Why Rent Control Doesn’t Solve Housing Problems
In 2018, the Royal Theatre was relying on government funding that hadn't been increased in 21 years and 30-year-old rent structures that were not profitable. To address its financial challenges, the theatre decided to significantly increase the rent for its long-time tenant, Victoria Symphony (a beneficiary of the rent structure), which was using the theatre for 50 evenings and 35 days during the year.
The theatre also sought to reduce “dark days,” when nonprofits book prime days and times years in advance for only $500 per day and then don’t use those days. By reducing the number of “dark days,” the theatre reasoned, it could commit to diverse performances like Broadway shows, Cheech & Chong, and a nostalgia show, which would cater to a broader demographic and better serve the region's cultural demographics, while also providing much-needed revenue.
The symphony’s rent rates would more than double, with Friday-Saturday rates increasing from $1,850 to $4,000 per day and rates on other days also increasing. Characterizing the rent increase as "exorbitant," the symphony decided to move half of its performance to a university auditorium. Not only did the university site have 200 fewer seats, but the location would be inconvenient for many of the symphony's patrons.
Through a series of negotiations, the theatre agreed to delay the rent increases for three years and to provide notice of rent increases two years, instead of one year, in advance. The symphony, in turn, agreed to cooperate in reducing “dark days.” And municipalities funding the theatre agreed to increase funding.
The strategy saved the Victoria Symphony, which continues to perform many of its concerts at the Royal Theatre, as well as the university site. Presumably, the Royal Theatre was eventually able to increase rents to rates more aligned with the market.
Although an apartment complex may seem to have little in common with a theatre, landlords and the theatre share the challenges of increasing costs and the need to raise rents to survive. And like the symphony, residential tenants facing rent increases must make the difficult decision whether to pay the increased rent or move.
District of Columbia’s Settlement in a Housing Voucher Discrimination Case
Unlike a theatre, one would think that an apartment complex doesn't receive additional funding to delay tenant increases. Yet, District of Columbia (DC) landlord, Petra Management Group (Petra), recently settled a case in which DC accused it of increasing profits by leasing rent-controlled units only to tenants with housing vouchers designed to help low-income families find housing.
The case represents a rare use of fair housing laws prohibiting discrimination based on source of income. Landlords often are accused of discriminating against tenants with housing vouchers. However, Petra was accused of discriminating against tenants without vouchers.
Even more concerning is that DC alleged that tenants with housing vouchers paid higher rents to Petra than were permitted under DC rent control laws. The DC housing voucher program is designed to pay a “reasonable rent” for the unit based on location, number of bedrooms, unit type, age, amenities, and included utility charges. If, as DC alleged, Petra received higher rental rates from vouchers than would have been allowed under the rent control law, that implies that the rents required under DC’s rent control laws were unreasonably low.
Rent Control Doesn’t Address the Cause of Rent Increases
The Petra case highlights a challenge state and local governments face. They have little power to address underlying economic conditions. When economic conditions lead to increases in residential rental rates, rent control becomes an inadequate substitute for addressing those conditions.
Rent control can help tenants stay in their homes during periods of rapid market rent increases. However, rent control laws don’t address the root problem that leads to the rent increases in the first place -- economic conditions that lead to rent increases, such as housing shortages and increased landlord expenses for mortgage interest, insurance, utility charges, and wages and employee benefits.
Over time, rent control can prevent a rental property from generating enough revenue to cover expenses. When that happens, landlords both tenants and the community at large suffer.
Rent Control’s Undesirable Consequences
DC’s housing voucher program was required to pay market rents. In the Petra case, the government alleged that tenants with vouchers paid higher rental rates than would have been permitted under DC rent control laws. So, it appears that DC’s rent control laws, initially adopted in the 1980s, prevented the landlord from charging the reasonable rates offered by the voucher program.
The Petra case highlights the challenge in adopting a workable rent control law that provides reasonable rents for both landlords and tenants. Rent control laws often seek to address increased market rents by allowing rent increases based on Consumer Price Index (CPI) increases or a fixed annual percentage. However, those laws can’t respond to the sometimes complex conditions that drive residential rental rates in the free market, such as supply and demand or landlord expenses that don’t directly correlate with the CPI or increase linearly.
If landlords can’t increase rents to cover expenses, they may need to lay off employees, pay employees below-market rates, or cut amenity or maintenance expenses. So, while tenants in rent-controlled units might not experience rent increases commensurate with the economic conditions, they will likely receive fewer services and amenities for their money.
Rent control laws also can disincentivize landlords from investing in property improvements, which require a significant capital expense outlay that can’t be supported by rent increases. Although tenants might not experience substantial rent growth, over time, their rental units become outdated and may require significant repairs.
Even where rent control laws allow rent increases to pay for capital improvements, to prevent drastic rent increases, the laws often require the landlord to spread those costs over several rental years rather than allowing the market to determine rental rates based on the unit's quality. However, contractors won’t agree to be paid over several years, so landlords must pay for capital improvements when the work is performed. So landlords may decide to defer needed capital improvements. Tenants will continue to pay low rents, but the quality of their housing will continue to decline.
In addition, tenants in rent-controlled units also may find themselves "trapped" in housing that is “ill-suited” for their needs. For example, as a tenant’s family size grows, a larger apartment might better meet their family’s needs. For example, the two-bedroom, one-bath apartment that was perfect for a couple with one child may be inadequate for a family that has grown to include two adults and three children. However, if, due to rent control, the couple is paying below-market rent on their two-bedroom apartment, they may decide they cannot afford a market-priced three-bedroom home even though it is better suited for their larger family.
Rent Control Can Lead to More Evictions and Housing Scarcity
Rent control may reduce landlords' flexibility when dealing with tenants facing financial challenges. It's expensive to evict a tenant and prepare an apartment for a new one, so landlords usually have an incentive to work out payment plans for tenants who get behind on rent. However, most rent control laws do not prohibit landlords from evicting tenants who don't pay rent, and many allow significant rent increases when a unit is vacated. So, landlords are incentivized to evict non-paying tenants and replace them with new tenants at a higher rental rate, rather than working out payment plans to keep tenants in their homes.
Rent control may increase scarcity and make it more difficult for people to find housing. Although rent control laws often don’t apply to new construction, they create downward pressure on market rents, which limits financial prospects for new rental properties. So, developers may be disincentivized from adding new rental units that must compete with rent-controlled units.
In locales where rent control applies only to low-income housing, developers who don't want to compete with rent-controlled units may not want to build new affordable units. Existing landlords may remove housing from the rental market entirely by converting lower-rent apartments to owner-occupied condominiums.
Rent Control Can Devalue Real Estate and Reduce Tax Revenue
Landlords must pay income tax on their net rental income. Rent control puts downward pressure on revenue, even as expenses skyrocket, resulting in reduced net income for landlords. And if landlords have less income, they will pay lower income taxes.
Further, most investors value real estate by applying a market capitalization rate (the percentage return they want from an investment with that level of risk) to the real estate’s net income. So, when net income decreases, the real estate’s value declines. When the property is sold, the landlord will have fewer capital gains and recaptured depreciation, which also results in lower income taxes.
Rent control also can reduce real estate tax revenue. Real estate taxes are based on the market value. So, when real estate's value declines, landlords may seek and obtain a reduction in their property's assessed value, which reduces real estate tax revenue.
Perhaps the effect of these tax decreases isn’t huge on the government as a whole, but when tax revenue doesn’t keep up with inflation, government programs get cut. The government may respond by increasing real estate tax rates. But if taxes increase, it fuels further reductions in property values by increasing landlords’ expenses, and the cycle starts again.
Conclusion
Rent control may appeal to voters by keeping rents low. However, as shown in the Petra case, rent control laws cannot replicate market rates.
Rent control laws interfere with the real estate economic cycle. A complete discussion of the real estate cycle is beyond the scope of this article. However, because it is based on the free market and competition, the real estate cycle organically addresses increases in market rents by adding supply.
When the market determines rents, landlords that charge too much won’t be able to find tenants for vacant units. While there is some "stickiness" in that it's costly for tenants to move, when tenants can find significantly lower rents elsewhere, they will move. As tenants move, the landlord's vacancy rate will increase. Eventually, that landlord is forced to lower rents to the market rate to address the high vacancy rate and lower revenue.
On the other hand, as market rents increase and vacancy rates go down, developers are incentivized to construct new housing. That new housing adds rental units to the market, which increases supply and puts downward pressure on market rents.
In the Petra case, market rental rates offered by housing vouchers were allegedly higher than those permitted under rent control laws. The result, according to DC’s allegations, was discrimination based on source income in favor of tenants with vouchers, so the tenants who rent control laws were designed to protect were shut out from housing.
© 2025 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality.
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