President Biden is widely expected to implement a 10% cap on rent increases for certain affordable housing properties that are subsidized by the government.

The regulation would target property owners and developers that participate in the Low Income Housing Tax Credit (LIHTC), an affordable housing program that delivers financing to developers but binds them to specific affordability standards.

The way the program is currently structured, rents may rise each year by the higher of either 5% or twice the percentage change in the national median income. While 10% rate increases on these properties aren’t common, the official rate cap would put an end to them entirely.

National Low Income Housing Coalition president and CEO Diane Yentel applauded the rent cap, saying it would “ensure greater housing stability for the millions of low-income households living in these homes.”

“The decision to prevent egregious rent increases is an important win for the millions of renters living in tax credit-financed properties,” she added.

Housing developers beg to differ, warning of unintended consequences such a regulation could bring.

Critics warn a rent control cap will stifle the development of additional low-income housing supply in the U.S., exacerbating an existing affordable housing shortage. According to the National Low Income Housing Coalition (NLIHC), the U.S. real estate market is short of over 7 million affordable rental homes for the low-income community.

Biden's cap might also sideline the government on more projects as developers get creative and obtain financing for low-income housing elsewhere.

Supply-demand dynamic

Multifamily housing developers have been facing increasingly challenging conditions since Covid, including a labor shortage, high building material costs, and expensive credit due to high interest rates.

If Biden's cap came to pass, builders would be less incentivized to invest in low-income housing, coming with additional restrictions around tenant protection.

The Mortgage Bankers Association (MBA) warns: “If the Administration imposes unworkable rent caps on LIHTC programs, it will severely suppress—if not kill—the program. Such a move is puzzling and contradicts many of the Administration’s other efforts to increase affordable rental housing.”

Instead, the MBA suggests bolstering the supply of affordable housing across the nation.

David Dworkin, president and chief executive of the National Housing Conference, similarly took aim at the rent cap.

“You’re discouraging the creation of supply,” he said. “At a time when insurance costs are skyrocketing, and the fixed cost of building is already high…how many different ways are we going to make it harder to build an affordable unit?”

Another obstacle includes pushback from communities where low-income housing isn’t welcome.

For example, in Minnesota, a local developer who had been selected for low-income housing credits set out to build an affordable housing project. But backlash from residents and the local government made the development no longer viable, causing the builder to abandon the project altogether.

Private market financing risk

One unintended consequence of greater government intervention could be developers shunning federal subsidies and tax credits altogether in favor of the private markets.

Similar developments are already beginning to unfold in California, which is in the throes of a homeless crisis that the state government has earmarked tens of billions of dollars toward.

The price tag on government projects isn’t cheap, leading at least one affordable housing developer to turn to private capital instead.

SDS Capital is skipping state assistance to build a low-income apartment complex in Los Angeles. The project, which will offer 4,500 low-income units, costs SDS $300,000 to develop compared with an average price tag of $600,000 to finance affordable housing projects of this magnitude with government funding.

“We believe there’s a different way than using government money, which really becomes slow and arduous and increases costs,” stated Deborah La Franchi, CEO of SDS Capital Group.

The risk is that the private markets will begin to take more share from the government, despite the fact that their long-term commitment to the low-income market is unproven.