The recent elections for the Boston City Council focused on the high price of housing in the city. The median price of a single-family home has risen more than 75 percent over a decade and now stands at $615,000. This is nearly triple the nationwide median price of $225,000. Median rents in Boston have also soared, going up 60 percent in 10 years. This has led to renewed focus on rent control as a solution to the housing crisis. A move to rent control in Boston would follow in the footsteps of recent rent control initiatives in California, Oregon, and New York City.
While housing costs in Boston are a problem, rent control is not the answer. Economics research shows that rent control will benefit some renters already in place, but will lead to a reduced supply of housing that will ultimately make housing less available for Bostonians — and less fairly distributed.
Perhaps the best example of the problems with rent control come from the experience of San Francisco. In 1994, the city expanded its rent control program to include a set of buildings that had been excluded based on size of the building and year of construction — but left other similar nearby buildings to be priced under the free market. This law had the intended effect of reducing the exit of existing tenants from the newly rent-controlled properties.
But the unintended consequences were costly. Landlords of the newly rent-controlled properties responded by removing them in large numbers from the rental market through condo conversation and other redevelopment. Over time, the result was a dramatic 15 percent reduction in the rental supply of small multi-family housing — which led to higher rents over the entire city. Moreover, since many of the rental properties were converted to higher-end owner-occupied condos, the housing stock became more elitist — further creating barriers to a thriving middle class in the city. Taken together, rent control increased, rather than decreased, the gentrification of San Francisco.
Looking at the Bay Area today, it’s clear rent control does little to help low- or middle-income families. The residents of these rent-controlled units had 8 percent higher income than those in noncontrolled housing. They were also 60 percent less likely to be a minority.
So if rent control doesn’t solve the problem, what does? The answer, unfortunately, is the one that economists have pointed to repeatedly for decades: reduce regulatory barriers to increasing the supply of housing and lowering prices. For example, a common restriction used in the Greater Boston area is minimum lot sizes — sometimes of an acre or more. One recent study found that imposing a minimum lot size of an acre per housing unit lowered new construction by 50 percent and increased housing prices by 12 percent. This is the effect of just a single type of regulation, of which there are many. Research collecting and aggregating all these complex policies into a single index to compare across cities shows that Greater Boston is the second most land-use regulated housing market in the country. Easing these restrictions to allow more new housing supply is the key solution to the housing affordability problem.
If the solution is that simple, why hasn’t it happened already? One possible answer is also quite simple: Existing residents of neighborhoods are usually opposed. A concern we often hear is that more supply will raise the prices that residents pay for housing through gentrification. Of course, this is not consistent with economic theory or evidence. Indeed, most of the evidence shows that adding new developments lowers surrounding housing prices — and certainly lowers the total cost of housing in the city.
But these concerns persist, and they place repeated barriers to new development. So we suggest not just relying on economic evidence but putting in place an explicit mechanism to protect existing renters from the risk of a “gentrification premium”: rental insurance. Under such a plan, neighbors around a new development would receive a monthly check from the government that compensates them partially for the rise in rents in their neighborhood above expectation. This check would be targeted to low- and middle-income families to ensure that housing policy changes aren’t just furthering gentrification.
Families could use this check to offset the higher neighborhood rents or could use it to compensate them for moving elsewhere. Either way, families are protected from the potentially higher costs of living in their neighborhood — without creating incentives for individuals to stay in place and for landlords to remove property from the rental pool.
To solve the problem of high housing prices in Boston, we need more supply. But this means creative solutions that can help smooth the way to removing barriers to supply. Rental insurance could be part of the solution.
Rebecca Diamond is associate professor of Economics at Stanford University. Jonathan Gruber is a professor of economics at MIT and author of “Jump-Starting America” (with Simon Johnson).