I often hear from people that I normally agree with on other issues that supply and demand don't apply when it comes to housing. I don't know why people who study housing all say one thing, and a corner of the advocacy space says another. I do have experience with Berkeley housing markets (albeit from the 1980s) and that soured me on rent control as the sole method to manage scarcity of an essential good.
Berkeley has long had a rent control ordinance and a rental registry to ensure compliance. Jeff Baker wrote some Python code to visualize the public data and it is fascinating. As a scientist, I always like to see real world data compared to idealized models of how things work.
The Rent Board of Berkeley, California maintains an Online Rent Registry with information about apartments and other dwellings under regulation by the city's rent control laws. The Registry lists the initial rent of a rent-controlled dwelling, and all of the subsequent annual adjustments.
The Registry tells us a bit about the city's rental market over time. Using the initial rent of tenancies still active at the present, we can deduce the market price of apartments in the year the tenant moved in. The chart below gives the median initial rent each year 1996-2022, adjusted for inflation to 2022 U.S. dollars, for tenants who are not listed as owners, managers, or any other special class.
Go to his site and read his analysis.
One surprising thing I learned is that, though rents in rent-controlled units are generally lower than in newer buildings not subject to rent control, they do rise unevenly instead of monotonically rise the maximum amount allowed. Rent-controlled rents plateau during recessions.
The population of apartments in the above figure are all older buildings, due to the nature of rent control in California. The rents shown are significantly below the advertised rents of the same size apartment in a new building in Berkeley. For example, some new buildings are currently advertising 1-bedroom apartments for around $3000 and 2-bedroom apartments at about $4200. The rents in old, regulated buildings are discounted by about 1 bedroom.So he took the initial rents for newly-signed leases, and deflated them by the CPI from BLS All items in U.S. city average, all urban consumers, seasonally adjusted using a constant 2022 dollar (when I think he wrote/started this project).
There's a lot of hand-wringing about how today's building code requiring two staircases results in mostly studios and 1-bedroom apartments with a few 2-bedroom units on corners. So, new construction is heavily weighted towards smaller units. Not too great for families, but fine for 1-2 person households.
Older units subject to the most stringent rent control have to report the new leases within 30 days of signing the lease. Newer buildings only have to report annually, Each dot represents the average rent for initial leases signed in one month. Note that the dots are really tiny, meaning hardly anyone moves. In a university town of 100,000+ population, less than 20 people move into 1-BR rentals.
Remember, older rent-controlled units have to report monthly. Newer buildings can report annually. The bigger circles are from the months that the newer buildings reported en masse, so the average new rents for those months are higher. In August 2023, a whopping 785 new leases for 1 BRs were signed.
Notice how the small circles are falling faster than the big circles?
What's going on here? I heard that building new, expensive apartments makes rents in older units more expensive!
The data in Berkeley shows that new, expensive apartments makes rents in older units decline! Score 1 for the housing economists who say that supply and demand applies to housing.
There are fewer new 2-bedroom apartments because of the International Building Code (IBC), but the same effect is noticeable in the 2-BRs.
In Dec 2023, 18 new 2BR leases were signed for an avg of $2529.
In Aug 2023, 275 new 2BR leases were signed, which is less than the 785 new 1BR leases for the same month. (Thank-you IBC.)
IBC hardly ever results in new 3 BR homes. But, when you have too few smaller apartments, people move in with roommates and outcompete families with children for the larger units. Even without building new 3 BR homes, just allowing people living with roommates who would rather live on their own (or in smaller households with fewer roommates), causes the rent for larger homes to stop sharply rising.
In June 2017, 19 new 3BR leases were signed for an avg of $4534.
In June 2023, 110 new 3BR leases were signed for an avg of $4728.
So, rent control provides certainty for incumbent renters, but doesn't allow them mobility if they need a larger or smaller unit. It also makes it impossible for new entrants to the market to find housing.
Creating new homes, even expensive ones (IBC is expensive to comply with), can lower the rents on older units.
The economists were right in this instance.
