Rent Control – Behavior Modification

Video Transcription

Hey, Travis Daggett with Cornerstone Properties. I’m in Eugene, talking again about rent control today. And specifically responding to Tina Kotek, who is one of our Oregon state legislators, and her proposal of rent control. Tried and true or tried and false?

Manipulating Tenant Behavior

Last time we talked about supply and demand and how rent control affects supply, it’s not good. Next we’re going to talk about how rent control artificially influences tenant behavior. Normal tenant behavior, when a market is allowed to be free and work on its own, versus with rent control. A couple analogies, or just one real example. Let’s say, again, you have market rent is $1,500 a month. So you have somebody that has $850 a month to spend. So naturally, it’s going to be hard for them to find a place for $850 a month. So their normal behavior is they’re going to move in to a place with a roommate or two and rent a place for $1,500 a month. That’s what they can find.

You have people that are single that can afford $1,500 a month. They don’t need to take roommates. They’re going to find a place for $1,500 as well. Now here if you artificially fix prices, you put rent control in place at $850 a month let’s say. Now you have the person that can afford the $850, and that’s all they can afford, but they’d have to get roommates. And then you have the person that can afford $1,500, but it’s capped at $850. Now both of those people and the potential roommates are all competing for the same place. So that’s not a good type of competition. That’s again another way that rent control reduces the availability and effectively reduces supply because it just makes it harder for people to find places because the market’s not able to work.

The Sports Analogy

Another analogy that might make sense too from sports is it’s like telling a certain athlete, and of course this has been done or attempted in a number of different sports. But let’s just say in football, there’s a salary cap at $100,000. In other sports, no cap. So they can make millions. What’s going to happen? Of course people are going to stop playing football. The best and the most talented football players or athletes are going to favor other sports. There’s not going to be near as many football players or people wanting to play football. They can go to another sport. Now back into the world of real estate, what happens with rent control is where developers and builders would … without rent control they’re going to build single family, but of course multi-family, mostly rental units. When rent control is enacted, it’s not worth the risk for them anymore because they don’t have the potential for profit that’s worth borrowing money, all of the things that people do as entrepreneurs.

It’s Just Not Worth the Risk Anymore

They’re going to usually move to commercial. That’s normally what happens. They move to developing and building commercial properties. So again, where’s the supply? The supply, the new supply effectively stops in that case because of rent control because it’s just not cost effective anymore. So, hope that explains how rent control artificially manipulates tenant behavior and landlord behavior as well. Travis Daggett, Cornerstone Properties, talking about rent control. And we’ll do one more video next time. See you. Thanks.

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