thus reduces the long-run supply of housing services. This finding would cast doubt on the notion that, following the initial capital losses imposed by rent control, new property owners may still be willing to undertake major improvements. Should property owners expect below normal returns on improvements then, in the long-run, a significant proportion of the stock of rent controlled housing will deteriorate, a result already noted by the Cambridge Rent Control Board study and by Smith and Tomlinson (1981).
