When the Biden administration laid out a suite of plans this week to address housing affordability, it added a bold update to previous proposals — and sent the housing industry and the economics world buzzing.
The White House called on Congress to pass legislation giving “corporate landlords” — defined by the White House as those with over 50 rental units — a choice to cap annual rent increases on existing units at 5% annually or lose federal tax breaks based on property depreciation.
The proposal is expected to go largely unaddressed this year, with Congress in campaign mode. But public reaction has been lively.
Tenant organizations and progressive leaders generally allied with the administration’s economic team cheered the news. Yet a range of economists, Wall Street analysts, real estate groups and landlord associations responded with forceful critiques, assailing the limits as counterproductive.
“Increasing the supply of affordable rental housing nationwide — not politically motivated and self-defeating rent control proposals floated during election campaigns — is the best way to alleviate affordability constraints for renters,” Robert Broeksmit, the president of Mortgage Bankers Association, said in a statement.
The policy would affect about 20 million units in the country, roughly half of all rental properties.
Senior administration officials responding to questions about unintended consequences — like disincentives to build housing — noted that in addition to exemptions for new construction, the proposed caps would be in place for only two years. That, they argue, would aid tenants until more units are built.
The administration initiative comes as surveys indicate growing public concern about the cost and availability of housing for renters and first-time buyers.
Rents have surged 26% nationally since early 2020, according to a recent report from the Joint Center for Housing Studies at Harvard University. That increase has exceeded overall inflation. In 2022, a Harvard report found that 50% of all U.S. tenants, a record high, were “cost burdened,” spending more than 30% of their income on rent.
The White House has undertaken previous efforts to increase housing supply. In 2022, the Transportation Department set up grant programs worth about $6 billion designed to award more dollars to jurisdictions that have deregulated zoning and land-use policies to allow more housing.
President Joe Biden’s 2023 fiscal year budget proposal called for 2 million new units with the same logic: States and localities that reduce constraints to building more housing would receive tens of billions of extra federal funding for development in return.
And the administration backed bipartisan legislation this year to expand the largest federal subsidy program for developers of affordable housing, the low-income housing tax credit. The bill was approved by the House but did not come to a vote in the Senate.
But for economists dedicated to a tight focus on relieving shortages of shelter, government caps on rent is taboo.
Economists of various ideological leanings cite years of research showing that aggressive rent control policies have often backfired, protecting renters from being displaced but failing to reduce overall prices in many cases for new tenants.
Jay Parsons, a housing economist at Madera Residential, a property investment company, called the White House’s rent cap exemptions for new housing development “an empty promise.” He specifically warned, “Look at New York, where rent control has been revised to ‘recapture’ units previously exempt from rent controls.”
(New York is contending with a particularly dire housing shortage, though some researchers also put a hefty amount of blame on restrictive local permitting processes.)
There is an industrywide fear that limited rent stabilization rules, once enacted, inevitably expand to cover more units, hampering profits and limiting construction.
At the same time, some economists and developers contend that there is plenty of room for nuance in the matter — with the policy details of tenant protections, including their degrees of magnitude, mattering the most.
“Everyone on all sides is getting too worked up with their blinders on,” said Paul Williams, executive director of the Center for Public Enterprise, a think tank focused on increasing the public sector’s capacity to fund and build infrastructure. “No one wants to strike a balance.”
Moses Kagan, a co-founder and partner at Adaptive Realty, a multifamily development and property management firm in Los Angeles, argued that “most deals in most markets will look pretty good” for large landlords like his firm, even with a brake of 5% on annual rent growth.
Many real estate investors put their money in projects that are expected to be profitable with annual rent growth assumptions below that rate.
Nevertheless, some economists sympathetic to using government carrots and sticks to limit price gouging, such as Christopher Clarke, an assistant professor of economics at Washington State University, have made the case that 5% per year may still be too low a ceiling for rent growth.
The most vigorous support for the White House’s rent cap plan has come from liberal organizations focused on economic justice issues.
Rakeen Mabud, chief economist at Groundwork Collaborative, a progressive advocacy group, said it “simultaneously checks the exploitative behavior of corporate landlords, stems the upward pressure that housing puts on overall inflation, and most importantly, helps address the skyrocketing cost of housing for families around the country.”
Many in housing development research hope that this latest debate will lead to bipartisan conversations in Congress next year about ways to encourage, subsidize or directly finance more housing.
“The piece of the puzzle that has yet to be addressed is financing constraints,” Williams of the Center for Public Enterprise said.
A report by the center detailed how “a national housing construction fund” could help solve the housing crisis for renters overall and for prospective first-time homebuyers, who have been hurt by the scarce sales inventory.
The fund would create a national market for construction financing loans indirectly backed by the federal government’s buying power. The key idea is that federal backing would provide safety for investors and lower the cost of credit, as it does in the residential mortgage market.
That security, Williams and his co-author Yakov Feygin say, would allow the math to add up for lenders providing financing for housing development — whether they are banks or state housing agencies. The end goal is that funding would flow much more freely, even in uncertain economic cycles.
It is the sort of market-oriented policy intended to win over people like Jonathan Woloshin, a strategist at the bank UBS who tracks large firms in the U.S. real estate and lodging sector. He panned the White House proposal on rent caps in a note as soon as it was released.
“If the economics of building additional shelter are artificially capped and not reflective of the economics and risks of development,” Woloshin said, “then developer capital will go elsewhere.”
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