President Joe Biden unveiled a plan to lower housing costs. He recommends nationwide rent control, which is a well-documented way to make the housing market worse for everyone.

Biden’s plan seeks to curb rising housing costs by imposing a 5% cap on rent increases for landlords with over 50 units, while exempting new housing from this limit.

The fundamental flaw with rent control is that it misinterprets the mechanics of the housing market. The best way to achieve affordable housing is to have a market of competitive pricing, where prices reflect actual supply and demand. Rent control, on the other hand, sets prices based on arbitrary political goals, not market realities.

What happens when landlords and developers compete in a free market? They offer quality housing at affordable prices to attract tenants, adjusting to the ebb and flow of supply and demand. This dynamism ensures consumers are well-served, and producers are motivated to maintain and improve their properties to stay profitable. In contrast, rent control imposes a rigid price cap that remains unchanged despite fluctuating market conditions, leading to an inefficient allocation of resources.

This is not mere speculation; the failures of rent control have been thoroughly documented. A recent analysis of 206 studies on rent control found overwhelmingly negative consequences. Rent control may lower costs for tenants in rent-controlled units, these studies show. But it also decreases housing construction, raises rents in units not covered by rent control, limits the mobility of people in rent-controlled units, lowers the quality of rent-controlled units and misallocates resources.

Biden’s plan could be seen as acknowledging some of these common pitfalls by explicitly exempting new construction. This could avoid the problem of discouraging new development. The plan’s vagueness about how the exemption will be implemented, however, makes its impact unclear. Nonetheless, history offers some insight: California’s 2019 rent control law exempted newly constructed homes from rent control for the first 15 years, and a recent study of rent control policies with similar new housing exemptions shows unpromising results. It revealed two significant long-term effects. Instead of incentivizing new housing, the exemption merely delayed the problem, with a 15% decrease in housing supply coming over time. Even more concerning, the study found that rents in the city increased by 5.1%. This demonstrates that while rent control aims to make housing more affordable, it often leads to shortages and, ironically, higher overall rents when exempt housing is taken into account.

The reason various government mandates fail is that they do not address the issue at its root. According to research from the National Bureau of Economic Research, before the late 1970s, whenever housing demand and prices rose, the market responded by building more homes, which helped stabilize prices. Since the 1970s, however, this dynamic has changed. The housing supply has become less responsive to rising demand, meaning that even as prices increased, new home construction did not keep pace. The fault lay in increased land use regulations during that period, which made providing housing increasingly difficult.

The California history shows why rent control is unlikely to solve the housing crisis. If the real problem is the lack of housing supply, rent control does not address the underlying issue. Instead, it only serves to make everything worse for everyone.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.