In 2020, Berlin implemented a rent cap that applied city-wide to both new and existing rental housing contracts. The policy was later found to be unconstitutional and so as of April 2021 this is no longer in place. But for a brief period of time, and for better or for worse, Berlin had a blanket rent control policy. Berlin is, of course, not alone when it comes to rent caps. They are seen by some as a solution to rising home prices, gentrification, and displacement. But do they actually work?
This recent working paper argues that the answer is no. And that there are other better tools available. Yes, overall rents do tend to decline. But when you have a city-wide policy, it means that rents also decline for high-income households. And in this paper, the economists argue that this tends to benefit the rich more than the poor. Rent caps also tend to decrease overall housing supply, which, as we all know, is counterproductive when you’re trying to make something more affordable/accessible.
But perhaps the key argument is this one here: Rent controls create a misallocation of housing that can actually decrease overall welfare for lower-income households. The reason behind this is that homes stop getting allocated to those who value it and need it the most. Instead, you get people who may be overhoused or underhoused, but who remain firmly put because of what are below-market rents.
There are a number of ways in which this distortion might play out. But it could involve someone with a very large older apartment who now no longer needs a large apartment, but is staying put because of their favorable and irreplaceable rent structure. This in turn precludes someone who desperately needs a large apartment from finding a suitable place. And since overall supply has also decreased because of the controls, the problem is exacerbated.
It can all get a bit complicated, but if you’re interested in this topic, here is another technical research paper from Edward Glaeser and Erzo Luttmer that deals specifically with the misallocation of housing under rent controls.