Harvard Law Review
(c) 1988 The Harvard Law Review Association.
Harvard Law Review
101 Harv. L. Rev. 1835
LENGTH: 13252 words
NOTE: REASSESSING RENT CONTROL: ITS ECONOMIC IMPACT IN A GENTRIFYING
... As a result of
gentrification, many American cities have experienced a sharp decline in the supply of
housing for low- and middle-income families, although demand for such
housing continues to rise. ... The proposal does not include vacancy decontrol, which
would allow the rent to rise to market level whenever a tenant moved, because
decontrol encourages tenant harassment and provides disincentives for landlords
housing units satisfactorily. ... By maintaining rental prices at a reasonable level
and by preventing direct displacement, Rent Control will slow the reduction in
housing currently occurring in gentrifying neighborhoods. ... Moreover, critics
suggest that rent control diminishes the
future supply of new
housing because the mere prospect of limits on rental price chills the construction of
housing. ... The imposition of rental price controls undeniably lowers landlords'
profits, but several aspects of the Rent Control proposal together prevent
investors in the
housing market from reducing the supply of existing
housing in response. ... This incentive is exacerbated when the landlord plans to
sell the building later as individual condominiums. ... This argument assumes
that in the current market people use
housing efficiently, by moving to smaller apartments or doubling up as rents rise,
whereas under rent control, tenants respond to lower rental prices by failing
to conserve space. ...
[*1835] As a result of
n2 many American cities have experienced a sharp decline in the supply of
housing for low- and middle-income families, although demand for such
housing continues to rise. The resulting increase in rents has left the low-income
n3 and often displaced or homeless. Rent control, typically proposed as a
solution, frequently meets with impassioned opposition. Many of the attacks on
rent control center on its economic effects and assert that rent control is
both inefficient and counterproductive.
This Note challenges the economic arguments against rent control by exploring
the impact of rent control in a gentrifying market. Part I describes a
housing market. Part II discusses the type of rent regulations that would ameliorate
the problems caused by
gentrification. Part III challenges traditional economic criticisms of rent control and
demonstrates that such criticisms are inapposite in a rapidly gentrifying
market. The Note concludes that, in such a market, a rent control scheme
serves as an effective partial response to the low-income
I. AN EXAMINATION OF THE GENTRIFYING
In the past, the primary source of urban
housing for the poor has not been new construction.
n4 Replacement rents -- the rents required
[*1836] to support new construction -- are significantly higher than the costs of
housing services in existing structures.
n5 Without government subsidies, the construction of new low-income
housing units remains unprofitable.
In the absence of new construction, low-income
housing becomes available to the poor in traditional, nongentrifying
housing markets through a filtering process.
n7 As the quality of
housing declines with age, the demand of the higher-income households
"cannot be satisfied by even the best of the standing stock."
n8 This affects the production and allocation of
housing in two ways. First, the demand for high-quality
housing at the upper-income level stimulates new construction of luxury
housing no longer desired by upper-income residents filters down to lower-income
consumers. As upper-income occupants vacate existing units, the vacancies
increase the supply of
housing available for the next income tier, thereby depressing prices. Middle-income
families then move into the formerly upper-income homes, and start the process
anew. As renters at the lowest level of quality and price
"filter up" in the
housing market, the least desirable units at the end of the
housing chain are abandoned. In this market, then, different income classes generally
do not compete for the same
In gentrifying cities, however, several economic factors have combined to
change the demand and supply of
housing. As a result, the filtering model no longer accurately describes
housing production and allocation. In the gentrifying market, upper-income groups
displace lower-income groups in existing
housing stock, instead of building new homes or moving into homes formerly occupied by
wealthier families. The impetus for this
"reverse filtering" lies in economic and demographic trends.
n10 During the 1970's and 1980's, the aggregate
[*1837] demand for
housing increased as the
"baby boom" generation began reaching peak household-formation years
n11 and as average household size declined.
n12 As new construction costs rose, and as other factors made new suburban homes
less desirable than existing urban homes, families seeking new homes no longer
looked to newly constructed
n13 Land use controls,
n14 such as exclusionary zoning ordinances, that either directly prohibited
multifamily and other moderately priced
housing developments or made development of such units economically infeasible
n15 raised the cost of most new single-family homes beyond the means of the middle
n16 A number of other factors, such as government subsidies and changes in the
makeup of families, further reduced the desirability of suburban relative to
[*1838] Because existing urban
housing has become more desirable to middle- and upper-income families, these families
have begun to bid for units rather than buying new ones. In gentrifying
neighborhoods, the higher-income newcomers have more money to spend on
housing, allowing them to outbid current residents.
"reverse filtering" process displaces lower-income tenants living in inner-city neighborhoods by
increasing the price of rental
housing and by depleting the supply of low-income apartments in two ways.
First, landlords have an incentive to convert their rental units to
condominiums for wealthier newcomers.
n19 This directly displaces low-income tenants and increases rental prices by
reducing supply. As wealthier consumers convert low-income rentals to
condominiums or luxury
housing, and as little new low-income
housing is built, the supply of low-income rental units decreases, driving up rental
[*1839] government subsidies supporting the only low-income
housing construction have declined greatly since 1980,
n21 these lost units go largely unreplaced.
n22 Second, even when apartments are not converted,
gentrification indirectly displaces tenants through rent escalation. As the average income
of families demanding
housing in a neighborhood rises, landlords raise the rents of existing tenants to
reflect the higher rents newcomers are willing to pay.
gentrification has sparked higher
housing prices, anticipation of even greater capital gains can generate explosive
price increases. In large measure, the basic forces of supply and demand, such
as population growth, employment, income distribution, taxes, interest rates,
and fuel and construction costs, determine
n24 In a market characterized by
gentrification, however, housing prices may rise more than these market fundamentals would predict.
n25 If investors expect demand to continue to propel
housing prices upward, they may engage in bidding that drives up prices and fulfills
their expectations. If they then revise their expectations to reflect actual
price behavior, they set the stage for another expectation-based price
housing market is more likely than other markets to generate price
"bubbles" because information about the
"fundamental" yield of
housing is difficult to obtain. Because
housing is a heterogeneous commodity, the cost of which reflects the prices of a wide
range of goods and services, consumers must rely on
"expert" opinions to estimate the value of potential purchases. However, these
experts, particularly real estate brokers, have incentives to create
expectations of future increases in order to make greater profits.
The increases in the price of
housing triggered by
gentrification and fueled by speculation represent economic rents attributable to land.
n28 The price of
housing includes the value of the initial capital investment, improvements, and
maintenance, and the value of land on which the
housing is located. In gentrifying cities, the rapid increases in the price of
housing have occurred in periods when capital and labor costs have remained relatively
constant. Instead, of being caused by increases in these costs the price
escalation reflects an increase in the revenues derived from the ownership of
n29 Land differs from other
housing price determinants because its supply is fixed, regardless of the price.
Thus, current demand and expectations of future increases in the value of land
determine the price completely, and any return on land is by definition
The higher rents caused by
gentrification and land speculation can exacerbate already large rent-to-income ratios for
poor tenants, resulting in an inadequate supply of food, clothing, and other
n31 Displacement imposes additional hardship.
n32 The luckiest of
[*1841] the displaced suffer only the economic losses of moving to other
housing, for which most pay higher rents.
n33 Others also suffer serious psychological harm when uprooted from homes and
neighborhoods with which they have developed strong ties.
n34 These detrimental effects are felt most severely by poor and elderly tenants,
n35 a disproportionate number of whom are displaced.
n36 Increased rents make it impossible for some urban residents to afford
housing. Forced to choose between feeding their families and paying the rent, many are
driven into the streets.
n37 More and more frequently, these
"new" homeless, who simply cannot afford
housing, include the most vulnerable members of society. Children represent the
fastest growing sector of the homeless population: five hundred thousand of the
estimated two to three million homeless in America are children.
II. NECESSARY ELEMENTS OF A RENT CONTROL ORDINANCE
This Note proposes a regulatory scheme combining rent control, a warranty of
habitability, eviction restrictions, a moratorium on condominium conversion,
and residential zoning restrictions.
n39 The term
"Rent Control" is used throughout this Note to refer to this full array of
housing regulations. Of course, some of these provisions already exist in various
jurisdictions; however, the full scheme is necessary to ensure rent control's
efficacy in a gentrifying market. This Rent Control proposal will prevent
displacement and ameliorate shelter poverty by allowing poor tenants to stay in
their units at approximately the current real rent.
[*1842] Under Rent Control,
n40 the rent level would be set to eliminate only increases in economic rents.
Thus, rent levels would reflect reasonable increases in capital and services.
Investors would be allowed a reasonable return on capital and full compensation
for maintenance expenses, but they would not receive as income that part of the
rent that reflects the scarcity of their
Rent Control would include additional provisions designed to prevent
circumvention of rent level regulations. Owners, for example, still might seek
higher profits by decreasing maintenance. A warranty of habitability would
prevent landlords from decreasing the quality of the
housing to recapture economic rents in two ways. First, landlords could raise rents
in response to increases in costs only if they had adequately maintained the
n42 Second, tenants would be able to withhold a percentage of the rent for
apartments that failed to satisfy the warranty of habitability or for
reductions in living space or services. The proposal does not include vacancy
decontrol, which would allow the rent to rise to market level whenever a tenant
moved, because decontrol encourages tenant harassment and provides
disincentives for landlords to maintain
housing units satisfactorily.
To prevent involuntary displacement, Rent Control would prohibit evictions in
the absence of good cause.
n44 However, the
housing regulation described would not be effective if wealthier consumers could still
outbid poorer consumers by purchasing former rental units that had been
converted into condominiums.
n45 Thus, the proposal would limit condominium conversion to prevent displacement.
[*1843] zoning restrictions would prevent landowners from switching from residential
to commercial uses in an attempt to achieve greater economic rents, and still
other safeguards could be used to prevent circumvention of the rent price
regulation and condominium conversion restraints.
The demand for
housing that cannot be met by the current
housing stock must be met by an increase in new construction. Thus, to provide an
incentive to build, the Rent Control proposal would exempt
housing built on previously vacant or commercial land from its provisions. This
exemption would not be available to landlords who demolished their buildings to
replace them with new
III. HOW RENT CONTROL WORKS IN A GENTRIFYING MARKET
This Part examines how the proposed Rent Control scheme would affect a market
with rising economic rent values fueled by speculative price bubbles and
gentrification. In a gentrifying market, lower-income tenants are directly displaced through
condominium conversion and are indirectly displaced by the rise in rents caused
by the resulting reduction in supply. Even without conversion, higher-income
individuals can bid up rents by increasing the demand for available units.
Taken together, these price increases often trigger speculative price spirals.
By maintaining rental prices at a reasonable level and by
[*1844] preventing direct displacement, Rent Control will slow the reduction in
housing currently occurring in gentrifying neighborhoods.
Traditional economic critiques of rent control fail on a number of grounds.
There is no proof that the Rent Control regime proposed will cause the
reduction in supply or allocational inefficiencies attributed to rent control
in other markets.
n49 The critiques are based on assumptions about the provisions for low-income
housing described by the traditional filtering model that do not hold true in a
gentrifying market. Moreover, some arguments assume inaccurately that the
current market is efficient. Third, economic critiques often focus simply on
rent regulation, which makes up only one component of the comprehensive scheme
described in this Note, or focus on a different type of rent regulation. The
omission or alteration of any one portion may critically undermine the
effectiveness of the proposal.
A. Supply Effects
The benefits of halting the decline of low-income
housing supply would be transitory if the imposition of rental price controls resulted
in a net long-run reduction in the supply of low-income
housing. According to standard economic analysis, rent control reduces the long-term
housing in three ways. First, traditional analysis argues that landlords may respond
to lower returns by abandoning their units.
n50 Second, it is claimed that rent control leads to a decline in
housing services, and ultimately supply, by giving landlords an incentive to maintain
their properties inadequately.
n51 Third, traditional economic arguments suggest that lower profits induce
landlords to convert rental units to more lucrative uses.
n52 Moreover, critics suggest that rent control diminishes the
future supply of new
housing because the mere prospect of limits on rental price chills the construction of
n53 According to this view, such a disincentive would be magnified in the market
housing, the provision of which is already less profitable.
[*1845] The imposition of rental price controls undeniably lowers landlords' profits,
but several aspects of the Rent Control proposal together prevent investors in
housing market from reducing the supply of existing
housing in response. Rather than chilling new construction, in a gentrifying market
the Rent Control proposal advanced in this Note is likely to
The Rent Control package permits landlords a fair return on their initial
investment in land and capital, and denies only subsequent escalations in the
rental price of land. Because Rent Control applies only to the
housing stock existing at the time of adoption, and because the long-run supply of new
housing is not affected by Rent Control provisions in any way, the proposal only
removes economic rents on a fixed supply of current
housing. The effect, then, will be a decrease only in price, not in supply.
n54 If investors were denied economic rents on all land, there would be no
incentive for landlords to reduce the supply of
housing over the long term through conversion, abandonment, or reduced maintenance.
Thus, because the only land under Rent Control that could not receive economic
rents is that which currently holds a residential structure, Rent Control
requires additional measures to ensure that the current stock remain.
Landlords cannot convert their existing rental property to other uses because
the Rent Control proposal directly prohibits condominium conversion and
conversion of the land to nonresidential uses.
n55 Moreover, because landlords are permitted a reasonable return above and beyond
costs and are denied only economic rents,
n56 they have no incentive to abandon the property. If a landlord continues to
operate a property, she will receive a return comparable to other investments
with similar risk. If, on the other hand, she abandons the property, her
return will be zero, or even negative if she cannot avoid paying property taxes
and other fixed costs.
Rent Control creates no disincentives to providing maintenance because it
permits landlords to recover maintenance costs. Instead, in a market beset by
gentrification and speculative price bubbles, Rent Control creates incentives to maintain
housing over and above those generated by the market. Initially, when values increase
more rapidly than rents, landlords often choose to finance acquisitions by
heavily mortgaging their current holdings, leaving few liquid funds available
[*1846] for maintenance.
n57 At the same time, the market fails to exert complete countervailing pressure
on landlords to maintain their property. In tight, gentrifying
housing markets, landlords can lease units regardless of their condition.
n58 This incentive is exacerbated when the landlord plans to sell the building
later as individual condominiums. Because individual purchasers are less
likely to inspect the entire building adequately, a landlord can reduce current
maintenance expenses without lowering his expected future gain upon sale.
Rent Control, on the other hand, removes incentives to undermaintain property.
n60 By imposing a ceiling on rents, and preventing conversion, Rent Control
eliminates quick capital gains, thereby discouraging speculation by landlords
and making financing of such projects less attractive to lenders. Although the
housing market still allows the landlord to lease the unit regardless of its
condition, the proposal enables tenants to police against this source of
undermaintenance directly by withholding rent on undercode apartments. By
reporting undermaintenance, tenants can also disqualify landlords from
receiving generally allowed rent increases. Thus, the landlord is fully
reimbursed if she maintains the apartment and will lose money if she does not,
a situation creating every incentive to provide adequate maintenance.
n61 Furthermore, when the building is sold, it must be sold to a new landlord
rather than to individual condominium owners. The purchaser of the entire
building will be better able to uncover the effects of poor maintenance,
thereby increasing the current landlord's incentives to maintain. The effect
of Rent Control on the existing
housing supply in the long term, then, is to increase the supply of low-income
housing, because Rent Control arrests the depletion of supply caused by
gentrification and price spirals without creating incentives to reduce current supply.
Rent Control will also have little negative impact on the future supply of
housing. Because Rent Control does not impose any regulation on new construction, it
creates no economic incentive to reduce building. Critics argue, however, that
rent control will depress new
housing starts because investors will fear that controls may be extended someday to
n62 There is no empirical
[*1847] evidence, however, that a rent control regime permitting pass-through of
maintenance costs and exempting new construction has a chilling effect on
Even if Rent Control were to chill future construction, it is unclear whether
it would decrease the future supply of
housing. Rent Control does not directly affect incentives for low-income rental
construction, because in the current market it is already uneconomical to
construct such projects. Under current market conditions, construction of
housing occurs only as a result of government subsidies that lower the effective costs
of production, or inclusionary zoning programs that force developers to
allocate a certain portion of project space or profits to low-income
n64 A change in the rental price available on the existing stock affects neither
of these types of programs.
n65 Nor will Rent Control impede indirect provision of low-income
housing as it has traditionally occurred -- through downward filtering.
n66 By definition a gentrifying
housing market inadequately provides low-income
housing through downward filtering. In short, the imposition of Rent Control cannot
deter what is not occurring.
[*1848] Rather than chilling the construction of new
housing, in a gentrifying market Rent Control may result in
more new construction. In a gentrifying market, middle- and upper-income consumers
satisfy their demand for
housing partially through new construction and partially through movement into
housing. In a market characterized by downward filtration of
housing, displaced low-income families cannot afford newly constructed
housing. Those families unable to gain access to the decreasing supply of existing
housing must either move in with others or remain homeless. In a market under Rent
Control, however, upper- and middle-income consumers will no longer be able to
outbid lower-income consumers for existing
housing. Thus, although the number of people seeking new
housing remains the same, in a controlled market a larger proportion of those
consumers whose demand is not met by the existing
housing stock will have incomes sufficient to afford newly constructed
housing. By forcing consumers to seek alternatives to the current
housing stock, Rent Control will keep the current supply from those consumers who can
housing. This will probably result in more new construction than would exist in an
uncontrolled, gentrifying market.
B. Allocational Effects
Critics often argue that rent control is inefficient.
n67 First, critics contend that rent control causes misallocation of
housing space because below-market rents encourage renters to
n68 This argument assumes that in the current market people use
housing efficiently, by moving to smaller apartments or doubling up as rents rise,
whereas under rent control, tenants respond to lower rental prices by failing
to conserve space. Second, critics assert that capital investment is
misallocated either because landlords are forced to retain capital in less
lucrative residential property rather than in its highest valued use, or
because landlords remove residential units from the market when they would
prefer to maintain their investment in residential
n69 Critics also argue that rent control is inefficient because the apartments are
not allocated to those who value
n70 them the most.
This section first argues that the current market is not perfectly competitive,
and that it therefore cannot be determined with any degree of accuracy whether
Rent Control would detract from the efficient allocation of space or capital.
Second, this section argues that greater empirical work is required to
determine whether wealth is maximized under Rent Control. In light of the
countervailing social factors favoring Rent Control,
n72 the efficiency arguments as currently developed by critics are simply too
indeterminate to serve as a compelling basis for rejecting this proposal.
Both the capital and space allocational critiques of rent control implicitly
assume that the current market is the most efficient one attainable.
n73 However, the current market is less efficient than the ideal market in a
capitalist economy. Whereas the latter is characterized by perfect competition
among profit maximizers directed at satisfying consumer preferences that have
been developed with perfect information,
n74 the current market is fraught with imperfections. In a market that is not
perfectly competitive, the restructuring of relative prices and allocation of
resources resulting from Rent Control may be more efficient than the existing
A brief overview demonstrates the imperfections of the current market.
Relative prices in the current market have been influenced by decades of ad hoc
government intervention motivated as much by distributional as by efficiency
concerns. The federal income tax system, for example, favors homeownership
n75 thus distorting the relative prices and allocation of resources between them.
n76 Exclusionary zoning laws represent another governmentally imposed departure
[*1850] from perfect competition. Wealthy suburbs have avoided internalizing the
adverse costs associated with development and poorer inhabitants
n77 by excluding lower-income families through single-family
housing, and large-lot and minimum floor area requirements.
n78 Government-created distortions such as these make it unlikely that existing
housing prices efficiently allocate
In addition to government intervention, characteristics peculiar to the
housing market are inconsistent with a perfectly competitive market.
n79 Prospective purchasers lack perfect knowledge about fundamental yield, so they
must rely for information either on real estate brokers who have an incentive
to increase commissions by inflating prices,
n80 or on current owners who may be unavailable or disinclined to provide full
n81 Similarly, prospective tenants have only fragmentary information about
n82 Finally, both the sale and rental components of the
housing market are composed of heterogeneous units, which make it difficult to find an
Because the current market is inefficient,
n84 one cannot conclude a priori that the relative prices and resulting allocation
of resources under a Rent Control scheme are less efficient than the current
price and allocation structure.
n85 This claim applies to both space and capital.
[*1851] First, it is not necessarily true that Rent Control causes tenants to allocate
housing space inefficiently. Although it is a basic premise of economics that a lower
price increases quantity demanded,
n86 it does not necessarily follow that Rent Control's lower rents mean people
will consume more, nor does it follow that
"more" is necessarily inefficient.
In both unregulated and regulated regimes, factors other than price play a
major role in determining rental consumption. In the gentrifying market, high
rent-to-income ratios and low vacancy rates suggest that many lower-income
tenants are unable or unwilling to move into smaller apartments to compensate
for higher rents; rather, these tenants adjust to increasing rent by decreasing
their consumption of nonhousing goods. Under the Rent Control regime, then,
such tenants will consume no additional space but will simply spend less of
their income on rent and more on food, clothing, and other needs.
Another major nonprice determinant of space consumption is the size of the
n88 Nationally, average household size has declined to less than three; in
metropolitan areas the average household size is often even smaller.
n89 Because smaller households consume more space per person than larger ones, a
small household will have
"excess space" irrespective of whether its
housing is rent-controlled.
The importance of these nonprice factors in determining space allocation has
been demonstrated empirically: living patterns under rent control simply do not
differ significantly from those in noncontrolled
housing. In 1981, for example, 27% of all controlled apartments in New York City
underutilized space, whereas underutilization in the decontrolled stock stood
Housing under New York City's stabilization program, a moderate rent control scheme,
experienced the least amount of underutilization.
[*1852] Significantly, even if space consumption does increase under Rent Control,
this allocation of resources is not necessarily less efficient. Indeed, if
government intervention and intrinsic imperfections in the
housing market impose costs such that the equilibrium rent is higher than in a
perfectly competitive market,
n92 by lowering economic rents the proposal, rather than causing people to waste
space, may reduce overcrowding and result in a more efficient allocation of
Second, the allocation of capital under Rent Control is not necessarily less
efficient than that existing in the current market. Rent Control maintains the
housing market's allocational decisions because landlords cannot remove their units
from the market. This allocation is not less efficient than that produced by
the existing market because the current
housing stock is the result of current market decisions as to the highest valued use
In the future, of course, it is possible that the current allocation of capital
housing uses may become undesirable
n93 because of some exogenous change, such as a shift in population or income
distribution. Under one scenario, a decline in
housing demand or vast increase in supply could create excess
housing. In this situation, capital would continue to be allocated efficiently, as
long as conversions were permitted in high-vacancy areas, because Rent Control
would not impose minimum rents. Under a second scenario, a change in income
distribution might cause a higher value to be placed on commercial than on
residential uses, even if the overall
housing shortage persists. In this situation, a rigid rent control scheme would
allocate capital to residential uses, whereas an uncontrolled market would
allow commercial conversion. If this occurred, however, the proposed Rent
Control plan could be modified to permit some shifts to commercial uses to
n94 In the absence of such exogenous changes, Rent Control simply maintains the
capital allocation of the current market.
n95 Furthermore, even if Rent Control were to shift
[*1853] the allocation of capital, current market imperfections make it impossible to
determine whether the shift would actually diminish or improve efficiency.
Critics also argue that any rent control scheme does not allocate
housing to maximize social wealth because it fails to allocate
housing to those most willing to pay.
n96 This analysis is too simplistic, however. Any determination whether a Rent
Control or uncontrolled
housing market is more efficient can be made only by considering the dollar gains and
losses to all affected groups, not just the gentrifier and the existing
tenants. Rent Control confers benefits and imposes costs on an array of
parties and in an array of ways not considered by traditional economic
critiques. The task of determining how each party would value the benefits and
burdens associated with the imposition of Rent Control generates enormous if
not insurmountable difficulties.
Suppose, for example, that Community A is considering adopting Rent Control.
Within the Community, landlords and those seeking to gentrify both bear some
cost under Rent Control, whereas current tenants and owners of vacant land and
condominiums and homes benefit.
n97 Beyond these groups, Community A would have to consider others bearing costs
and receiving benefits from Rent Control. For example, Community A would have
to absorb associated administrative costs, but it would be able to spend less
in the future on shelters and other programs designed to reduce the costs of
displacement and homelessness.
n98 Community A would also want to consider the effect on the tax base and
community services required.
n99 To perform an accurate cost-benefit analysis, Community A would also have to
[*1854] the spillover effects from its adoption of Rent Control. If Rent Control were
imposed, some of the wealthy who would have purchased and converted low-income
housing would move to Community B or C, raising the
housing prices there to the benefit of some and detriment of others. Alternatively,
Community A's lack of Rent Control may displace its poor to Communities B and
C, requiring those communities to bear the costs of overcrowding and providing
services for the displaced. The list of costs and benefits Community A might
consider should also be expanded to include nonmonetary benefits and costs.
These include, among others, the psychological distress of the displaced, the
discomfort people suffer because of the plight of the homeless, and outrage at
the unfairness of selecting landlords to bear the burden of Rent Control. The
list also includes the loss of neighborhood cohesion that occurs when longtime
members of a community move -- a cost borne by both the mover and the remaining
members of the community.
After Community A discerned all the affected groups and costs, it would still
face the difficult task of determining what people would pay or require as
payment to shift from the status quo.
n100 Community A could not rely on the market alone to determine the efficient
outcome. Transaction costs,
n101 existing legal rules,
n102 and costs and benefits external to market pricing prevent the market from
reaching an efficient outcome. To calculate Rent Control's efficiency, then,
Community A must determine what the market solution would be, if one exists.
This calculus includes the decision whether to use offer or asking prices,
n103 the determination of equivalent dollar values of nonmonetary gains and losses,
and the calculation of the dollar value to a person of achieving or avoiding a
result that has not yet occurred. Some commentators question whether an
efficiency analysis of this type can yield a determinate result.
n104 Whether or not this question
[*1855] can be answered in the abstract, the overall wealth effect of Rent Control
simply cannot be determined without greater empirical work.
Gentrification in many cities has created an urban
housing market characterized by rising rents and a decreasing supply of homes for
poorer urban residents. The result is greater poverty, displacement, and
sometimes homelessness. In this market a complete Rent Control proposal can
serve as an important partial solution to the plight of the poor. By allowing
tenants to remain in their units at a lower rent, Rent Control will prevent
displacement and reduce shelter poverty.
Critics have attacked rent control
housing policy, however, on economic grounds. Their economic efficiency arguments do
not provide a compelling basis for rejecting Rent Control. Most of the
economic criticisms are mistaken or are accurate only when applied to
rudimentary forms of rent control or to rent control in a non-gentrifying
market. In a gentrifying market, however, Rent Control will not lead to
abandonment, conversion, or inadequate maintenance. Nor will it lead to a
decrease in future construction. Whether Rent Control's allocation of space
and capital is more or less efficient than in the non-rent-controlled market is
impossible to determine, given the inefficiency of both markets. Which
housing regime maximizes wealth is also indeterminate without further empirical work.
Indeed, in a gentrifying market Rent Control may increase construction of new
housing, provide greater incentives to maintain rental property adequately, and ensure
the continued vitality and cohesiveness of urban neighborhoods. Moreover, Rent
Control will reduce the social costs associated with poverty and homelessness,
including the costs of welfare programs, shelters, and medical care. In short,
a regulatory pricing regime that taxes economic rents will not result in the
economic harms predicted. Rather, Rent Control will increase the supply of
housing, reduce shelter impoverishment, and prevent the further degradation of the
n1 This rent control proposal was first suggested by Professor Duncan Kennedy,
Harvard Law School, and Karl Case, Federal Reserve Bank of Boston. Research
for this Note was supported in part by a grant from the John M. Olin Foundation.
Gentrification occurs when the movement of more affluent classes into older, central
neighborhoods transforms them, through privately financed rehabilitation, into
higher-priced, residential areas.
Displacement in Gentrifying Neighborhoods: Regulating Condominium Conversion
Through Municipal Land Use Controls,
63 B.U.L. REV. 955, 958 (1983). For a description of this process, see, for example, Durham
Mitigating the Effects of Private Revitalization on
Housing for the Poor,
70 MARQ. L. REV. 1 (1986).
For studies determining where
gentrification is occurring, see Henig,
Gentrification and Displacement Within Cities: A Comparative Analysis, 61 SOC. SCI. Q. 638, 644-45 (1980); LeGates
14 URB. LAW. 31, 32 nn.5-8 (1982); Marcuse,
Gentrification, Abandonment, and Displacement: Connections, Causes, and Policy Responses in
New York City, 28 J. URB.
& CONTEMP. L. 195 (1985); Smith,
Toward a Theory of
Gentrification, A.P.A.J., Oct. 1979, at 538; and Wright
Homelessness and the Low-Income
Housing Supply, 17 SOC. POL'Y 48, 51-52 (1987).
"shelter poverty" phenomenen is defined as
"deprivation of non-shelter necessities resulting from the squeeze between
housing costs." Stone,
Housing and the Economic Crisis: An Analysis and Emergency Program, in AMERICA'S
HOUSING CRISIS 103 (C. Hartman ed. 1983).
The Effect of the Warranty of Habitability on Low Income
"Milking" and Class Violence,
15 FLA. ST. U.L. REV. 485, 486 (1987).
n5 Replacement rents depend largely on tax policy, federal monetary and fiscal
policy, zoning laws, development and building codes, land prices, and
See THE REPORT OF THE PRESIDENT'S COMM'N ON
HOUSING xx, xxi, 177-237 (1982) [hereinafter COMMISSION];
see also Baar,
Guidelines for Drafting Rent Control Laws: Lessons of a Decade,
35 RUTGERS L. REV. 723, 726 n.5 (citing Strachota
Market Rent v. Replacement Rent: Is Rent Control the Solution?, 51 APPRAISAL J. 89, 93-95 (1983) (estimating replacement rent as less than
half of that necessary to provide an incentive for new construction)).
Housing Needed for America's Poor, 60 J. ST. GOV'T 98, 104 (1987); Weitzman,
Economics and Rent Regulation: A Call for a New Perspective, 13 REV. L.
& SOC. CHANGE 975, 981 (1984-85).
n7 For general discussions and critiques of the filtering theory, see
HOUSING IN AMERICA: PROBLEMS AND PERSPECTIVES 161-203 (R. Montgomery
& D. Mandelker 2d ed. 1979); Edel,
Filtering in a Private
Housing Market, in READINGS IN URBAN ECONOMICS 204-15 (M. Edel
& J. Rothenberg eds. 1972); and Lowry,
Housing Standards: A Conceptual Analysis, 36 LAND ECON. 362 (1960).
supra note 7, at 364.
See H. AARON, SHELTER AND SUBSIDIES 7 (1972).
See generally Berry,
Islands of Renewal in Seas of Decay, in THE NEW URBAN REALITY 69, 75 (P. Peterson ed. 1985); James,
The Revitalization of Older Urban
Housing and Neighborhoods, in THE PROSPECTIVE CITY 130, 140-42 (A. Solomon ed. 1981).
Housing in the United States: An Overview, in AMERICA'S
HOUSING: PROSPECTS AND PROBLEMS 51 (G. Sternlieb
& J. Hughes eds. 1980) (estimating a 35% rise in number of people in peak home
buying age during the 1970's); James,
supra note 10, at 144.
Accessory Apartments, in 1984 ZONING AND PLANNING LAW HANDBOOK 351 (J. Gailey ed. 1984). Smaller
households require more space per capita.
The Population Factor and Urban Structure, in
THE PROSPECTIVE CITY, supra note 10, at 32, 36-37. Thus, even absent a population increase, all other
things being equal, smaller household size alone would have led to a dramatic
increase in demand.
See A. DOWNS, RENTAL
HOUSING IN THE 1980'S, at 78 (1983) (asserting that construction of rental units was
inadequate to replace those withdrawn from use);
see also COMMISSION,
supra note 5, at xxi, 60, 61; U.S. BUREAU OF THE CENSUS, STATISTICAL ABSTRACT OF THE
UNITED STATES 704 (1987) (stating that
housing starts have dropped dramatically); Gilpin,
Housing Tumble by 16.2%, Worst in 3 Years, N.Y. Times, Jan. 21, 1988, at 1, col. 6 (same).
n14 Examples include restrictions on density, lot size, and structure size.
The Interjurisdictional Effects of Growth Controls on
30 J.L. & ECON. 149, 151-52 (1987).
The Effect of Land Use and Environmental Regulations on
Housing Costs, 8 POL. STUD. J. 277 (1979) (arguing that zoning leads to increased land
prices); S. SEIDEL,
& GOVERNMENT REGULATIONS 159-86 (1978) (discussing types of zoning and their
See U.S. DEPT. OF
HOUSING AND URBAN DEVELOPMENT, THE CONVERSION OF RENTAL
HOUSING TO CONDOMINIUMS AND COOPERATIVES i-iii (1980) [hereinafter CONVERSION]; Durham
supra note 2, at 4.
n17 The widening of the suburban ring away from inner-city jobs and the advent of
two-income couples doubled the family's commuting time and made urban
housing more desirable.
supra note 12, at 46-47. Moreover, a reduction in household size and an increase in
the proportion of the middle- and upper-income population with no children,
supra note 10, at 81;
Comments, The Condominium Conversion Problem: Causes and Solutions,
1980 DUKE L.J. 306, 308, n.14 (1980), diminished the value of open spaces and good public school systems associated
with suburban life.
supra note 12, at 48; Lipton,
Evidence of Central City Revival, 43 J. AM. INST. PLANNERS 136 (1977); Sumka,
Neighborhood Revitalization and Displacement: A Review of the Evidence, 45 J. AM. PLAN. ASSOC. 480 (1979). After 1970, the development of condominium
and cooperative forms of tenure allowed a growing segment of the population who
preferred home ownership to move into existing multifamily dwellings rather
than suburban single family homes, thus capturing tax advantages of home
Effects of the U.S. Tax System on
Housing Prices and Consumption, in THE URBAN ECONOMY AND
HOUSING 11 (R. Grieson ed. 1983); H. Hansmann, The Law and Economics of Cooperative
Housing 4, 6 (1986) (unpublished manuscript on file with the Harvard Law School
library) (describing the development of the condominium form of tenure).
Finally, some local governments subsidized the
gentrification process by granting subsidized loans, directing federal grants to private
developers working in gentrifying neighborhoods, and giving tax benefits to
See TASK FORCE ON RENTAL
HOUSING: HEARINGS BEFORE THE SUBCOMM. ON
HOUSING AND COMMUNITY DEVELOPMENT OF THE COMM. ON BANKING, FINANCE AND URBAN AFFAIRS,
96th Cong., 2d Sess. 465-73 (1980); Marcuse,
supra note 2, at 212-213, 228.
n18 The typical new owner in a gentrified neighborhood is a young white person
whose income falls somewhere in the middle to upper end of the income range --
well above the urban and metropolitan area medians and the income of the
supra note 2, at 36-37.
supra note 5, at 837 (noting that the value of a condominium unit is usually at
least double that of the same unit as a rental);
see also Hansmann,
supra note 17, at 40 (calculating tax savings earned on condominium conversion).
Federal tax code provisions encourage this process; although the federal tax
code permits certain deductions to both owner-occupiers and landlords,
26 U.S.C. § 164(a)(1) (deductions for state and local real property taxes);
26 U.S.C. § 163(a) (deduction for interest paid on mortgage liabilities), home owners are not
taxed on the imputed rental value of owner-occupied
Redistribution of Income Through Regulation in
32 EMORY L.J. 691, 699-700 (1983). The value of this subsidy is offset somewhat by the landlord's ability to
deduct depreciation, but the value of the exclusion of imputed rental income is
supra note 17, at 26-42.
supra note 2, at 961. Nationwide data indicate that the supply of low-cost
housing is decreasing at a growing rate.
See Morganthau, Cohn
Housing Crunch, NEWSWEEK, Jan. 4, 1988, at 18 [hereinafter Morganthau]; Wright
supra note 2, at 51 (finding a net average of 360,000 rental units lost annually
between 1974 and 1979 due to arson, abandonment and
see also R. GOETZE, UNDERSTANDING NEIGHBORHOOD CHANGE 103 (1979); Wright
supra note 2, at 52 (arguing that determining the exact number lost to
gentrification alone is difficult because sometimes arson and abandonment are caused by
The decline in supply has caused a shortage of low-income
supra, at 18 (finding that the national gap between supply and demand at 1 million
units for rentals that cost no more than $ 250 a month); Wright
supra note 2, at 51 (finding the number of low-income units to have declined thirty
percent from the late 1970's to early 1980's whereas the number of poor
increased thirty-six percent).
n21 The Reagan administration has decreased spending on low-income
housing from $ 25 million per year to less than $ 8 million.
supra note 20, at 18. Under Presidents Ford and Carter, the federal government
built or rehabilitated an average of 200,000 units per year. Under Reagan,
that figure has dropped to 27,000 in 1986.
States Take a Fresh Look at
Housing, 60 J. ST. GOV'T 95, 96 (1987). The number of publicly owned
housing starts has dropped from 20,000 in 1980 to 3000 in 1985 with only 6400
currently under construction; the total number of low-income public
housing units has decreased from 1,432,200 in 1982 to 1,373,700 in 1985.
See U.S. BUREAU OF THE CENSUS,
supra note 13, at 704, 717. In addition, the Tax Reform Act of 1986 eliminated most
of the special tax treatment of investments in low-income
housing and reduced the volume of tax exempt bonds that states and localities can
issue to fund their
Housing: Can We Keep Up What We Have?, 60 J. ST. GOV'T 137, 138 (1987).
supra note 2, at 12.
An Analysis of Intercity Rents, in THE RENT CONTROL DEBATE 75, 83, 87-88 (P. Neibanck ed. 1985).
The Market for Single-Family Homes in the Boston Area, NEW ENG. ECON. REV., May-June 1986, at 41-44.
See id. at 45. Case formulated the speculative bubble market theory described at p.
1840 below. His theory and results are described in Case, cited in note 24
Prices of Single Family Homes Since 1970: New Indexes for Four Cities, NEW ENG. ECON. REV., Sept.-Oct. 1987, at 45; and K. Case
& R. Schiller, The Efficiency of the Market for Single Family Homes (December
10, 1987) (paper presented at the American Finance Association on file at the
Harvard Law School Library).
For a discussion on speculation, see C. KINDLEBERGER, MANIAS, PANICS AND
CRASHES (1978), and Feagin,
Urban Real Estate Speculation in the United States, in CRITICAL PERSPECTIVES ON
HOUSING 99 (R. Bratt, C. Hartman
& A. Meyerson eds. 1986).
supra note 24, at 45.
See R. GOETZE, RESCUING THE AMERICAN DREAM 30 (1983); C. HARTMAN, D. KEATING
& R. LEGATES, DISPLACEMENT: HOW TO FIGHT IT 46-47 (1982) [hereinafter
DISPLACEMENT]. Economic rent is
"any payment over and above what is necessary to maintain a factor of production
in its current activity." R. MILLER, INTERMEDIATE MICRO-ECONOMICS 407 (1978).
n29 Since the 1970's
"[l]and has become an increasingly important component in the total cost of
supra note 5, at 60;
see also Case,
supra note 24, at 38-39, 42, 44 (discussing rising relative cost of
housing components in Boston).
See B. SCHILLER, THE ECONOMY TODAY 757 (3d ed. 1986).
n31 More than 10 million renter households paid 35 percent or more of their income
for rent in 1983; 6.3 million paid 50 percent or more, and 4.7 million paid 60
percent or more.
See R. BRATT, C. HARTMAN
& A. MEYERSON, CRITICAL PERSPECTIVES ON
HOUSING xiv (1986). In Boston in the years 1984 through 1985, 54 percent of renting
families paid at least 25 percent of their income for
housing, and almost 80 percent of families with income under $ 15,000 paid at least
half of their incomes as rent.
See BOSTON REDEVELOPMENT AUTHORITY, BOSTON AT MID-DECADE: RESULTS OF THE 1985
HOUSEHOLD SURVEY, V. CHARACTERISTICS OF
HOUSING UNITS 44 (1986);
see also Stone,
supra note 3, at 102-05 (stating that a family of four with income under about $
23,000 (adjusted for inflation) and spending 25% of income on rent would be
unable to purchase the minimum amount of nonshelter necessities in 1984).
n32 A recent national study shows unwanted displacement responsible for 5% of all
residential moves in urban areas, representing 2.5 million displaced persons
supra note 2, at 52;
see also Durham
supra note 2, at 13 (quoting surveys estimating between 1.17 million and 2.4 million
people displaced in 1979); Marcuse,
supra note 2, at 206 (discussing difficulty in calculating accurate figures).
n33 Studies of
gentrification-driven displacement demonstrate an increase in shelter costs.
supra note 2, at 47, 48.
See Comments, supra note 17, at 320; Note,
supra note 2, at 960 n.40, 961.
See SENATE COMM. ON BANKING,
HOUSING, AND URBAN AFFAIRS, S. REP. NO. 871, 95th Cong., 2d Sess. 49,
reprinted in 1978 U.S. CODE CONG.
& ADMIN. NEWS 4773, 4822; Stegman
States, Localities Respond to Federal
Housing Cutbacks, 60 J. ST. GOV'T 110, 114 (1987) (quoting the Raleigh, North Carolina
Housing Task Force Report of April 1986).
supra note 2, at 41, 42, 44; Marcuse,
supra note 2, at 198-99; Wright
supra note 2, at 52.
See J. KOZOL, RACHEL AND HER CHILDREN (1988); Wright
supra note 2, at 49-51; Scondras,
Condo Conversion, Feb. 18, 1986, at 4 (response letter of city councilman David Scondras).
See J. KOZOL,
supra note 37, at 3.
n39 This proposal is not a complete solution to the
housing crisis. Without an expanded stock of
housing there will be a continuing gap between need and supply. Also, without greater
equality of incomes there will still be families unable to afford even the
lower prices available under rent control.
n40 For a guide to drafting an effective rent control ordinance, see Baar, cited
above in note 5.
n41 One appropriate method of establishing the proper level of rent is to set rent
as the sum of three components: operating expenses, capital recovery, and fair
net operating income.
See H. LEONARD, REGULATION OF THE CAMBRIDGE
HOUSING MARKET: ITS GOALS AND EFFECTS 79-80 (1981). Rent adjustments should be
allowed for all reasonable, documented, maintenance cost increases, with
indexing for inflation; landlords already maintain records of these
expenditures for tax purposes. This procedure assures a fair capital recovery
by allowing landlords to amortize documented, allowable capital expenditures
according to the prevailing market interest rate on similar risk investments.
Such a scheme would allow landlords to receive a competitive return on further
investments in their buildings, so long as those investments were limited to
functional repairs and not used to upgrade the buildings to luxury apartments.
Mayo v. Boston Rent Control Adm'r, 365 Mass. 575, 580-81, 314 N.E.2d 118, 122 (1974). Finally, the fair net operating income can be set equal to a
"base year" net income on the building that acts as a ceiling on the economic rent. This
amount would provide the cash flow for the landlord to pay for maintenance. As
of 1983, this and similar plans for setting rent levels were estimated to be in
place in 60% of rent-controlled units in the United States.
supra note 5, at 785.
supra note 5, at 831-32. (describing the mechanism).
See id. at 837 n.34.
See id. at 833.
Flynn v. City of Cambridge, 383 Mass. 152, 159, 418 N.E.2d 335, 339 (1981).
n46 For a description of types of condominium conversion regulations, see Baar,
cited above in note 5, at 835-38.
n47 Without means testing, which this proposal omits because of high
administrative cost, some seepage of apartments to wealthier people will occur
over time. Some studies, however, suggest that the vast majority of apartments
will remain occupied by tenants in the same economic class as the original
tenant. Cambridge, Massachusetts is an example of the principle. Cambridge
imposed rent control in 1971 and in 1987 70% of all households in
rent-controlled units had incomes below the median for all
See ABT ASSOCIATES, CAMBRIDGE
HOUSING STUDY: FINAL REPORT 15 (1987);
see also Leonard,
supra note 41, at 65, 69 (giving different data on percentage of low-income
households living in and moving into rent-controlled apartments in Cambridge).
This occurs because most apartments are transferred through an informal market
to friends of tenants, who are usually in the same socioeconomic class.
Landlords permit and prefer this method because resort to advertising and to
interviewing new tenants is risky and costly. The risk can be reduced and the
cost eliminated by choosing the friend of a good tenant who is leaving.
Landlords also may prefer not to have means testing because it limits their
choice of tenants and requires further dealings with an administrative process.
The proposal also must include some disincentive for the creation of a black
market. By allowing the tenant to collect a substantial fine and the
overcharge from the landlord or to withhold that amount from rent, the system
can provide the tenant with an incentive to report overcharges and the landlord
with an incentive not to seek them.
See, e.g., 1976 Mass. Acts ch. 36,
An Act Enabling the City of Cambridge to Continue to Control Rents and
§ 11. Little seepage is likely to occur because it is less likely under Rent
Control that wealthier tenants will want to move into the vacant units.
Because landlords have no financial incentive to provide luxury units, and
because the tax benefits and investment potential of a condominium in a
gentrifying neighborhood are unavailable, wealthier groups will prefer
ownership or uncontrolled new rental stock to rent-controlled units.
supra note 5, at 838-40.
n49 For examples of economic criticisms, see COMMISSION, cited in note 5 above, at
91-94; C. BAIRD, RENT CONTROL: THE PERENNIAL FOLLY 57-69 (1980); M. LETT, RENT
CONTROL: CONCEPTS, REALITIES AND MECHANISMS 44-48 (1976); RENT CONTROL: MYTHS
& REALITIES (W. Block
& E. Olsen eds. 1981); and Navarro,
Rent Control in Cambridge, Mass., PUB. INTEREST, Winter 1985, at 83.
See, e.g., COMMISSION,
supra note 5, at 92.
See, e.g., M. LETT,
supra note 49, at 45-46, 151; Hirsch,
"Food for Thought" to
"Empirical Evidence" About Consequences of Landlord-Tenant Laws,
69 CORNELL L. REV. 604, 611 (1984); Muth,
supra note 19.
See, e.g., Muth,
supra note 19, at 695.
See, e.g., A. DOWNS,
supra note 13, at 36-37; Fallis
Uncontrolled Prices in a Controlled Market: The Case of Rent Controls,
74 AM. ECON. REV. 193, 196 (1984); Hirsch,
Landlord-Tenant Laws and Indigent Black Tenants, 10 RES. L.
& ECON. 129, 138 (1987).
n54 Henry George wrote that, because the supply of land is perfectly inelastic,
one could set a tax that would only reduce economic rents without reducing the
supply of that factor.
See H. GEORGE, PROGESS AND POVERTY (1879). Economists have accepted that economic
insight as true for any factor that has a fixed supply.
See, e.g., R. MILLER,
supra note 28, at 408-10; P. SAMUELSON, ECONOMICS 526-30 (11th ed. 1980).
n55 Rent control has never been shown to be a significant cause of the increased
rate of condominium conversions.
supra note 16, at ii.
See supra p. 1842.
supra note 5, at 738-39.
See R. GOETZE,
supra note 20, at 34; Baar,
supra note 5, at 738-39.
supra note 17, at 24-25 (suggesting that condominium markets may exhibit some of the
see also Akerloff,
The Market for
"Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. ECON. 488 (1970) (discussing
supra note 5, at 737-39.
The Social Utility of Rent Control, reprinted in
HOUSING URBAN AMERICA 459, 469-70 (J. Pynoos, R. Schafer
& C. Hartman 2d ed. 1980); Weitzman,
supra note 6, at 984.
See supra note 53.
supra note 61, at 468. Although some studies purport to show a decline in
construction after the imposition of rent control, they fail to explain why
identical trends are found in non-rent controlled cities.
supra note 6, at 979; M. Mandel, Does Rent Control Make Tenants Better Off? 37-38
(July 1986) (unpublished manuscript on file at the Harvard Law School library);
see also Baar,
supra note 5, at 759 n.135 (arguing that it is virtually impossible to isolate the
effect of rent control alone on construction of new apartments because
construction is so dramatically impacted by other factors).
Also, many of these studies examined the effects of earlier types of rent
control schemes that, unlike the present proposal, do no permit a competitive
rate of return on investment. The traditional supply analysis presumes that
"when the cost of providing
housing services increases . . . rent control ordinances can prevent landlords from
passing on part of these cost increases to tenants." Hirsch,
supra note 51, at 609. First-generation rent-control ordinances resembled price
freezes and prevented pass-through of costs. Contemporary rent regulation or
moderate rent control, in contrast, permits a fair and reasonable return on
investment, pass-throughs of operating costs, and exemptions from control on
all new multifamily construction.
supra note 6, at 985;
supra pp. 1842-43. For a description of rent control past and present, see
generally M. LETT, cited in note 49 above, and Blumberg, Robbins
The Emergence of Second Generation Rent Controls,
8 CLEARINGHOUSE REV. 240 (1974).
Evidence that rent control schemes that exempt new
housing from control decrease construction is
"at best inconclusive." Weitzman,
supra note 6, at 979. Indeed, in a gentrifying market, Rent Control probably will
See infra pp. 1847-48.
Developer Payments and Downtown
Housing Trust Funds,
18 CLEARING-HOUSE REV. 679, 680-84 (1984).
n65 The tenuous connection between rental prices and the quantity of rental
housing supplied may not be restricted to the low end of the market. Higher rents may
produce no increase in construction in the middle- and upper-income rental
market. Replacement rents are significantly above market rents at all levels
of the market.
See supra note 5. Thus, an increase in market rents will only generate excess profits,
because new construction is inhibited by its prohibitive cost.
supra note 6, at 981.
See, e.g., Hirsch,
supra note 53, at 138 (explaining that much low-income
housing exists because of downward filtering).
n67 In this Note the phrase
"economic efficiency" means
"that allocation of resources which could not be improved in the sense that a
further change would not so improve the condition of those who gained by it
that they could compensate those who lost from it and still be better off than
Property Rules, Liability Rules, and Inalienability: One View of the Cathedral,
85 HARV. L. REV. 1089, 1094 (1972). This conception of efficiency is variously called the
"Kaldor-Hicks criterion," the
"potential Pareto superiority test," and the
"wealth maximization criterion."
The Pursuit of a Bigger Pie: Can Everyone Expect a Bigger Slice?,
8 HOFSTRA L. REV. 671, 671 n.2 (1980); Coleman,
Economics and the Law: A Critical Review of the Foundations of the Economic
Approach to Law. 94 ETHICS 649, 651-52 (1984); Posner,
Utilitarianism, Economics and Legal Theory,
8 J. LEG. STUD. 103, 119-35 (1979).
The Revolution in Residential Landlord-Tenant Law: Causes and Consequences,
69 CORNELL L. REV. 517, 581-82 (1984);
see also Comment,
Challenging Rent Control: Strategies for Attack,
34 UCLA L. REV. 149, 151 (1986) (outlining the argument).
See, e.g., Radin,
Residential Rent Control, 15 PHIL.
& PUB. AFF. 350, 351 (describing the argument); Weitzman,
supra note 6, at 977-78 (same).
n70 Value is defined as aggregate consumer willingness to pay.
See R. POSNER, ECONOMIC ANALYSIS OF LAW
§ 1.2 (2d ed. 1977).
n71 Commentators argue that free markets maximize society's wealth.
See, e.g., Posner,
supra note 67, at 123. In particular, economists argue that unregulated markets
serve to allocate
See, e.g., B. SCHILLER,
supra note 30, at 758-59.
See supra pp. 1843-48.
Toward a Sociology of Rent: Are Rental
Housing Markets Competitive?, 34 SOC. PROBS. 261, 262 (1987); Olsen,
An Econometric Analysis of Rent Control, J. POL. ECON. 1081, 1082 (assuming that uncontrolled
housing markets are perfectly competitive).
See P. SAMUELSON,
supra note 54, at 39. For a list of the seven conditions necessary for prices to
respond freely to changes in supply as posited by conventional economic theory,
A Competitive Theory of the
59 AM. ECON. REV. 612, 613 (1969).
Homeowner Preferences, in READINGS IN FEDERAL TAXATION 214 (M. McIntyre, F. Sander
& D. Westfall 2d ed. 1983);
supra p. 1838.
supra note 75, at 215-16; Muth,
supra note 17.
Southern Burlington County NAACP v. Township of Mt. Laurel, 67 N.J. 151, 179, 336 A.2d 713, 727-28,
423 U.S. 808 (1975); A. DOWNS, OPENING UP THE SUBURBS 9-11 (1973);
Developments in the Law -- Zoning,
91 HARV. L. REV. 1427, 1626-27 (1978).
Some commentators have argued that any zoning, including exclusionary zoning,
that allows specialization among suburbs is efficient.
See, e.g., Tiebout,
A Pure Theory of Local Expenditures, 64 J. POL. ECON. 416 (1956). There are, however, serious objections to the
See, e.g., Buchanan
Efficiency Limits of Fiscal Mobility: An Assessment of the Tiebout Model, 1 J. PUB. ECON. 25 (1972). For a general critical evaluation of zoning's
efficiency, see Ellikson,
Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use
40 U. CHI. L. REV. 681 (1973).
See R. BABCOCK
& F. BOSSELMAN, EXCLUSIONARY ZONING: LAND USE REGULATION AND
HOUSING IN THE 1970'S, at 7-9 (1973); S. SEIDEL,
supra note 15, at 159-86; Katz
supra note 14, at 149-50; Sager,
Tight Little Islands: Exclusionary Zoning, Equal Protection, and the Indigent,
21 STAN. L. REV. 767, 781-82 (1969).
See generally H. AARON,
supra note 9, at 11-22; Gilderbloom
supra note 73.
See supra p. 1840.
n81 Owners have an incentive to withhold information about defects in order to
obtain as high a selling price as possible.
See H. AARON,
supra note 9, at 14.
n82 Because tenants seldom are able to gather data systematically, they often rely
on newspaper advertisements that inflate rental prices.
supra note 73, at 265.
See id. at 266; Case,
supra note 24, at 45.
n84 No one has ventured to test the efficiency of the real estate market
rigorously, primarily because of a lack of accurate data.
See K. Case
& R. Shiller,
supra note 25, at 1, 2, 15.
n85 This is a corollary to the theory of second best: a change (such as price
controls) that would be inefficient in a perfectly competitive economy may
enhance efficiency in a less-than-perfect economy.
See generally Davis
Welfare Economics and the Theory of Second Best, 32 REV. ECON. STUD. 1 (1965); Lipsey
The General Theory of Second Best, 24 REV. ECON. STUD. 11 (1956-57).
See P. SAMUELSON,
supra note 54, at 53-55.
n87 One commentator studying New York City
housing in 1968 found that rent control did not increase
housing consumption, but that the occupants of rent-controlled units
"consumed 4.4 percent less
housing service and 9.9 percent more nonhousing goods than they would have consumed in
the absence of rent control." Olsen,
supra note 73, at 1081.
The Model: Rent Control in New York City, in THE RENT CONTROL DEBATE,
supra note 23, at 29, 47.
See, e.g., BOSTON REDEVELOPMENT AUTHORITY,
supra note 3, at 9, 29 (discussing declining household size in Boston); Stegman,
supra note 88, at 47 (discussing declining household size in New York City);
supra note 12.
supra note 88, at 47-48.
See id. at 36, 47; Achtenberg,
supra note 61, at 467; In Cambridge, Massachusetts, rent control has not
demonstrably affected the use of space.
Cf. ABT ASSOCIATES,
supra note 47, at 43 (giving data on space utility in controlled and uncontrolled
units in Cambridge).
n92 Price bubbles, exclusionary zoning, lack of information, and possible
monopolistic price behavior,
supra note 73 (describing the possible existence of monopolistic price behavior);
supra note 6, at 982-83 (same), all lead to prices in the current market that are
higher than they would be in a competitive market. To the extent that
government policies favoring condominium ownership have contributed to
gentrification-induced demand, prices in gentrifying neighborhoods are higher than they would
be in a perfectly competitive market. Counterforces include the tax subsidies
n93 The change must make
housing less desirable. If
housing becomes more desirable than nonresidential capital uses, Rent Control will
have no effect on the allocation because it, like the market, maintains capital
n94 Such a change is required in current markets in most cities as well. Most
cities have residential and commercial zoning, and any person seeking a shift
in uses must petition a government body for a zoning exemption.
See Developments in the Law -- Zoning, supra note 77, at 1439-40.
n95 The allocation of capital to maintenance is altered under Rent Control.
Whether this change is inefficient is difficult, if not impossible, to
determine. In the current market, landlords may allocate too little capital to
maintenance (relative to the perfect market) because of low cash flow,
see supra pp. 1845-46, and market failures,
see H. AARON,
supra note 9, at 12-13. By forcing a minimum level of upkeep, Rent Control may
correct for those market failures. If, however, as critics maintain, Rent
Control will result in less maintenance than that occurring under the current
market, this too could be a more efficient result.
Toward a Fuller Understanding of Rent Control, in
THE RENT CONTROL DEBATE, supra note 23, at 112 (arguing that evaluative studies must be done to determine if a
housing stock that is marginally undermaintained better serves the needs of
See, e.g., P. SAMUELSON,
supra note 54, at 370-73, 531-32.
n97 For a general overview of the costs avoided by tenants who are not displaced,
& Sheldon, cited in note 2 above, at 25-28. Existing home and condominium
owners and those who own vacant land may benefit, because the value of their
uncontrolled property may increase under Rent Control.
supra note 53; Marks,
The Effects of Partial-Coverage Rent Control on the Price and Quantity of
Housing, 16 J. URB. ECON. 360-69 (1984).
Pennell v. City of San Jose, 108 S. Ct. 849, 859 n.8 (1988) (arguing that
"[p]articularly during a
housing shortage, the social costs of the dislocation of low income tenants can be
n99 Gentrified property has a higher assessed value for property taxes, but its
occupants usually demand more city services as well. Under Rent Control,
property that would have gentrified will have a lower tax base, but the
uncontrolled property will have a higher base; those two effects may or may not
cancel each other out.
See A. POLINSKY, AN INTRODUCTION TO LAW
& ECONOMICS 123-26 (1983).
n101 Transaction costs include the cost of strategic behavior.
See id. at 18.
n102 One example would be laws that prevent bargaining for votes on
housing policy between residents of different towns.
n103 The issue as normally posed is
"whether the cost-benefit analyst should measure the winners' gains by the
number of dollars that they would be willing to pay (to offer) to obtain a
policy's implementation or by the number of dollars that they would have to be
given (that they would ask for) to acquiesce in the policy's rejection." Markovits,
Duncan's Do Nots: Cost-Benefit Analysis and the Determination of Legal
36 STAN. L. REV. 1169, 1178 (1984) (offering one solution to the measurement problem). For an analysis of the
differences between offer and asking price and their impact on economic
analysis, see Kelman,
Consumption Theory, Production Theory, and Ideology in the Coase Theorem,
52 S. CAL. L. REV. 669, 678-95 (1979); Kennedy,
Cost-Benefit Analysis of Entitlement Problems: A Critique,
33 STAN. L. REV. 387, 401-21 (1981).
The Ideology of the Economic Analysis of Law, 5 PHIL.
& PUB. AFF. 3 (1975)
supra note 103
The Mirage of Efficiency,
8 HOFSTRA L. REV. 641 (1980)
with R. POSNER,
supra note 70
supra note 103.
Prepared: January 24, 2003 - 5:02:29 PM
Edited and Updated, January 25, 2003
Kristen A. Stelljes