Washington’s New Rent Cap Act Shows How We Refuse to Learn From History

Insights From the Publisher: Despite positive intentions, Washington’s new rent control law mirrors past policies that have undermined housing markets and driven capital out of state.

By Damon Elder, publisher and editor-in-chief, AltsWire

After a four-decade ban on rent control, Washington Governor Bob Ferguson recently signed into law House Bill 1217, making Washington the third state, along with Oregon and California, as well as the District of Columbia, to institute statewide rent control. Under the new bill, Washington rents are capped at 7% plus inflation, or 10% maximum, whichever is less. This limit will last for 15 years. Mobile home rents are limited to a flat 5% annual increase cap with no expiration date. New buildings are exempt for their first 12 years after occupancy, and only lease renewals are affected. Landlords still have the ability to raise rents freely when a unit becomes vacant.

Rent control is often positioned as a solution for renters struggling with rising costs. Zohran Mamdani, who describes himself as a democratic socialist, recently won New York City’s Democratic mayoral primary with rent freezes as one of his main campaign proposals. Mamdani, who is now the frontrunner to be New York’s next mayor, wants to suspend rent increases on the city’s approximately 1 million stabilized apartments. While rent control may be a popular way to nab votes, this move reflects a deeper, more persistent issue: the unwillingness of political leaders to learn from the well-documented failures of rent control policies across our history.

It seems that few economic policies have been as extensively studied as rent control, and for most economists, the data is clear: rent control does not help developers, investors, or the very tenants that it aims to support. In a study published in the Journal of Housing Economics, 112 published empirical studies, performed between 1967 and 2023, are examined. In the end, the author finds that rent control “results in a number of undesired effects, including, among others, higher rents for uncontrolled units, lower mobility and reduced residential construction. These unintended effects counteract the desired effect, thus, diminishing the net benefit of rent control.”

Perhaps most relevant to the alternative investments industry is rent control’s effect on housing supply. According to a 2023 study by the National Apartment Association and NDP Analytics, more than 70% of housing providers stated that rent control impacted their investment and development plans, and they planned to take actions including reducing or removing investments or canceling plans altogether. This likely means that Washington can expect fewer multifamily developments, a deterioration in existing stock, and an overall halt on private investment.

According to a study led by Ike Brannon, senior fellow at the Jack Kemp Foundation, Washington’s 7% price cap is estimated to result in 7,000 fewer units being constructed over the next decade, along with a loss of $11 million a year in tax revenue, a $16 million per annum decrease in maintenance spending, a total income loss of $57 million per annum, and a total reduction in property values of about $1.1 billion.

If Washington lawmakers are not satisfied to examine studies of what is likely to happen in the future, they may look to California as a cautionary tale. According to a study by The Center Square, housing production fell by 35% in Los Angeles between 2019 and 2022, after the implementation of stricter rent controls. Even as demand has surged, supply has stagnated, as developers face mounting regulatory hurdles, rising insurance costs, and caps that make risk-adjusted returns unattractive. This forces capital toward less regulated markets and only exacerbates affordability issues. According to the same study, market rent for a studio apartment increased from $1,158 in 2019 to $1,534 in 2023. Similarly, a study by the National Bureau of Economic Research examined San Francisco’s 1994 rent control expansion and found that, while tenants initially benefited, landlords ultimately reduced the rental housing supply by 15%, causing a 5.1% citywide rent increase. It seems that Washington is determined to repeat these same mistakes.

Along these same lines, rent control also fails to target the populations that it purports to help. As stated, rent control can drive up overall rents, but it also subsidizes housing for all renters, not just low- and moderate-income households, often resulting in misallocation. In an unregulated market, residents have an incentive to move as their lifestyle changes. Households may look to upgrade with an increase in income or downsize as children leave home. In a regulated market, there is little incentive for residents to move. In Washington and New York City, there is no means test or income-based eligibility for rent-controlled housing. This can result in higher-income residents in rent-controlled housing or individuals and empty nesters living in a larger unit meant for a family. This further reduces options for low- and moderate-income households. According to the Journal of Housing Economics, this can also result in certain black-market activities like demanding “key money,” a nonrefundable deposit upon moving in, or residents subletting their apartments for a profit.

Finally, rent control can create a regulatory quagmire, especially for smaller firms. In California, for example, cities may layer on their own local caps on top of the state rent cap, creating a maze of red tape that investors and developers now seem to actively avoid.

California and Oregon both face significant housing shortages. This may be due to the fact that capital is mobile, and investors are likely to choose to place funds in states that respect market fundamentals, not those that shift risk asymmetrically onto owners. With Bill 1217 signed into law, Washington may soon share the same fate as its West Coast neighbors.

Rather than focusing on rent control, Washington’s policymakers may be better served to pursue other alternatives, such as incentives for developers, streamlined zoning regulations, and public-private partnerships. If lawmakers instead encourage the construction of new rental units and expand affordable housing options, they can benefit residents, developers, and the state as a whole.

Washington’s move toward rent control is not just an economic mistake. It is a strategic signal to the alternative investment industry to stay away. Institutional investors, private equity firms, and real estate sponsors may be expected to seriously reassess Washington’s market attractiveness in light of this new regulatory landscape. By choosing political expediency over market reality and layering political risk onto the real estate sector, Washington is effectively pushing capital away. This will ensure fewer housing starts, weaker property valuations, and slower economic growth in the coming decade. Perhaps the next state will have the opportunity to learn from their mistake.

Damon Elder is the publisher and editor-in-chief of AltsWire, as well as president of Spotlight Marketing Communications. He has worked in the alternative investments industry for nearly 20 years and was previously a congressional aide and political consultant before finding honest work in the private sector. Agree or disagree with what you read here? Share your views with him at [email protected]. Thoughtful replies may be published in AltsWire.

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