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Feb 21, 2017

This is the abstract taken from a study conducted by Professor Christopher Palmer and his colleagues entitled, 'Housing Market Spillovers:  Evidence from the End of Rent Control in Cambridge, Massachusetts'.  As follows:

'We measure the capitalization of housing market externalities into residential housing values by studying the unanticipated elimination of stringent rent controls in Cambridge, Massachusetts, in 1995.  Pooling data on the universe of assessed values and transacted prices of Cambridge residential properties between 1988 and 2005, we find that rent decontrol generated substantial, robust price appreciation at decontrolled units and nearby never-controlled units, accounting for a quarter of the $7.8 billion in Cambridge residential property appreciation during this period.  The majority of this contribution stems from induced appreciation of never-controlled properties.  Residential investment explains only a small fraction of the total'.

The following is a (slightly edited) transcript of the podcast with Professor Palmer discussing the impact on both rent controlled and never-rent-controlled housing when rent control is eliminated from a housing market.  The short story is that all house prices benefit from the removal of rent control – so the implication is that if you live in a rent controlled market and own the home you live in, your property value could be lower than it should be simply because there are rent controlled properties around you.  Dr. Gower first asked Professor Palmer about the background to the rent control study. 

Professor Palmer:  Well, I’ll give you some back story that is a curiosity and kind of an interesting story.  I grew up right outside of Cambridge and the summer after my freshman year of college, I got a job as a research assistant for an MIT researcher who is trying to understand a little bit about the aftermath of rent control.  My first job academic research was driving around Cambridge trying to figure out if the renovations that I had in my database that were purportedly done in response to end of rent control were actually plausibly connected to rent control.

A couple of times I found a building that had been multifamily and they put in a gas station on the ground floor and it was listed as a $2 million renovation.  Not surprisingly we dropped that from our database because we were able to ascertain that a gas station on the ground floor is not plausibly a causal effect of the end of rent control, but something that would have probably happened anyway and to call this a renovation boom as an effect of the end of rent control was not right.

That was my first foray into rent control and studying its aftermath in Cambridge.  And Cambridge provides an incredible laboratory to study rent control. Let me tell you a little bit of the details behind how Cambridge instituted rent control, and what their rent control regime was like.  One thing that is very interesting for communities that have rent control in the United States right now is it seems like a policy that comes but never goes away, and so it’s interesting as a case study that rent control actually ended at one point in Cambridge.

Like many communities in the United States, Cambridge and the Boston area had various regimes of rent control, a lot of them coming from the post war housing boom.  The intuition was that law makers were saying, look, it’s so hard for people to find an apartment that’s affordable in this city, let’s cap the rents.  A lot of the legislation when you read it says we’re enabling our rent control regulation to address the housing shortage.

That ends up from an economist perspective being exactly backwards.  You have a shortage so you are going to put a price ceiling on it and so there are now even more people that want to live there and fewer people that want to provide housing.  It ends up being a somewhat backward policy so every freshman in college taking Econ 101 learns that price ceiling and rent control is the most iconic example of reducing the quantity and quality of available housing.

 There are more people that want to buy, that want to rent a unit because the rent is now below what market is, so you have more people that are interested in buying this great deal. Then you have fewer landlords who are interested in providing their units, and also fewer landlords who are interested in fixing up their units to market standards.

That had been the traditional analysis and what we took advantage of is in 1994 the entire state of Massachusetts voted as to whether rent control should be legal per se; or allowed in the state of Massachusetts. Now this is a very curious thing to do because only three towns Boston, Brookline, Cambridge had any rent control to speak of. For years the landlords in Cambridge would put on the local ballot that they wanted to get rid of rent control. Not surprisingly Cambridge is predominantly renters with approximately a 60/40 split, or even more, with renters to owner occupants.

The renters are going to be in favor of rent control and, as Cambridge is also known affectionately as the people republics of Cambridge, [you can tell that it is] a fairly progressive place they are going not surprisingly vote in favor of the little guy, the tenant. Every time they put it on the ballot rent control would resoundingly lose. 

But the landlords in Cambridge and in Boston and Brookline got smart in the early 1990.  They rebranded themselves as a small property owners association.  When they did that it was less about taking money from the evil absente corporate landlord and giving it to the little guy tenant that deserves to live here because he or she is a public school teacher or somebody that works at city hall or an artist; someone that we think is important to the kind of community character that we have.

Their rebranding transferred [the approach] from the big buy to little guy and they said, look these small property landlords that own five or six units; this is their livelihood, and they take good care of [their properties] and this is also their inheritance for their kids.  They are as deserving as the tenants, and just as important a part of the community as the tenants are.

So that was one thing that was affective, but also putting it on the state wide ballot was a curious move that ended up paying off. Then you had people in kind of the tony suburbs of Boston and also rural western Massachusetts voting on whether Boston should be allowed to have rent controls. It was a fascinating election and the landlords ended up winning 51% to 49% with Cambridge voting overwhelmingly to keep rent control, but being overruled by people who were relatively unaffected by rent control.

 That provides us this natural experiment where all of a sudden January 1st, 1995, rent control is gone in Cambridge and we can see what happens, and, it being the modern era, we have got unit level data on assessed values and renovations.  We have data on when a house is sold, how much it was sold for, what the dollar per square foot was – the composition of these various homes.  We can compare and contrast neighborhoods across Cambridge and we can answer a couple of fundamental questions that everyone always believed about rent control such as does it keep down rent, does it create a shortage, does it reduce the quantity of housing, the quality of housing?  But then we are able to go one step further and address the question that was fascinating that no one ever had really been able to get a handle on which is, what’s the effect of rent control on the neighborhood?  If I’m an owner occupant and live next door to a building that’s rent controlled, am I affected in some way.  [Here we can] get at what economists call externality – the externality mechanism.

That was a very interesting piece of the study.  We are able to ask, what’s the effect on you, as an owner occupant, of living near rent control.  The punch line is that after the end of rent control there is a lot of residential turn over.  There are a lot of renovations and [increases in] property values.  [Prices] are increasing everywhere in the late 90s in the Boston, and especially in Cambridge, and we have this excess return for property in Cambridge not only amongst stock that was now capitalizing a much higher future rent stream, but also for never rent controlled properties.  Owner occupied properties, single family houses, condos, things like this that had not been rent controlled [we saw that they also] appreciated a lot.  Over the course of next 10-years there is an extra $2 billion of property value that’s created in Cambridge, and most of that is actually coming from stuff that had never been rent controlled, but appreciated in response to an improving neighborhood.

There are two sides to this, of course.  If you are a tenant advocate and affordability advocate you can say, look, there is proof here that when we get rid of rent control property values go up, rents go up, things becomes less affordable – and that is absolutely the case.  I think a flip side argument was to look at how much value was unlocked to owners, to people that wanted to move in and now could move in because there wasn’t as much of a shortage it was easier to find a unit in Cambridge that meant that you are bidding up rents, you are bidding up property values.

But there are people that would have been willing to pay more than what other people were paying to live in Cambridge and now have the opportunity to do so, kicking off a bit of a renaissance in Cambridge.  And you know, other work since then has shown that crime went down in these areas as well as the people that move in start to take extra precautions.  The people that move in seem like they are more likely to call the police when something sketchy happens or install a private security system and things like this that change a little bit the character of some of those neighborhoods. That’s the rent control study in a nut shell. It’s been fascinating to work on and also to think about how it applies to other rent control initiatives that have been on the ballot across the country in recent years.

Dr. Gower:  It is fascinating. Did you look at demographics as well and how the demographics in Cambridge changed?

Prof. Palmer: One of the things that was interesting as we [have] presented this, [is that] somebody would say, well you know I can tell you signs of the character changing is that my favorite dive bar, my favorite pub is now a yoga studio.  We looked at the business composition as well; are we seeing more whole foods and fewer bodegas? Are we seeing more coffee shops and fewer dive bars?

We also looked at demographics to see what’s the age mix up, what’s the racial ethnic mix up, and one of things we see is we do see some more students moving into the area.  They would be living in other communities but for the end of rate control it seems like.  And we do see fewer families with kids living there to some extent. We also see fewer retirees living there.  [This is because it] became advantageous if you were retired and you were living in a rent controlled apartment that was three bed rooms and you raised your family there, that now you are “over housed.” As your rent began to increase there was an incentive for you to find a more advantageous situation for you and then turn that over to some other family or to some other group of roommates. But to be honest the demographic changes we saw were not as dramatic as what we were seeing in the housing market.

Dr. Gower:  Very interesting. What about from a municipal perspective was there any impact on tax revenues as a result of the increase in properties values and slight demographic shift?

Prof. Palmer:  There was absolutely.  As property values go up, Cambridge is able to capture a lot of that revenue and they are able to capture it in two ways. One, even if they kept their property tax rate the same they are able to have much higher evaluations; they are bringing in a lot more revenue. But, two. that actually allowed them to lower property tax rates, so that the effective rate was not growing nearly as high for cash constrained owners and so that was a benefit to the resident in two ways.  One, there is higher revenue intake, but also they are able to lower tax rates.  Cambridge has a split property tax system with commercial, industrial, and residential tax – the different rates also gave them some extra flexibility.  But that’s allowed Cambridge to enjoy much lower property tax rates historically and certainly that gap was accelerated in the aftermath of rent control relative to surrounding communities from a municipal perspective.  [Additionally], the Cambridge police department [reported that] they have been excited about what they see as improvements in criminal activity in Cambridge. There are definitely some wins for the town’s fiscal health and the town as a whole.

Dr. Gower:  What are the implications, then, for other people in other parts of the country that are either facing rent control that they don’t want to see, or lobbying for rent control?

Prof. Palmer:  Rent control is a very touchy issue because it’s so instinctual to see people that you care about that seem like they are an important part of your community being priced out because they can’t afford their rent any further.  You would like some kind of quick fix for that and you would like to favor the people that are living here now. The people that we are attached to, the proverbial artist or public school teachers or municipal workers, working class people.

Often people are motivated by seeing their kids trying to get into an apartment and wanting to live in the community where they grew up and having a hard time doing that. There is this very sensible sympathy and knee jerk reaction that says, well let’s just try to cap rents.  One of the problems with that is it’s a Band-Aid on a gushing wound in a lot of cities that have an affordability crisis.  Take the Bay area, for example, it’s taken us decades to get to the affordability crises that we have now in many Bay area communities. It’s just not feasible that we’re going to be able to undo a crisis that’s 30-year in the making with a quick fix.

So there are all these unintended consequences from doing rent control.  It’s also a little bit too blunt of a policy in that it targets a lot of the wrong people. The statistics are that in San Francisco for example one in four renters in rent stabilized apartments are making more than six figures. So they are making more than a $100k and that’s because rent control, as an economist would say, is not means tested. It’s not a program where you have to submit your tax returns and show that you don’t have the means to be able to afford market rates, and therefore you are deserving [of], and qualifying for this affordable housing.  Instead it just limits the rent growth for everyone and that gets some of the people that really need it and some of the people that don’t need it, and it also misses some of the people that do need it.

There are just a variety of leaks through the rent control system and problems with it.  That said, it is something and lot of people would [rather] do something than nothing.  If it has some unintended consequences and some side effects they still see it as being able to benefit a tangible number of people.  In a lot of communities the solution, if you don’t want to be priced out of your area, is to lock in your rent by getting a fixed rate mortgage and buying a home. In a community like San Francisco or many parts of Los Angeles or New York or some of areas of Seattle – a lot of our most expensive places – being an owner occupant is just not feasible because of the difficulty of coming up with not only a down payment on very expensive house prices, but being able to afford that regular mortgage payment.  So then that leads people to be lifelong renters and lifelong renters are very susceptible to changes in rent.

Any way those are some of the issues that I think people think about in communities across the country when they are thinking about affordable housing policy.

The link to the original rent control study is here:  Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts

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