Housing Bubble 2: Return of the Ugly

California already has state wide rent control. It’s fixed to 5% max plus up to an additional 5% based on annual inflation. So in a year where inflation is 2%. Rent increases are limited to 7%. In a year with 8% inflation, rent increases are limited to 10%. This often goes by a different name “rent abatement” because it is not explicitly stopping all rent increases.

Now with that out of the way. Historically rent control is bad because it creates low-profit areas for landlords and builders and developers ultimately move elsewhere, starving already developed cities and communities from more growth and locking in whoever already lives there. Historically rent control in cities studied has been limited to specific cities, neighborhoods, or even one off buildings and never to a full state or country.

Once you acknowledge that, what happens when you increase the radius of rent control to all areas equally? Secondly, what happens when you pull other levers to incentivize development?

In California, controlling for reduced development is also being done; in two ways even. First, new developments are exempt from rent control for 10 years. Second, the state is funding development with additional grants and tax breaks.

As this has not been done to this scale before we are still learning what’s happening in real time. But the early results are good. For example, the cost of rent in California has slowed, but the amount of development has not. We are seeing states like MA continue to have housing costs spike while CA is slowing down by comparison.