Rent Control Helps Few People, and Harms Many More
Housing price controls are a dangerous and ineffective temptation.
As local governments in growing metropolitan areas increase rules and regulations that limit housing production, housing prices increase. Among the responses these local governments consider is controlling housing prices by legislative fiat. Rent control policies promise consumers frustrated with rising prices an end to inflation.
What is rent control?
Central to this promise of rent control is the assertion that supply of housing has no effect on or relationship with its price; rent control advocates reject the basic economic principle that price is a quantitative measure of supply and demand. Instead these advocates view price arbitrarily set by people who develop and manage rental property. Rent control is a form of price control that attempts to solve inflation through legislation rather than increases in production.
What causes housing price inflation?
Milton Friedman said that inflation is “caused by too much money chasing after too few goods.” He also said that production is just a bit player in the drama of inflation. But when it comes to housing inflation, local policies play the same role as a central bank, using land use and housing policy to stoke inflation by both limiting production as demand rises and then urging more taxes for subsidies when prices rise. There is a strong relationship between what I call the three Ps, permits, population, and price. When there are fewer permits issued, prices go up.
Do price controls work?
Price controls never achieve the intended outcome, lower prices. From Hammurabi’s Code to Emperor Diocletian’s “Edict on Maximum Prices” to similar efforts during the Nixon administration, price controls lead to limited production, scarcity, and more inflation.
Do measures to control rent work?
Rent control has the same impact on the housing economy as price controls in other sectors: it creates scarcity, higher prices, and rationing. The following are from a review of numerous studies of rent control over several decades.
Rent control:
- Limits new construction. Because of uncertainty about whether the costs of new construction will create enough return to recoup the costs of construction and operations.
- Causes the loss of existing housing. When revenues are low, and costs to operate rentals get too high, owners covert units into a use other than rental housing.
- Leads to hoarding. Residents of rent controlled units, rationally, don’t want to give up a controlled unit, supply is again suppressed and those with no place to go suffer.
- Requires rationing. As long as demand exceeds supply, and without price signals, government must allocated limited housing based on its own criteria, meaning that even though prices are low, there is no housing available.
- Incentivizes deferred maintainance. Without the ability to adjust prices to recover investment in improvments, buildings decline and the quality of housing suffers.
- Leads to coercive subsidization. When rent control measures fail to yield promised relief from scarcity and high prices, governments resort to more and more limits on the use of private property to ensure people with less money get housed. Of course, this exacerbates all of the problems above and leads to the commandeering of private property for public use.
Summary
To read the complete analysis of the history of rent control and why it doesn’t offer a solution for rising housing prices, see the full document here. Here is the summary:
- Rent control isn’t about economics; it is about power. In a free market, prices aren’t set by one group or committee, but by people trying to meet each other’s needs. Rent control takes that away and puts prices under the control of the government and advocate groups.
- Housing inflation is caused by a lack of housing. The three Ps are critical: Population, Permits, and Price. When local governments overregulate housing, they benefit incumbents by increasing the value of their asset and increase housing prices.
- Rent control helps few people and harms many more. Although people lucky enough to win the rationing game find themselves in a cheap apartment, everyone else bears the burden of even higher prices for housing.
- More housing, not more rules, is the answer. As long as housing is scarce, tenants will have to compete with each other for housing rather than landlords competing for tenants with lower prices or rent concessions.
- There are better, more efficient ways of helping people. Programs that invest public resources in offsetting costs of rent restrictions and that get cash into the hands of people who need rent money are the best way to help people.
