While New York City is on the cusp of electing a mayor who adores the thoroughly discredited policy of rent control, another American city is poised to blaze a new trail in questionable housing policy.
Residents of Duluth, Minnesota, will this week weigh in on Question 1, known locally as Right to Repair. Unlike the more common use of the term, which concerns people repairing property they own, Duluth’s version allows tenants to repair property they do not own, and at their landlord’s expense. In an attempt to address under-repaired dwellings, the law incentivizes over-repair. Much like rent control, it is likely to create more problems than it fixes.
The problem of under-repaired rentals is well understood. Tenants find something broken (a leaky faucet, a faulty appliance) and alert the landlords, who take weeks or even months to fix it. At worst, these small issues are left to degrade into major deficiencies.
The parable of the neglectful landlord describes a classic principal–agent problem. Renters (the principal) must trust landlords (the agent) to act in their best interest. The problem is that landlords have weak incentives to act with alacrity when a problem arises. They pay the cost of repair, but the leaking faucet does not drive up their water bill, and the broken appliance does not frustrate their life. Knowing it’s hard for tenants to move, landlords get to it when they get to it. Tenants suffer in the meantime.
Homeowners (people living in the home they own) avoid this problem because they act on their own behalf. The party that suffers an issue is the same as the party that pays to fix it. Important problems are dealt with quickly, and minor ones are logically left to linger. Addressing the principal–agent problem requires getting repairs done as if landlords were also residents of the property.
Right to Repair tries to do this by allowing tenants to order repairs and have their landlord foot the bill. There’s a certain logic to it. Tenants are in the best position to know when there’s a problem, and are most hurt by needed repairs. But Right to Repair doesn’t really improve the situation—it just swaps one principal–agent problem for another. Instead of the tenant trusting the landlord, the landlord must trust the tenant.
There Are Endless ‘Repairs’
Anyone who owns a home knows the projects appear as soon as you move in, and not all of these projects are worth doing. Sticking windows, cracked ceilings, depreciating appliances, sagging doors, loose (but still working) fixtures, and faulty hardware of little-used areas are all annoying, but usually not worth the cost of a handyman. My dishwasher works fine, except the display’s scrambled so I can’t tell when it finishes. It’s an annoyance, but hardly worth the cost of a handyman. Not all problems are worth fixing.
But under Right to Repair, tenants have strong incentives to get every little issue fixed. If someone else is paying, why not? While Right to Repair has a reimbursement cap, it sets that cap at half the monthly rent or $500, whichever value is greater. That leaves little incentive for renters to shop around. And repairs can be demanded every month, enabling tenants to break up a superfluous overhaul into several small jobs.
How distortive could this law get? Reasonable repairs amount to an annual cost of about $0.90 per square foot for a typically-aged dwelling. Thus an average two-bedroom Duluth apartment should incur about $75 in monthly repairs. Under Right to Repair, landlords could get hit with over ten times that—$950—every month. The law could jack up monthly repair costs as much as 9 to 18 times, depending on the type of property.
Admittedly, these extreme multipliers would require tenants to find hundreds of dollars of extra repairs every single month, and they would have to meet the approval of the city’s building inspector. That stopgap will prevent some absurdities, but only if the landlord can get an inspection within the required 30 days, and the inspector agrees with the landlord’s challenge.
In short, the law puts the burden of proof on the property-owner. Such a nice-sounding standard creates the potential for another concern: knowing problems will be quickly fixed at no cost, tenants are more likely to be careless.
The Moral Hazard of Right to Repair
Avoiding damage takes work. It’s annoying to dispose of cooking oil properly, or to move furniture very carefully so that it doesn’t scratch the floor. Anyone with young kids knows a substantial amount of effort goes into making sure that they don’t break everything they touch. But why bother taking care when you can quickly get a fix on someone else’s dime?
Landlords have always had to deal with the danger of tenant carelessness, what economists call moral hazard. It’s why there are security deposits and why smart landlords diligently photograph units between renters. Even the delay in repairing issues acts as an incentive for tenant prudence.
Right to Repair turns that moral hazard problem up to eleven. While tenants can’t pass on the cost of repairs caused by their negligence or deliberate action, the owner must prove the problem was the renters’ fault. Rarely an easy task.
As renters know what needs fixing, they have unsurpassed information on what happens in the dwelling. Did that hole in the wall come from a trip or a fit of anger? Did the microwave break due to age or rough use? Between what’s clearly wear-and-tear and what’s clearly tenant-created is a vast gray area that’s ripe for abuse.
It’s true that most tenants won’t demand endless minor repairs while shoving bones down the garbage disposal, but landlords will have to account for these worst actors. Even doubling repair costs could amount to a sizable increase in rent.
A better system would require landlords to set aside a small repair fund based on the size and age of the unit. A tenant could use the money to pay for repairs as they saw fit and pocket anything leftover. That would incentivize tenants to act more like owners, thoughtfully prioritizing issues and taking care to prevent problems. It’s not a perfect solution to the landlord–tenant repair problem; renters could ignore important problems, especially if they are about to move out. Landlords would have to continue to play an active role when it comes to major repairs. But at least this solution is in the same time zone as good policy.
Alas, it’s the one fix no one seems interested in making.
The post This Tenant ‘Right to Repair’ Law Will Create More Problems Than It Fixes was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.
