THIS ISSUE BRIEF is part of a series examining a variety of controversial local and national issues, focusing on specific policy proposals that are under active consideration. The premise of these essays, as outlined here and here, is that many important public policy issues are more complicated than the most fervent adherents to either side usually acknowledge, a dynamic that often hinders our ability to engage in thoughtful debate. (Earlier essays in the series have addressed proposals for free community college, free MBTA service, and the state’s right-to-shelter law.)

For each proposal in the series, I will provide some basic background, with a high-level framing of the disagreement and the polarized “bumper sticker” arguments on both sides. I’ll then present what I believe to be the most reasonable evidence-based cases, pro and con. Each issue brief will conclude with reflections on possible avenues for finding common ground or higher ground and some basic data points, with links to useful resources, to help facilitate a rational and civil dialogue, ideally leading to agreement or at least understanding, if not in the halls of power, then maybe just around the dinner table. 

The Proposal: 

Enact a state law authorizing municipalities to limit annual residential rent increases and impose an additional “transfer fee” on high-priced real estate to help fund affordable housing development.

Background:

Massachusetts in general, but Greater Boston in particular, is one of the most expensive places to live in the country.  Although this is a reflection of a strong economy and high levels of average wealth and income, there is a risk that our high cost of living could dampen future economic growth and exacerbate income inequalities by undermining the state’s competitiveness and squeezing low-to-moderate income households that do not fully benefit from rising incomes. 

Since the passage of a ballot initiative in 1994, municipalities in Massachusetts have been precluded from imposing restrictions on rent increases (known as rent control or rent stabilization). Similarly, under the state constitution, municipalities may not impose new taxes without approval from the Commonwealth, and since the passage of Proposition 2½ in 1980, municipal property taxes cannot exceed certain limits.

Boston Mayor Michelle Wu and the City Council have submitted so-called “home rule” petitions to the Legislature (as has Brookline), seeking authority to restrict annual residential rent increases to six percent, plus inflation, with a combined cap of 10 percent. At the same time, the city is seeking authority to impose a two percent marginal “transfer fee” (technically not a property tax) on the value of all real estate transactions above $2 million. The Commonwealth currently levies a statewide transfer fee of $4.56 per $1,000 on all real estate transactions, with higher rates on Cape Cod.

Sticking Points and Bumper Stickers:

The argument between the activists regarding rent control and additional real estate taxes is generally framed as a conflict of rights or entitlements between tenants and property owners.

Affordable Housing is a Human Right!: Rent control activists tend to believe that in an affluent society everyone is entitled to a decent home they can afford. While landlords have a right to a “reasonable” income, tenants’ rights advocates argue they are not entitled to gouge their residents or drive them out with unreasonable rent increases. At the same time, they argue that developers and other real estate owners who make significant “unearned” profits from a general increase in property values should have to help subsidize lower-income renters and home buyers.

Rent Control is Legalized Theft!: Advocates for landlords generally maintain that they have a fundamental property right to charge whatever rent they want, based on supply and demand, just like any other business is free to set its own prices. Similarly, they argue that it’s unfair for income from real estate sales to be treated differently than income or capital gains from any other source.

Evidence-based Case in Favor:

The development of new housing in Massachusetts is extremely slow and costly, relative to other parts of the country. As a result, the Commonwealth ranks 42 among all 50 states in housing permits per capita, at almost half the national average. Without a robust construction market, the cost of housing tends to rise steadily, especially in a state like Massachusetts, which has the highest per capita personal income in the country.

For a variety of reasons, including restrictive municipal zoning regulations and procedures, there are few opportunities for developers to invest in significantly expanding the state’s stock of residential housing, especially when there are better opportunities elsewhere. When it comes to rental units, these general market conditions produce low vacancy rates, leading landlords to increase returns on their existing properties by raising rents or pursuing condo conversions, contributing to dislocation of lower income families and neighborhood gentrification. 

As with any product or service, the tighter the supply relative to demand, the higher the price. The problem is that for many low-to-moderate income families, their earnings are not rising nearly as fast as their rent. Since 2012, median gross rent in Massachusetts has grown almost 30 percent faster than median household income and almost two-thirds faster than the average income of the bottom quartile. The cost of housing presents a particularly acute problem in Greater Boston, where it accounts for about 33 percent of the average household budget, ranking seventh among major metropolitan areas in the US.

The bottom line is that housing is becoming unaffordable for a growing number of Massachusetts families, who have few, if any, alternatives, creating a distorted and inequitable rental market that unduly favors landlords, with little that can be done in the near-term to change the underlying supply and demand equation.

Given this state of affairs, it’s reasonable to allow municipalities to consider modest limits on annual rent increases, in order to avoid further disruptions to families and neighborhoods, at least during this particularly tight housing market.

While providing relief to renters now, state and local policy makers need to take more ambitious steps to enable and encourage housing production, especially affordable housing for low-to-moderate income families. Making a meaningful impact on the pace of development will require policy changes, but also more public resources to subsidize projects that would otherwise not be viable or competitive in the current economic environment. 

While the state is taking steps to increase its level of investment, municipalities need the ability to mobilize new resources too, but in light of the legal limitations on local taxing authority, there is little practical opportunity to do so.

Authorizing municipalities to impose a modest charge on the largest real estate transactions, with revenues earmarked specifically for affordable housing, would help stimulate new construction of multi-family dwellings in those high-need, high-demand neighborhoods that lack adequate housing stock.  Given Massachusetts’s overheated real estate market, especially in Greater Boston, it’s highly unlikely that a two percent fee on the value of transactions above $2 million will have any appreciable impact on demand or home sales.

Evidence-based Case Opposed:

The underlying problem of housing costs in Massachusetts is the lack of supply due to the costs and bureaucratic challenges of new construction. Restricting rent increases and taxing real estate transactions will inevitably have the effect of reducing incentives even further for private investment in housing of all kinds, which will only serve to make the problem worse. It also places a disproportionate burden on the real estate industry, rather than the general public, for funding a broad-based social challenge.

There is a long history of rent control in Massachusetts (pre-1994) and around the country, which paints a consistent picture of market distortions and unintended, often inequitable, consequences. New York City is perhaps the largest, longest lasting example.

Today, close to one million New York City homes are covered by its rent regulation policies, about 44 percent of all rental units. There are restrictions on removing apartments from the rent-control system and eviction protections for tenants, including the right of a tenant to pass on an apartment to a family member. As a result, many units have been part of the rent control system for decades. Importantly, landlords are not required to rent these apartments to lower-income tenants, so many of the beneficiaries are upper-income households, who also tend to be savvy enough to find and hold the best units. Among other consequences, these rules can lead to higher vacancy rates and lower maintenance standards in rent-controlled apartments.

More broadly, there is a general consensus among economists that rent control is not a solution to the affordable housing shortage. A 2018 study by the center-left Brookings Institution summarizes the issue this way: “While rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhood.”

A 2019 study out of Stanford University on rent control in San Francisco found a very similar impact on the rental market. The study’s authors conclude that “since many of the existing rental properties were converted to higher-end, owner-occupied condominium housing and new construction rentals [which are exempt from rent restrictions], the passage of rent control ultimately led to a housing stock which caters to higher income individuals.”

Taxing real estate transactions has similarly distorting and counterproductive effects. A 2019 study by PFM Group Consulting cites a “definitive” Toronto study, which “found that Toronto’s 1.1 percent tax caused a 15 percent decline in the number of sales and a decline in housing prices about equal to the tax.”

Unfortunately, the track record of rent control and higher real estate taxes suggests that they are not solutions to our affordable housing crisis.

Potential for Common Ground or Higher Ground:

Assuming both sides of this argument support more housing and lower occupancy costs, the disagreement might be more about whether one prioritizes immediate relief and stability in urban neighborhoods or more long-term regional solutions, and who should bear the added expense.

Expanded rental subsidies or vouchers, especially during periods of rapidly rising rents or low vacancy rates, might provide more direct relief for lower-income tenants in the near term, without creating perverse incentives for landlords. Relaxation of local zoning restrictions and permitting procedures, especially for multi-family dwellings, including triple-deckers and “in-law” apartments, not just in cities like Boston, but also in surrounding suburbs, could also spur housing production. 

This is the focus of the MBTA Communities Law. Additional direct subsidies or tax credits to for-profit and non-profit developers might likewise encourage the construction of more units for middle-income families, who might not otherwise be eligible for government support. Innovative public-private partnerships for mixed-income developments to complement traditional public housing might also be worth exploring or expanding.

Jim Peyser served most recently as Massachusetts secretary of education under Gov. Charlie Baker.

Data:

  • Median monthly Massachusetts rent (2022):  $1,634
  • Average monthly Boston rent (June 2023):  $3,116 (up 12.5 percent compared to June 2022)
  • Real-time availability rate for Boston apartments (June 2023): 3.2 percent
  • Percentage of subsidized housing units in Massachusetts (June 2023):  9.7 percent
  • Percentage of subsidized housing units in Boston (June 2023): 19.2 percent
  • Median single-family home price in Greater Boston (May 2023):  $900,000 (up 2.9 percent compared to May 2022)
  • New housing units permitted for construction in Massachusetts per 1,000 existing units (2022):  5.9 (compared to 11.7 national average, 10th lowest in the U.S.)

Sources & Resources:

Massachusetts Zoning Laws:  https://www.mass.gov/info-details/massachusetts-law-about-zoning

U.S. Census Data on Housing and Income:  https://data.census.gov/

Real-Time Availability Rates for Boston Apartments:  https://bostonpads.com/blog/boston-rental-market/2023-mid-year-boston-apartment-rental-market-report/