Why does the HOME Act cap increases at 3 percent?
Montgomery County’s Voluntary Rent Guidelines (based on the housing component of local CPI) have averaged 2.25% over the last 10 years and 3% over the last 20 years. A 3% cap is in line with standards Montgomery County has held for decades.
Prince George’s County just passed a law limiting rent increases to 3% for the next year and will look to pass a permanent bill before it expires. Mt. Rainier just passed a permanent bill with a similar cap. This number is in line with regional trends.
Nearly half of Montgomery County’s renters are considered cost-burdened, meaning they’re spending 30% or more of their income on housing and may have difficulty paying for food, transportation, and other necessities. Nearly a quarter of our renters spend half of their income or more on housing, and of those, the income of most is 30% or less of our AMI, or Area Median Income. An enormous – and disproportionately Black and brown – segment of our residents cannot just absorb annual rent increases of 6%, 8%, 10%. In Montgomery County especially, those increases are a lot of money. For many, getting an increase like that is tantamount to an eviction notice on their door.
If we go a little too low now, we can reevaluate and adjust. If we go too high, we will displace residents, and that cannot be undone.
What does the research say about rent stabilization?
The most recent studies will be the best, because legislation has improved over time due to the ability to see how negative impacts can be addressed through better policy that closes loopholes. Additionally, it's important to look at comprehensive studies that analyze many jurisdictions, as isolated case studies can be easily found by both critics and proponents of rent stabilization.
Here are two recent research studies which take a comprehensive look at rent stabilization measures all across the country:
How might the HOME Act affect new construction and the overall housing market?
It is common for opponents of rent stabilization, including developers themselves, to claim that instituting rent regulations will cause development to slow to the extent that the housing supply decreases and harms the people we intend to help. They may point to isolated case studies.
The truth is, per the 2021 Minneapolis Rent Stabilization Study linked above, which looked at the approximately 200 municipalities and two states across the U.S. with rent regulation:
“Little empirical evidence shows that rent control policies negatively impact new construction. Construction rates are highly dependent on localized economic cycles and credit markets.”
Even a study sponsored by the Urban Land Institute, a research group funded largely by the development industry, found that “repeated studies of temperate rent controls in the United States provide no persuasive evidence that such controls significantly reduce new construction.”
This is likely in part because most rent regulations include a provision exempting new construction for at least a few years. The HOME Act exempts new construction for 10 years.
Even if this development myth was true, it’s not an acceptable solution to allow lower-income renters to be displaced on the grounds that allowing that will make it easier to build more new housing, which would primarily go to higher-income renters.
There are many ways to encourage development. Allowing landlords to make sky-high profits off our lowest-income residents should not be on the table, and does not need to be.
Overall Housing Market
Rent regulations have been shown, in some cases, to correlate with an overall reduction in rental units. However, this is commonly due to owners responding to regulations in two ways that we have accounted for in the HOME Act:
Owners convert apartments to condominiums: The way to address this is by ensuring tenants have the first right to buy, so that reduction in rental housing through condo conversion results in tenants becoming homeowners (a good thing!) instead of being displaced. We already have a Right Of First Refusal law in place in Montgomery County. The County itself and the HOC also have the right of first refusal, so we can also just take over the property ourselves and continue tenants’ rental contracts.
At the same time, the County and HOC are building more housing developments than ever before, including social housing with much higher percentages of affordable and deeply affordable units than private developers. The vacancy tax in the HOME Act funds this effort, with revenues going to the Housing Production Fund.
Will owners and landlords still maintain the buildings and grounds?
Will landlords still make a reasonable profit?
The HOME Act is written to ensure owners and landlords are able to stay profitable, with a court-tested system used in other jurisdictions. If a landlord is unable to maintain their net operating income with the cap in place, they simply submit a Fair Return Petition along with their income and expenditures to be granted an exception. However, they must be in good standing with the County – in terms of maintenance and code enforcement – to do so.
So, in addition to accounting for the cost of maintenance and improvements, the HOME Act creates a new incentive for landlords to keep their properties up to code. This is an important detail, because we know the County needs more tools in the toolkit for gaining compliance. It is often the very landlords who aren’t fixing plumbing, pest, and other issues who are doling out excessive rent increases to simply pad their profits. This bill puts a stop to that.
As an additional measure for landlords, in years when the VRG is over 3%, although the cap remains 3%, landlords can “bank” the amount over 3% for up to five years and apply it to the next year that the cap falls under 3%. For example: if the VRG is 4% one year (so, a 3% cap) and 2% the next year, landlords would be allowed to “bank” that unused percent and increase up to 3% the second year. This is another way we are working to balance landlord profitability with predictability for tenants.
Will landlords evict tenants just so they can raise the rent?
The HOME Act specifically eliminates this incentive. If a unit becomes vacant, the annual cap still applies to the property during the period it is vacant. For example, if a unit is vacant for a two-year period during which the caps are 2% and 3%, the next tenant cannot be charged more than 5% over the base rent of the previous tenant.
Without this key provision (commonly called vacancy control), and especially without Just Cause legislation in place, landlords under rent regulations are incentivized to evict or otherwise drive out tenants in order to increase rent dramatically and bring in a higher income tenant.
How does rent stabilization impact home ownership?
When renters are unable to save, home ownership is unattainable. Stabilizing rents is an essential part of making home ownership a realistic possibility for more people.
How does the HOME Act fit into an overall strategy for housing in the County?
Rent stabilization is just one necessary component of a larger strategy for solving the housing crisis.
We also need zoning changes, increased investment in social housing, improvement of housing conditions through better code enforcement, and more. The HOME Act directs vacancy tax revenue to the Housing Production Fund for social housing, but we are exploring other means of increasing that funding stream as well.
Leaning only or even primarily on MPDUs (Moderately Priced Dwelling Units) included with private luxury developments will not get us to our housing goals.
Does either rent regulation bill in front of the Council provide rental assistance?
No. Neither rent bill (the HOME Act: Bill 16-23, or Anti-Gouging Bill 15-23) being considered by the Council generates or provides rental assistance, or even mentions it. Unfortuntaely, there is also no rental assistance currently in the state legislature's budget.
However, the authors of the HOME Act, Councilmember Mink just introduced a bill that will generate significant rental assistance. Recordation Tax Bill 17-23 would increase the one-time tax paid when someone buys a home, in a progressive manner (people purchasing homes over $1 million see much more of an increase than someone purchasing a home under $500,000). This increase would fund rental assistance as well as school construction, generating an estimated $10.5 million for rental assistance over the next 5 years.