Rent Control Chokes Supply by Making Every Building Risky in the Same Way
When every rental shares the same citywide risk, building one more no longer spreads risk around, so buyers demand higher returns and fewer projects make financial sense.
The Diff · What We Periodically Relearn About Rent ControlImagine you own five apartment buildings in different neighborhoods in the same city. Normally, that spread protects you. One street gets trendier, another cools, and your rental income roughly balances out. Owning five is safer than owning one, and safer means you can get by with a lower return to own them.
Investors have a name for this logic. It is the idea behind the capital asset pricing model, a finance rule that says you do not get paid extra for risks you could have diversified away. Because a five building owner is diversified, that owner needs a lower return to justify holding them.
Rent control weakens that protection. It reduces the profits from owning rental housing, and it increases the unpredictability of those profits, because once some units are controlled it becomes easier to extend controls to more buildings or to change the terms. Since it discourages upkeep, because the landlord no longer captures the upside, it brings further rules that might not reflect what renters would have chosen to pay for.
The deeper problem is that a citywide factor makes returns move together. Owning a building in a city ties you partly to how the whole city does, and partly to whether your particular block stays popular. A local owner can spread the risk of particular neighborhoods falling out of favor by holding buildings in separate neighborhoods, but the citywide part remains and moves all of those buildings' returns together.
When incomes from different properties move in lockstep, adding another unit adds less diversification, because a dip tied to the citywide factor hits the new building too, so it offers little cushion. Less diversification means buyers demand a higher return to take the risk, which economists call a higher discount rate. A higher discount rate lowers the present value, or what future rents are worth in today's dollars, and if that value falls below what it costs to build, the project is not worth building. So fewer empty lots and small buildings clear the return hurdle necessary to get built, and a city that is a desirable place to live stops becoming one with room for more people.
Questions people ask
If rent control hurts supply, why do tenants still support it?
Current tenants in controlled units often do pay less for as long as they stay, while the costs show up years later in less maintenance and fewer new apartments. That delay makes the tradeoff easy to miss.
What is a discount rate in plain English?
It is the annual return an investor demands to tie up money in a risky project instead of something safer. The riskier or less predictable the future rents look, the higher the demanded rate, and the less the investor will pay upfront for the building.
Can't a landlord diversify by owning buildings in different cities?
An owner with buildings in another city does escape this city's rules for those other buildings. But a local owner focused on one city cannot spread that citywide risk that way.