NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The End of Rent Control in Cambridge

The end of rent control raised the overall valuation of Cambridge's housing stock by $1.8 billion between 1994 and 2004, more than $1 billion of which was due to spillovers to never-controlled houses.

In 1995, two months after voters in a state-wide referendum approved the elimination of rent-control policies in communities across Massachusetts, controls on apartment rental prices were almost entirely abolished in the city of Cambridge. In Housing Market Spillovers: Evidence From the End of Rent Control in Cambridge, Massachusetts (NBER Working Paper No. 18125), authors David Autor, Christopher Palmer, and Parag Pathak estimate that abolishing rent control added about $1.8 billion to the value of Cambridge's housing stock between 1994 and 2004, nearly a quarter of Cambridge's total residential price appreciation in this period. Nearly $1 billion of this increase came from the positive spillover impact of decontrol on the valuation of residential properties that were not previously covered by rent control.

In 1970, the city of Cambridge imposed far-reaching rent controls on residential properties built prior to 1969, placing strict caps on rent-price increases and implementing policies that made it difficult for property owners to remove rent-controlled units from the rental stock. Significantly, residential units built after 1968 and owner-occupied homes were exempt from the new rent-control rules. In all, more than one-third of the city's total residential units were subject to rent control.

In 1994, opponents of rent-control policies in Massachusetts placed a referendum question on the November general-election ballot that asked voters whether to eliminate rent-control ordinances and laws in cities and towns across the state, including in Cambridge. The state referendum to ban rent controls narrowly passed, by a 51-to-49 percent margin.

Just prior to the elimination of rent control in 1995, controlled units typically rented at 25 to 40 percent below the prices of nearby uncontrolled units, a clear benefit to tenants in those units. But valuations of rent-controlled units were significantly lower than non-controlled units, and evidence indicates that ownership investments in rent-controlled units, including maintenance, upkeep and capital improvements, were lower than investments in non-controlled units.

Immediately following rent decontrol, rents at formerly controlled units in Cambridge increased steeply. Simultaneously, residential turnover rose sharply, with the sharpest increase occurring at decontrolled units as tenants relocated in the face of rising rents. Over the next several years, direct dollar investments in housing units, as measured by building-permit filings, more than doubled on an annual basis.

To estimate the effect of decontrol on real estate values, the authors exploit a wealth of before-and-after property sales and assessment data from city real estate records, valuation and sales figures, building-permit filings, and U.S. Census data. Because the density of rent-control units varied from neighborhood to neighborhood, the authors are able to track inter-neighborhood and cross-neighborhood changes in housing prices, both within Cambridge and in nearby cities and towns that never had rent controls.

As theory would predict, the assessed values of previously controlled properties, which generally had lower valuations before the statewide referendum of 1994, increased substantially, by approximately 18 to 25 percent. More surprisingly, the authors also find a "large and significant" spillover impact from the removal of rent controls onto the valuation of never-controlled properties. Exploiting cross-neighborhood variation in the proximity of never-controlled units to previously controlled units, the authors estimate that decontrol raised the market value of never-controlled units by 12 percent on average between 1994 and 2004.

Although the value of previously controlled units rose by proportionally more than the value of never-controlled units, the never-controlled units were both more numerous and more desirable than the decontrolled units. Consequently, more than half of the induced rise in residential real estate values – about $1 billion – was due to positive spillovers to market value of never-controlled housing units.

--Jay Fitzgerald

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.
 
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