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Matthew Gagnon of Yarmouth is the chief executive officer of the Maine Policy Institute, a free market policy think tank based in Portland. A Hampden native, he previously served as a senior strategist for the Republican Governors Association in Washington, D.C.
Next week, residents of the city of Portland will head to the polls, and make a fairly consequential decision on one of the most important issues facing the city right now: housing.
At issue is a referendum question, Question A, which seeks to amend Portland’s rent control ordinance. The change being proposed leaves the rent control provisions almost entirely in place, with a small change that would allow landlords to adjust rents once a tenant voluntarily vacates the apartment.
Proponents claim that it maintains the existing “protections” in the ordinance for those who live in an apartment, but affords landlords needed flexibility to get the financial wiggle-room they need to conduct routine maintenance, make necessary improvements, and actually profit from their ownership of the building.
The argument is a good one. The majority of landlords in Portland, and indeed statewide in Maine are small-scale owners, either individuals or families, who have a small number of properties, oftentimes a single building or just a few units. For these people, owning a rental property is not a ticket to wealth, but rather a long-term investment that will often take decades to truly pay off, if it ever does.
For a fairly typical property, the net profit is often only a few hundred dollars a month before you even consider things like repair work, utilities, regular maintenance, yardwork or plowing snow. Many of these small owners take a very small annual profit, or even a loss, for the hope that their investment may someday provide a way to build a nest egg for retirement.
In the city of Portland today, a property owner like that is legally prevented from raising the rates beyond certain very modest thresholds for as long as they own the property, despite spiraling costs for labor and materials due to inflation. That means that as time goes by, the very modest profit that a landlord could potentially make quickly turns into losses, and then big losses.
As that profitability craters, there is no longer any incentive, nor any capacity to do needed maintenance and repair work, let alone upgrades. There is a reason why housing stock deteriorates significantly in rent controlled cities: landlords simply don’t invest in maintenance because they can’t recoup their expenses.
This is what Quesion A seeks to address. When a tenant voluntarily leaves a property, the landlord would now have an opportunity to recoup some of the lost income that the rent-controlled unit had held back. That makes it possible for them to afford the repairs and do the upgrades they would ordinarily want to do.
The question is logical, and frankly necessary, but it does have some problems. First, of course, is that it is a referendum, and I have always (and will always) have a problem with complex legislation being passed in this way.
Second is the fact that while it does address a major flaw in Portland’s rent control ordinance, it will also likely exacerbate the biggest problem it creates: contracted supply. Already tenants are incentivized to stay in their apartments for as long as possible, but with this change the fear of rent increases coming from a move into a vacant apartment may push tenants to stay even longer. This could keep apartments from rolling over, and maintains artificially low supply.
Third, and most important to me, it just doesn’t go far enough.
The problem is rent control in Portland, not certain aspects of it. It is a classic example of a policy that sounds good, while being actively destructive. It makes worse the very problem it purports to solve.
The problem in Portland — and increasingly other areas — is demand versus housing supply. The solution to this is either to lessen demand, which is unlikely, or to increase supply. Rent control, though, creates market distortions, which induce a myriad of factors that make supply shrink. Allocation inefficiency coupled with the delayed cycling out of units drastically reduce available apartments, as can the financial incentive for landlords to convert rental units into condominiums, reducing the available rental stock even further.
But more than anything, it is Portland’s systematic attempt, through rent control and countless other policies, to destroy any kind of profit motive that has destroyed any incentive for building new housing stock. Without the hope of capitalizing on an investment, few invest, and little of any substance is built. This compounding bureaucracy is the very same phenomenon that has destroyed the housing market in cities like San Francisco.
So if you are wondering how a city that has nearly 10,000 fewer citizens than it did 70 years ago suddenly has a housing crisis, blame bad policy.
