Rent Stabilization in a Seasonal Resort Town
Harbor Springs is a resort town of 9,000 year-round residents. Median rent is $1,400 a month, vacancy is 1.8%, and 35% of housing units are short-term rentals. Service workers increasingly commute 40 minutes. The city council proposes rent stabilization: annual increases capped at 3% for buildings with five or more units built before 2010; new construction exempt for 15 years; landlords may reset rent to market when a unit turns over. Landlords warn they will convert units to short-term rentals or sell; tenant groups report 20% increases in the past year. The council's seven members include two landlords and one tenant organizer. A housing consultant estimates that the cap would cover 1,900 of the town's 4,200 rental units. The state does not preempt local rent regulation, but a referendum is possible if opponents gather 900 signatures.
1. Using supply-and-demand reasoning, predict the short-run and long-run effects of the proposed cap. Be explicit about elasticity assumptions.
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In the short run, supply is highly inelastic: 1,900 units are covered, and owners cannot quickly build new buildings or convert each unit. Demand is also inelastic because tenants need housing. If the 3% cap holds rents below market, excess demand appears: more applicants per unit, longer searches, informal discrimination, and reduced maintenance as landlords cut costs. Some owners will convert to short-term rentals, which the cap does not cover, or sell to owner-occupants, shrinking the rental stock. In the long run, supply is more elastic. The 15-year exemption for new construction reduces the deterrent to building, but the pre-2010 cutoff and the five-unit threshold still make older rental housing less attractive to invest in. The net effect depends on how far market rents exceed the cap and on enforcement. A cap is not a true price ceiling if vacancy decontrol lets landlords reset at turnover; that feature weakens tenant protection and may accelerate turnover. The policy may help sitting tenants while worsening availability for new arrivals.
2. How do the policy's design features-the five-unit threshold, the pre-2010 cutoff, the 15-year new-construction exemption, and vacancy decontrol-shape who bears the burden?
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The design features allocate burdens unevenly. The five-unit threshold exempts small landlords, who may be less able to absorb costs but also less likely to be the main source of affordable units; it may push owners to subdivide or keep buildings small. The pre-2010 cutoff targets older stock, which is often where lower-income tenants live, so it protects them-but it also discourages maintenance and renovation of that stock. The 15-year exemption for new construction is an incentive to build, but it creates two rental markets: regulated old units and unregulated new ones, with higher rents in the new market. Vacancy decontrol lets landlords raise rents sharply when a tenant leaves, so the cap mainly protects those who stay put; it can discourage tenants from moving and landlords from renewing leases. The two landlord council members and the tenant organizer have clear conflicts, so they should disclose and possibly recuse. Overall, the policy protects a subset of sitting tenants while leaving service workers who arrive later to face the unregulated market.
3. What alternative or complementary policies should the council consider, and how would you evaluate them against the stated goal?
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The council should compare the cap with policies that increase supply or target need. Short-term rental regulation-limits on non-owner-occupied units or a higher tax-could return units to the long-term market. Inclusionary zoning could require a share of affordable units in new buildings, though it may slow construction. A housing trust fund could subsidize rentals for service workers. Rental assistance is targeted and avoids price-control distortions, but it can raise rents if supply is fixed. Property-tax relief for owners who keep long-term leases could be cheaper than a cap. Transit improvements address the 40-minute commute. The council should evaluate each option on speed, fiscal cost, targeting, and incentive effects. A package-short-term rental limits plus a trust fund plus modest stabilization-may outperform a standalone cap, but it requires revenue and enforcement. The council should also model the referendum risk: a policy that angers 900 voters may be repealed before it works.