What's the Solution for Rising Rent Prices?

It shouldn’t be a surprise to learn that rent prices are still rising consistently, across many areas of the country. As of March, the cost of rent was, on average, 3.7 percent higher than it was last year (according to the Labor Department, as reported by Realtor.com). Average wages grew about 3.2 percent during the same period, meaning rent is growing faster than wages can keep up with it.

It’s estimated that there is currently a shortfall of 2.6 million housing units for Americans with low to moderate levels of income. Fast-growing urban areas are hit especially hard, with exceptionally high demand and faster-growing rent prices than wages.

So what’s the solution? If you’re left-leaning, you might suggest the development of rent control, regulating the amount of rent a landlord can charge or restricting how much rent can increase from year to year. However, there may be some inherent problems with this approach, and if we’re going to cultivate an economy where everyone can thrive, we need a more comprehensive solution.

Buying vs. Renting

First, let’s consider the fact that many people currently renting could feasibly afford to buy a house -- and in many cases, end up paying far less in a monthly mortgage payment than they’re currently paying for rent. The two inhibitory factors preventing more people from buying houses are an inability to be approved for a loan (due to a low credit score or bad credit history), and not being able to save enough for a down payment. The former issue is difficult to navigate, since banks do need some reassurance that their loans will be repaid. The latter issue is directly tied to rental prices; if a tenant can barely afford rent, they won’t have much (if any) extra money each month to put toward buying their own home.

Fundamental Issues with Rent Control

Like most government policies intended to help the poor, rent control can actually hurt the poor long-term. For example, in San Francisco prior to 1995, all small multi-family buildings (i.e., multi-family rental properties) were exempt from rent control. After 1995, only buildings built after 1980 were exempt. For some tenants, this was a positive change, helping them pay the bills even as rental prices in their surroundings began to increase, but for others, this was counterproductive.

Some landlords were incentivized to convert rental units into condominiums as a way to circumvent the rent control restriction. Others resorted to demolishing old buildings on valuable property and rebuilding new ones that would be exempt. Both of these strategies forced tenants to move out, and reduced the total supply of rental units, which in turn, increased rental prices further (thanks to basic economic supply-and-demand effects). Moving is stressful, expensive, and in some cases traumatic (if you’re being forced to move on short notice), meaning that rent control had a net negative effect on many members of the community that were the most vulnerable.

There’s an important bottom line here, and it’s one that applies to almost any measure of economic regulation. Attempting to improve the economy by introducing new regulations and/or penalties on landlords, owners, or top earners will inevitably drive them to use tactics to circumvent or avoid those penalties. This new set of strategies usually does more harm than good, reducing opportunities for those not already in a privileged position.

Supply and Demand

Housing and rental prices are affected by supply and demand, like any other economic system, and that needs to be worked into any law, regulation, or strategy meant to relieve low and moderate earners. If rent prices naturally rise, it’s because more people are willing to pay those prices for housing in the area. If rent prices are too high to be sustainable, more people will leave, reducing demand and allowing prices to fall back down.

Interfering with this balance can be counterproductive, since it typically has a way of working itself out. Instead, we need to play to its strengths.

Introducing New Incentives

So what are we supposed to do about a situation where low and middle-income Americans can’t afford housing in the area in which they work? We can’t always rely on supply and demand to even things out on their own.

The solution is to provide more incentives for wealth creators and landlords to provide opportunities that allow these people to thrive. Giving tax breaks and rewards to landlords for building low-cost housing in high-demand areas, or similar measures, would naturally encourage more construction and more economic opportunities for low-earning populations. There isn’t a single or comprehensive way to do this, but it’s the best solution we have to preserve as many opportunities as possible for all rungs of our economic ladder.