Rent control sounds like a good, humanitarian idea. Certainly, few if any tenants would quarrel with this policy. Nor would any person of good will, given the recent skyrocketing of rents. Landlords? Ok, they may be excused for not saluting at this particular flagpole, but even the decent ones (are there any such?) cannot but at least be cognizant of the financial plight of many renters.
Why, then, are virtually all economists opposed to rent control. Are they that hard-hearted? Well, yes. This cannot be denied. But that is not the explanation. Rather, it is due to supply and demand analysis.
Even highly credentialled leftist economists denigrate rent control for this reason. In the view of Gunnar Myrdal: “Rent control has in certain western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” According to Assar Lindbeck: “In many cases, rent control appears to be the most efficient technique presently known to destroy a city except for bombing.”
When a price ceiling is placed below the equilibrium point where supply and demand curves intersect, the latter is greater than the former. That is, a shortage of the commodity or service ensues. This applies to all items bought and sold, whether it is ships and sailing wax or, more to the point, residential rental accommodation.
One way to see things more clearly, whether in economics or any other field, is to take an extreme case. Suppose no rental payment were allowed greater than $1 per month. What would happen then? Simple. There would cease to be any apartments offered for rent. For sure, no new buildings for tenants would be erected. Existing units would be converted to condominiums, or commercial space. If the rent control law did not allow such conversions, landlords would simply walk away from their buildings. No property owner could pay mortgages, heating or cleaning bills, repairs, painting, etc. on the basis of that amount of money. The demand for rental housing at that price would huge, but the supply would be non-existent. In a word there would be a gargantuan shortage of housing.
So much for the extreme case. Actual housing legislation of this sort is more moderate, usually merely limiting rent increases, often to rates lower than inflation. So all of the above deleterious effects still occur, but to a lesser degree.
Rent control has never been applied to industrial or retail real estate. That is why shortages in this sector of the economy, if they ever occur, are of short duration. (Right now, thanks to covid and working at home, the opposite is the case). But shortages are only the tip of the iceberg in terms of problems created by this legislation. Another one is landlord – tenant relations. In the absence of these price controls, if the customer is not always right, the supplier is at least incentivized to treat them as if they almost always are. Vendors compete with one another for consumers and earn profits by satisfying them.
But under rent control, landlords garner wealth by providing as few services as they can get away with. Relations with tenants are so frayed that in New York City, the headquarter of such controls, they were suing each other so often that special courts had to be set up to handle the litigious overflow. Significantly, no such phenomenon arose in the Big Apple regarding commercial and industrial real estate, where no such restrictions apply. Nor was anything of the sort needed even in the residential sector, before the advent of rent control.
Another problem is space wastage. Some call this the “little old lady” effect. How does this work? A middle-aged husband and wife and six children occupy a ten-room rent controlled apartment. The kids grow up and move out, establishing domiciles of their own. The man predeceases the woman (females live seven years longer than males). Now the wife sits alone in that gigantic space with no incentive to occupy smaller premises. If she could but find them, her rent would catapult. She only needs four rooms at most so she closes off the other six. In the absence of rent control, in sharp contrast, she would be led by Adam Smith’s “Invisible Hand” to seek a smaller apartment, thereby releasing the extra space to others.
According to some commentators, rent control is like holding a tiger by the tail. It is dangerous to hold on, and even more so to let go. If this housing policy were abolished, it is not unreasonably feared that long suppressed rent levels would rise to unconscionable levels. True, more rental units would be built (if investors could trust government not to reimpose controls), but it would take years for them to come on stream. In the meantime, rents would soar and tenants suffer. One way to have our cake and eat it too would be to gradually, not suddenly, eliminate this pernicious law. But, face it, rent control amounts to outright theft (more politely, an uncompensated “taking”), and if we had the power to rid the system of this robbery but did so only slowly, we as a society would be guilty of (continued) criminal behavior.
Those who see no solution to this challenge reckon in ignorance of the “Little Old Lady” effect, which applies to far more than this narrow demographic. Real estate space wastage is endemic under this system. Yes, it takes year for new high rises to be added to the stock of housing, but the end of space wastage will ameliorate the tendency of prices to sharply rise.
The real reason the city is plagued by this housing crisis is that it is all but politically impossible to end rent control: there are far more voters who rent, than there are landlords. But rent control, a World War II emergency measure (there is nothing as permanent as a temporary government regulation), was abolished by every other city in the country, and no catastrophic results were experienced.
All we need is leaders with courage and vision to do the right thing.
This originally appeared on Real Clear Markets.
