Rent Caps in Marrow City
Marrow City has 480,000 residents, 62 per cent of them renters. The rental vacancy rate is 1.6 per cent, down from 3.4 per cent in 2019. Median rent rose 15 per cent in 24 months while median renter income rose 4 per cent. Residential building permits fell 22 per cent from their 2021 peak; the construction cost index is up 31 per cent over the same period, and the planning department estimates the city is 9,000 units short of demand. The council is considering a cap on rent increases at CPI plus 2 per cent, exempting buildings less than 10 years old and new construction for 15 years. A companion measure would levy a 3 per cent surtax on units left vacant more than six months. The landlords' association says the cap will "destroy supply." The tenants' union calls the exemptions "fake rent control." The vote is in six weeks and the city's own economists disagree.
1. Predict the short-run and long-run effects of the cap, explaining the mechanism.
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Short run: a transfer, not new supply. The stock is fixed at 1.6 per cent vacancy, so the cap binds immediately on sitting tenants. Surplus shifts from landlords to tenants, and tenants stop moving - turnover falls, which is a benefit to them and a cost to would-be entrants, who now face fewer vacancies. Rents in the uncontrolled segment can rise as demand is displaced there.
Long run: supply responds. With 9,000 units of shortage and permits already down 22 per cent, the cap adds a reason not to build. Expect reduced new starts, conversion to owner-occupation or short-term rental, and deferred maintenance, since returns on upkeep fall when rents are fixed. Over time the shortage worsens, which is the mechanism behind the landlords' claim.
The exemptions complicate both. A 15-year new-build exemption preserves the incentive to build and blunts the long-run supply effect, but it also means the cap covers a shrinking share of the stock and creates an incentive to redevelop to reset the exemption - the tenants' union's point.
2. Who bears the burden of the 3 per cent vacant-unit surtax, and will it increase the supply of rented homes?
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Start with why the unit is vacant. The tax is not one policy but several, because vacancy has different causes:
- Speculative holding or land banking: the owner has no tenant to pass the tax to, so the incidence sits with the owner. The tax raises holding cost and should push units onto the market - the intended effect.
- Between tenancies or under renovation: the owner will try to shorten voids and may raise rents slightly, so incidence partly shifts to tenants. The city should allow exemptions for documented renovation.
- Second homes or deliberate under-use: revenue is raised, but the housing stock may not change.
So yes, it can increase supply, but modestly, and mainly at the margin. The risk is conversion to short-term rental or even demolition to avoid the tax, which cuts long-run supply. A 3 per cent rate on a unit worth $2,000 a month is small relative to a year's rent, so the design needs a credible penalty and a clear definition of vacancy before predictions are confident.
3. What evidence over the next two years would change your recommendation?
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I would commit in advance to the observations that would count against the policy, so the decision is revisable rather than tribal.
- Permits and completions, especially in buildings that will be exempt: if starts collapse relative to comparable cities, the long-run supply worry is confirmed.
- Vacancy rate and turnover: if 1.6 per cent falls further, tenants are being protected at the cost of entrants.
- New tenancy rents versus sitting-tenancy rents - the gap measures how much of the benefit is captured by incumbents. This is the key equity test.
- A difference-in-differences comparison of controlled and exempt buildings, testing whether maintenance complaints and evictions diverge.
- Surtax incidence: share of vacancies attributable to renovation versus holding, from inspection data.
If rents in new tenancies keep rising while sitting rents flatten, that is the strongest case for pairing the cap with supply subsidies rather than extending it to exempt buildings.