Key Details:
- Last week’s announcement of Biden’s rent cap proposal has provoked a strong reaction from housing industry leaders who argue it would harm renters in the long run by exacerbating supply shortages and reducing incentives for new housing developments.
- We’ve rounded up responses from Notorious R.O.B., the Nevada REALTORS®, National Association of REALTORS® president Kevin Sears, Redfin’s Research Lead Chen Zhao, and the Housing Solutions Coalitions.
- With President Biden announcing his decision to drop out of the race, it’s anyone’s guess as to how much support the Biden-Harris Housing Plan will receive in Congress.
Last Tuesday’s White House announcement of President Biden’s rent cap proposal has gotten quite the reaction from real estate industry leaders—and probably not the one expected.
The 5% rent cap targeting corporate landlords (though making an exception for new construction and rental units currently going through renovation) is just one part of new legislation proposed by the Biden administration to improve housing affordability.
He announced the legislation on Tuesday during his campaign stop in Nevada.
The problem? From what several housing insiders are saying, a rent cap would ultimately hurt renters rather than provide any long-term relief.
Now that Biden has officially dropped out of the race, it’s anyone’s guess as to how much support the Biden-Harris Housing Plan will receive in Congress.
We’re highlighting some of the strongest reactions on the rent cap proposal, including one from the Nevada REALTORS®.
Biden’s argument for 5% rent caps on “corporate landlords”
From President Biden’s Nevada statement unveiling his plan:
“I’m sending a clear message to corporate landlords: If you raise rents more than 5% on existing units, you should lose valuable tax breaks. Rent is too high, and buying a home is out of reach for too many working families and young Americans after decades of failure to build enough homes. I’m determined to turn that around.”
For context, roughly 22.4 million renter households are classified as “cost-burdened,” according to the Joint Center for Housing Studies at Harvard University. That number has grown by two million in just the past three years, hitting a record high.
“Cost-burdened” means these renters are spending more than 30% of their income on rent and utilities.
Unfortunately, as many industry leaders are now arguing, the consequences of limiting rent growth to an arbitrary rate is more likely to hurt renters than to help them.
And that begs two questions:
- Who was in the room when this policy was decided?
- Who wasn’t in the room that should have been?
Because, for starters, we know the folks at Nevada REALTORS® were not involved. Neither was the National Association of REALTORS®.
In fact, so far, the only reactions from industry leaders have been critical of the proposal.
Redfin Recalls Berlin’s Failed Experiment
Let’s start with Redfin—the folks behind one of the key monthly rental reports we cover here at BAM (in blogs as well as on the Hot Sheet)
Research Lead Chen Zhao’s published the following statement on Biden’s rent cap proposal.
Zhao draws from her knowledge of the U.S. housing and rental markets to explain how a rent cap would ultimately worsen housing affordability.
Caps on rent hikes are appealing politically to renters in the short term because they limit rent increases. But they only make housing affordability worse in the long term, because they exacerbate the supply shortage…
If you’ve been tuning into the Hot Sheet, you know we’re not big proponents of policies that focus on lowering the bar to homeownership rather than offering real solutions to the housing supply shortage.
So, we would agree with Zhao’s statements alluding to the same:
The best way to address the lack of affordability in both the for-sale and rental markets is to build more housing units. For developers to be incentivized to build more housing, they need to feel like they would make a profit. If rent increases are capped below what supply and demand would otherwise dictate, then builders have little incentive to build more housing units.
The result of caps on rent increases is lower rent in the short term, but a worse housing shortage in the longer term, which would worsen affordability. Experiences like that of Berlin, Germany should be instructive for the U.S.
Here, Zhao is referencing the one-year results of Berlin’s experiment with rent control.
Another caveat with Biden’s rent cap proposal is tied to its exception for new construction and units undergoing “substantial renovation or rehabilitation.” The problem is the omission of any details as to how long those exceptions will hold. What’s new construction during the first year will eventually be numbered among “existing” supply and will likely fall under the new rent cap.
Also, the exception for landlords with fewer than 50 units essentially punishes investors with 50 or more, discouraging them from investing in new construction or in units currently undergoing renovation or repurposing, since these larger investors won’t be able to charge enough to offset the costs of purchasing and maintaining more rental units.
And while nationwide rent growth is largely flat, some markets—especially in the Northeast and Midwest—are seeing rent growth of more than 5% year over year. Capping annual rent growth at 5% in these markets would effectively inhibit the growth of supply, ultimately driving up costs for area renters.
As for Biden’s other proposals—the ones aimed at increasing supply—Zhao considers them steps in the right direction but doesn’t hesitate to point out where they falter.
President Biden’s other proposals, which include using federal land to build more housing units and giving grants to communities to build them, should help increase supply. But they don’t go far enough to entirely solve the supply problem because they wouldn’t create enough new units. The federal government could make a much bigger difference if it were to pressure localities to allow for denser housing. That pressure can be applied by tying federal funding to local regulation, similar to how the rent cap proposal is structured.
Statement from NAR president Kevin Sears
The National Association of REALTORS®, issued a statement from its president Kevin Sears on Biden’s rent cap proposal shortly after the White House published its fact sheet.
NAR opposes misguided attempts to cap or control rental rates. Price controls may seem appealing, but they have backfired on local governments and harmed the people we need to help the most. Developers are reluctant to build in areas where the government imposes rent controls on new buildings, and these policies actually decrease the supply of low- to mid-range housing units.
In other words, the rent cap would hurt the very people it’s supposedly meant to help. While it doesn’t go as far as Berlin’s five-year rent freeze, it still hobbles supply growth and discourages landlords from investing in properties for lower-income renters, leaving these renters with fewer (desirable) rentals to choose from.
Another flaw industry leaders are seeing in Biden’s rent cap is its overreach. And Sears isn’t the only one calling out the current administration for an “infringement upon private property rights,” specifically the right of property owners to set rents at fair market rates.
The Housing Solutions Coalition draws on decades of research
Another statement critical of Biden’s rent cap proposal comes from the Housing Solutions Coalition, which includes the Mortgage Bankers Association (MBA), the National Apartment Association, and the National Multifamily Housing Council:
“Decades of academic research from across the United States and around the world clearly show that rent caps—more commonly known as rent control—reduce the supply of available housing and fail to target those renters who need help the most while simultaneously harming other residents and the communities they reside in. Rent caps hurt renters and communities.”
Nevada REALTORS® speaks out
In his July 18th Substack, Notorious R.O.B. brought our attention to a news article on the Nevada REALTORS® reaction to the Biden-Harris Housing Plan.
Brandon Roberts, President of the Nevada REALTORS®, gave the following statement:
“Rent control is a flawed policy that has failed to work in communities across the country. Studies have shown that rent control leads to the deterioration of housing units because landlords who are barely breaking even or losing money cannot afford to repair or improve them. Nevadans deserve better.
“The Biden Administration’s plan to release land in Southern Nevada for the development of government-subsidized housing for low-income households does not address the struggles of hundreds of thousands of hard-working Nevadans who don’t qualify for HUD housing or who live outside the Las Vegas metropolitan area.
“The Nevada REALTORS® has consistently supported supply-side solutions for our housing crisis that benefit all Nevadans. We have long called for the release of federal land as the best way to spur public and private economic development across the state, including creating more attainable housing for the use and benefit of every Nevadan.
“The Nevada REALTORS® also support the right of all Nevadans to own property free of unreasonable and unhelpful government controls.”
Jared James: “I think the focus is wrong, here…”
Jared James also shared his take on Biden’s proposal in a green screen video:
I think the focus is wrong here…If you’re going to put a cap on rents going up by more than 5%, are you going to cap how much insurance goes up? God knows you’re not going to put a cap on how much taxes go up, which is a huge reason rents keep going up, because people’s property taxes keep doubling and going up. There’s no cap on that. And ultimately, the role of the investor, they need to make money. If they’re not going to make money, they’re not going to continue to invest. And you really have to look at what’s the role of the government, right? This is supply and demand. This is free market. Is it the government’s role to be capping what you can and can’t do?
And I also think we’re focused on the wrong thing here. We’re looking at investors like they’re the bad people when they’re the ones putting the money into the economy. And I saw that Biden came out and said, ‘I’m sending a clear message to these investors,’ as if they’re the bad people. And the problem is you are sending a message, and you’re telling them to stop investing with us. And that is a problem.
What are the odds this actually gets through Congress?
There’s good reason to doubt the Biden-Harris Housing Plan (including the rent cap proposal) will survive Congress.
With the presidential election less than four months away, the odds of this becoming law are slim to nonexistent as lawmakers (particularly those not favorably disposed to this bill) are more likely to set it aside until after the election.
Now that Biden has withdrawn from the race, Democrats will be focused on choosing his replacement. And that replacement could have a very different approach to addressing the housing shortage.
Stay tuned for updates as we learn more.
