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.
READER COMMENTS
David Henderson
Sep 5 2022 at 4:50pm
I don’t quite get The Economist‘s point about enthusiasm for rent control being less partisan. That may be true, but pointing to 3 other states in which the Democrats dominate–Maine, Minnesota, and Oregon–doesn’t make their point.
Pierre Lemieux
Sep 5 2022 at 11:20pm
David: You are right that they are very weak on that point (even if their claim is vague—I echoed their vagueness). They should have been more precise, including on what are the half-dozen states where rent control is considered, and whether it is considered in specific places or at the state level.
Craig
Sep 5 2022 at 5:58pm
“Ladies and gentlemen, the Bronx is burning”
https://www.youtube.com/watch?v=bnVH-BE9CUo&t=24s
1977 World Series occurring during the backdrop of a fire at a large abandoned apartment building.
Naturally that specific incident it is impossible to know what caused the fire specifically, but in that era rent control was causing landlords to burn their buildings to get the insurance proceeds rather than keep them. The video suggests the building had already been abandoned which suggests the landlord allowed the building to fall into disrepair making it susceptible to fire possibly because prospective tenants’ rent payments would not justify the investment.
In any event while there were a myriad of political, social and economic factors at play in the late 1970s, rent control was unequivocally a cornerstone of urban decay in that era, the population of the Bronx dropped by 20% during the 1970s and only in the decade ending 2020 did the population in the Bronx exceed the population in 1970.
Walt
Sep 6 2022 at 3:19am
The dwindling number of rent regulated (controlled and stabilized) apartments in NYC has not prevented an ongoing boom in the construction of new apartment buildings, all with exorbitant and ever-rising rents and even more astounding purchase prices. Then, too, most buildings with rent stabilized apartments went coop or condo beginning in the 1980s which means that all apartments become deregulated when their (pre-conversion and therefore also older) occupants move. IOW, the owners still profit (and how) from the high market rates on the majority of apartments in their buildings. With one-bedroom units now going for over 4k+ a month and two-bedroom at 6.5K+ (both up about 35% in the last 2 years) without some form of regulation, the city would be entirely populated by young masters of the universe and an increasing number of homeless on the streets. .
See LA and SF.
Craig
Sep 6 2022 at 10:47am
If you look at the profile of Manhattan from Hoboken or Jersey City you will surely note that there is a dip in the height of buildings between Midtown and Fidi. Why? That’s government. Zoning. And of course Central Park itself is a massive gap in the amount of area available to build. Of course Central Park is considered to be a sacred ‘no development zone’
“With one-bedroom units now going for over 4k+ a month and two-bedroom at 6.5K+ (both up about 35% in the last 2 years) without some form of regulation, the city would be entirely populated by young masters of the universe and an increasing number of homeless on the streets”
That price signal is saying, “Build more and build it HERE”
And sure they are building in Manhattan still, always will be to some extent. The fact the slim towers on billionaire’s row exists doesn’t take away the fact that the vast majority of people in Manhattan aren’t billionaires. In fact the median income really isn’t that high there GIVEN the cost of living. I think median rent is more than 40x salary.
You need more units, let them build, there’s actually no shortage of space in 3-dimensions, there’s a solution in a place like NYC. Build up.
John
Sep 6 2022 at 11:58am
The dip is also a function of the geology of Manhattan. The middle where there are no high-rises is mostly rubble and midtown and lower Manhattan have solid bedrock at a decent depth to support huge buildings. I don’t know about the zoning, but one might assume that’s reflective of the geology.
Craig
Sep 7 2022 at 9:14am
Over the years I have heard that many times and honestly just assumed it was true as well, but actually the bedrock rationale is simply a myth: https://buildingtheskyline.org/bedrock-and-midtown-i/
Pierre Lemieux
Sep 7 2022 at 11:00am
Very interesting!
Pierre Lemieux
Sep 6 2022 at 11:00am
Walt: Don’t forget the following. The economic argument is that rent control reduces the value of rental properties compared to what it would have been without rent control. Once the value has gone down, the return on investment is the same; indeed it is because the return on investment must remain the same (because alternative investments exist in NYC, in America, and in the world) that property values fall. Rent control also reduces the return on new construction, compared to what it would have been otherwise, because construction prices have not changed. Lower investment is the way by which the return on the construction of rental housing is brought back to its former level. This means that rents must go up in the future compared to a situation where rental investments would not have decreased, partly reducing the downward impact of rent controls on rents.
Craig
Sep 6 2022 at 11:37am
I did want to add that rent controls are another way for governments to deflect from the true cause of inflation: government. You see they want you to think its greedy landlords or greedy capitalists or supply chain issues etc. All to deflect from the party ultimately responsible for inflation: government.
Walt
Sep 6 2022 at 12:18pm
No new buildings are subject to any form of rent regulation. Most regulated apartments become market rate once tenants move or die. There’s no competition or price depression on new buildings because of regulation because those apartments don’t become available since the tenants hold on to them, so they’re not there to compete.
Craig
Sep 6 2022 at 12:50pm
Quick google showing 1% are rent control which os apparently built becore 1947 and tenant there before but half are currently subject to rent stabilization.
Jose Pablo
Sep 6 2022 at 3:20pm
There are 3.5 million apartment units in NYC (2017) that’s a lot of “masters of the universe”
The exorbitant rents and the outstanding prices are the rents and prices that people can pay. Because people sure can do the things that they do (by definition of “can”)
David Seltzer
Sep 6 2022 at 7:41pm
Pierre: “For example, richer households are more capable of buying the apartments that landlords transform into condominiums to avoid rent controls.” Only up to where the marginal cost of conversion exceeds marginal returns. Case in point: In the late 1980’s, our private equity group started buying rent controlled property in Hoboken and Jersey City NJ. We paid tenants to leave. As the conversion process required municipal approval, the process could take as long as 6 months. (more bureaucratic sand in the gears from activists) Tenants aren’t stupid. The longer it took to convert, the more money they demanded to move. With carry rates near 17%, we quickly folded our tent.
Pierre Lemieux
Sep 8 2022 at 11:18am
David: My statement was referring to demand, not to supply. If the price of a converted apartment is infinite (because Leviathan has made the conversion very costly and thus reduced supply to zero), neither a rich family nor a poor family will bring any demand to the market. But at any price lower than infinity, there will me more rich demanders, that is, more rich ones than poor ones are willing to pay.
Craig
Sep 8 2022 at 11:32am
Of course note the backdrop of Mr. Seltzer’s post. In theory he shouldn’t need to pay tenants to leave, he could simply wait out their current leases and tell them there won’t be a renewal.
However, NJ’s law on the topic, entitled the ‘anti-eviction’ law so that tells you the inherent pro-tenant bias in statutory law in NJ has intervened: https://www.nj.gov/dca/divisions/codes/publications/pdf_lti/grnds_for_evicti_bulltin.pdf
So when a lease expires you can change the terms, raise the rent, but those changes need to be ‘reasonable’
I am en route to NJ tomorrow to take possession of a premises from my tenant, voluntarily leaving, and I’m sprucing it up and selling it, not the lease of which was the most recent eviction moratorium and a leftist tilt in NJ where they actually do have limited rent control and even some at the state level, but I don’t trust that they won’t go down that rabbit hole in the future.
So, as my tenants rollover, I’m out.
Craig
Sep 8 2022 at 11:34am
“The rent increase must not be unconscionable and must comply with all other laws or municipal ordinances, including rent control.” — That’s a soft rent control and Mr. Seltzer apparently was dealing with a bright line rent control in Hoboken.
What’s ‘unconscionable’?
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