The Scourge of Rent Control
The Economist, a venerable magazine created a century and a half ago to promote free trade, argues against rent controls, which have been spreading in the United States during the past few years (“American Cities Want Rent Control to Rein in Housing Costs: Economists Still Think They Are a Bad Idea,” August 25, 2022). It would be inconsistent to defend international free trade and oppose domestic free exchange. It may be an excess of pessimism for me to wonder if the magazine’s opposition has a bit mellowed in the past couple of years (see “Rent Control Will Make Housing Shortages Worse,” and “Democrats Clamour Again for Rent Control,” September 19, 2019).
By weakening price signals that rental accommodations have become scarcer, rent control (a form of price control) prevents market adjustment including supply increases. Moreover, rent control hurts many poor households, who can least avoid the queues that are generated by prices below market equilibrium. For example, richer households are more capable of buying the apartments that landlords transform into condominiums to avoid rent controls. The magazines writes:
Rent control also tends to benefit rich tenants more than poor ones. “The targeting of the benefits of rent control is completely backwards,” says Rebecca Diamond, one of the authors of the Stanford study. She notes that rent-controlled tenants in San Francisco have higher incomes, on average, than those living in unregulated properties.
Another factor often neglected is that waiting lines increase the incentives of landlords to discriminate against poorer (and more risky) potential tenants. It is less costly to discriminate when ten persons want your available apartment than when only one potential tenant answers your ad. Defenders of the poor and virtuous promoters of income redistribution are often only proponents of “solutions” that increase government power.
According to the OECD, Sweden suffers from the most restrictive rent controls among its member states. A consequence is that the average waiting time for legally renting an apartment in Stockholm is 8 to 10 years. Interestingly, 10 years was the typical waiting time for the delivery of a brand-new car in the old Soviet empire; the powerful, including the apparatchiks, were the ones able to jump the queue (see my Regulation article “Dispelling Supply Chain Myths” and the research by Luminata Gătejel referenced there).
Note that rent increases are not only a matter of inflation, which boosts wages too, but also of higher relative prices caused by fewer housing units due to zoning regulations, especially in large cities where population is growing. Rent control, clamored for by social activists, is in large part a response to the perverse effects of previous government intervention—a frequent phenomenon.
It used to be that Democrats favored rent control while Republicans opposed it. The difference is less obvious now:
Enthusiasm for such policies is less partisan today than it was in the past. For years rent-control regulations existed in just five Democratic strongholds: California, Maryland, New Jersey, New York and Washington. … Since 2019 rent-control laws have been enacted in three additional states—Maine, Minnesota and Oregon—and they are being considered in half a dozen more.
In 2019, The Economist observed that it is normal for politicians to respond to vocal discontent with measures that, like rent control, have no apparent cost for government itself. The Economist wrote:
It is unrealistic to expect politicians to ignore voters’ demands. But the danger is that one abuse of power is replaced by another as renters, just like nimbys, campaign for regulations to lock newcomers out of the market. Although today’s residents might benefit from capped rent increases, outsiders, faced with less supply and fewer opportunities, will suffer. … Rent control harms almost everyone eventually because the housing stock deteriorates.
This calls for some additional observations. First, it is indeed unrealistic to expect politicians to ignore voters’ demands, at least the vocal or weighty ones. Second, politicians who introduce rent control are likely the main beneficiaries in terms of political support. Third, it is understandable, and perhaps inevitable, that the typical individual does not understand supply and demand, not to mention more complex economic phenomena: he has little incentive to learn since his own vote or political participation has a near-zero chance of changing the outcome. This factor explains the popular support for rent control. Fourth, the only acceptable solution lies in constitutional or institutional limits to governments’ capacity to satisfy all demands addresses to it.