Politics in the Pro Forma

When toilet paper disappeared during COVID, prices spiked. Yet no one demanded price caps. Everyone knew supply would rebound, because anyone could produce, ship, and stock toilet paper.

Housing is different. When rents surge, calls for political intervention follow almost immediately. Not because people misunderstand economics — but because unlike toilet paper, they can’t add supply themselves.

In the early 1900s, Boston families built triple-deckers. They lived in one unit, rented the others, and in doing so directly expanded the city’s housing stock. Today, new supply doesn’t come from households. It comes from 400-unit build-to-rent projects, executed by institutions with capital, entitlement expertise, and scale.

When ordinary households feel priced out, they turn to the only lever available: politics.

From the early 1970s to 1994, Cambridge, Massachusetts imposed one of the strictest rent control regimes in the United States. The aim was affordability. The outcome was misaligned incentives that every investor will recognize.

Rent control capped upside while leaving downside intact. Landlords stopped reinvesting. Developers shifted capital elsewhere. Supply froze. And ironically, affordability worsened for the very households rent control was meant to help.

In 1994, voters abolished rent control. Within months, capital flowed back. Buildings were renovated, projects finally penciled again, and the city’s housing stock rebounded. Rents rose, yes — but quality and availability improved after decades of neglect.

For investors, Cambridge is more than a historical anecdote. It is a case study in how policy distortions alter the pro forma — and how reversals can unlock generational returns.

The toilet paper analogy is instructive. Consumer goods are elastic and individual. Housing is inelastic and institutional.

That structural difference explains why housing markets attract political pressure in ways other goods do not. Once supply requires institutional capital and long lead times, affordability crises inevitably spill into politics. Pushback — rent caps, zoning fights, ballot measures — isn’t noise. It’s intrinsic.

For institutional residential investors, this means politics must be treated as part of the underwriting model. Just as you stress-test interest rates or construction costs, you must stress-test for political risk.

Cambridge crystallizes three enduring lessons:

1. Policy Risk Is Market Risk

   Rent control didn’t just change tenant-landlord dynamics. It reshaped the risk-return equation. For investors, regulation belongs in the pro forma as a fundamental input.

2. Distortion Creates Scarcity

   When incentives are capped, capital exits. Supply contracts. Scarcity deepens. Policy designed to protect affordability often amplifies the shortage.

3. Reversals Unlock Opportunity

   Cambridge’s post-1994 rebound shows how quickly capital re-prices when distortions unwind. Those positioned early captured generational wealth creation.

Housing affordability is once again headline news. Rent control proposals are resurfacing in New York, California, Minnesota, and beyond.

It’s natural to put on the Mr. Monopoly’s hat and call for more supply = good. But for serious institutional investors, the sharper question isn’t whether politics will intrude. It will.

The sharper question is: Where is today’s Cambridge — and how do you position for the reset when policy and economics inevitably converge?