Rental Reality Check

AS THE TWIN TOPICS OF home affordability and availability grip the nation, more government leaders are advocating for rent regulation to offset rising housing costs. In 2023, President Joe Biden called on corporate landlords to limit annual rent increases to 5 percent or risk losing federal tax breaks.

Supporters say such regulations — also called rent control and rent stabilization — create more affordable housing and lead to housing stability for working families and marginalized people.

But research by Zack Hawley, a professor of economics at TCU, shows that one form of rent regulation — limiting rent increases — doesn’t solve housing shortages and can make housing problems worse.

Hawley and three other researchers analyzed a proposed 7 percent annual rent increase cap in Washington state, which has one of the nation’s highest housing costs. Their paper, published in February 2024 in the SSRN Electronic Journal, concluded the cap would reduce the future supply of rental units and decrease apartment maintenance, among other consequences.

While they focused on one state, a growing body of research on rent regulations shows similar findings in other places.

“We’ve tried rent control so many times, and it just doesn’t seem to work,” Hawley said. “People repeatedly say it’s a supply issue … but no one listens.”

He is “a very dedicated teacher,” said Stephen Quinn, a fellow economics professor of Zack Hawley. “Students adore him. He holds them to a high standard.”

TAKING STOCK OF HOUSING

Hawley, who joined TCU in 2012, has long been interested in the intersection of economics and housing.

“Housing and real estate are a basic need,” said Hawley, who has written or co-written 20 journal articles on housing issues, from landlord and mortgage discrimination to land values and property tax delinquencies.

Hawley is “a star in the field,” said Andrew Hanson, who was a Georgia State University economics professor on Hawley’s dissertation committee and co-wrote the Washington paper. “He thinks of really good ideas.”

TCU students voted Hawley the 2023 Honors Professor of the Year, one of the university’s top faculty distinctions. He is “a very dedicated teacher,” said Stephen Quinn, a fellow professor of economics at TCU. “Students adore him. He holds them to a high standard.”

Hawley likes to incorporate hands-on experiments into his classes. On the first day of his Introductory Microeconomics course, he auctions off classroom seats so students can experience how property rights are determined.

“They’re competing for location,” Hawley said. “They can buy more than one seat. They can rent a seat. Some people refuse to buy a seat and they’re homeless.”

At first, “I thought he was joking,” but the experiment remains one of her best classroom experiences, said Lorna Green, a recent graduate who took that honors-level class as a first-year student and is now a tax consultant for Deloitte in Kansas City, Missouri.

ZOOMING IN ON WASHINGTON

Zack Hawley collected a trio of economics degrees from Georgia State before joining TCU in 2012. In 2023, he earned the Honors Professor of the Year award.

In Washington state, housing costs and availability top residents’ concerns, per a state Department of Commerce survey. That agency projected a need to add 1.1 million homes by 2044 to keep up with population growth, yet building permits for new housing have declined. The more than a million people living in rental households in Washington must earn $40.32 per hour to afford a two-bedroom rental home costing about $2,100 a month, reports the National Low-Income Housing Coalition.

As a solution, some state legislators proposed the 7 percent rent increase cap alongside other measures.

While Hawley acknowledges rising rents consume an increasingly larger share of residents’ income, cutting into their ability to afford basic necessities or save money for emergencies, he argues that rent caps don’t work based on the basic economic theory of supply and demand. If rent regulations are effective, they limit housing supply, he said.

“What happens is a stop: No one builds or sells or rents,” Hawley said. “Landlords will sell to a larger firm that can sustain smaller profit margins or sell to an [individual who will live there], which will reduce supply.”

Hawley and Hanson built an economic model to analyze Washington’s proposed rent cap, finding it would impact 46 percent of rental units and cause a domino effect, including the construction of 7,380 fewer rental units over the decade, which could lead to a $57 million decline in rental income each year. In turn, less rental income could cause annual property values to fall by about $1.1 billion, which would cause yearly state tax revenue to fall by $11 million. Another oft-overlooked impact is that landlord spending on annual building maintenance would fall by $16 million statewide, including $6 million in Seattle.

“Landlords have less incentive to maintain a property properly because they can’t charge market rents, or they may shirk on issues or won’t respond as fast to issues,” Hawley said. “If you couple reduced construction with reduced maintenance, you’ll get an aging housing stock that’s deteriorating and depreciating faster than normal, which will exacerbate the lack of supply.”

TAKING THE NATIONAL PULSE

Separate research by Hanson for the National Apartment Association found similar rent cap results in other metropolitan areas — and a strong link between rent control and declining neighborhood quality, such as increased litter and crime.

Rent caps address the housing affordability problem but not availability, said Hanson, now with the University of Illinois Chicago. “It fixes half the problem, but it makes the other half worse.”

Although rent regulations have existed for decades, more cities and states are enacting them than ever before.

More than 200 local governments nationwide have rent control policies, per the National Apartment Association. California and Oregon recently passed statewide rent control laws for the first time in 70 years, and New York, Illinois and Massachusetts are mulling similar laws.

“When you’re on the campaign trail and trying to explain rent control … the average voter says this sounds awesome,” said Washington state Sen. Mark Mullet, who opposed the rent cap bill. “The science of housing gets disregarded.”

For Washington, Hawley suggested encouraging more rental construction through offering builder incentives, relaxing zoning regulation or allowing small, self-contained dwellings — also called in-law suites or granny flats — in a home’s converted attic, basement or garage on the property of a primary residence.

The rent cap proposal didn’t pass in Washington in 2023, but some state legislators plan to revisit the issue — for a third time.

“I wasn’t surprised that there was a loss this time,” Hawley said. “My hope is that they’re reading these reports.”