RationalWiki's 2020 Fundraiser

There is no RationalWiki without you. We are a small non-profit with no staff – we are hundreds of volunteers who document pseudoscience and crankery around the world every day. We will never allow ads because we must remain independent. We cannot rely on big donors with corresponding big agendas. We are not the largest website around, but we believe we play an important role in defending truth and objectivity.

If everyone who saw this today donated $5, we would meet our goal for 2021.

Fighting pseudoscience isn't free.
We are 100% user-supported! Help and donate $5, $20 or whatever you can today with PayPal Logo.png!

Donations so far: $3500Goal: $3500

Rent control

From RationalWiki
Jump to: navigation, search
Rent control rally in Seattle, 2019
The dismal science
Economics
Icon economics.svg
Economic Systems

  $  Market Economy
  €  Mixed Economy
  ☭ Socialist Economy

Major Concepts
People

Rent control is simply another form of price control, specifically it's a price ceiling, but applied to housing. Rent control is a disastrous policy, and anyone who pushes it is either deeply misinformed, dishonestly peddling pseudo-economic garbage, an ideologically driven hack, or some combination of the three.

Views of economists and communists[edit]

To quote Paul Krugman, a Nobel Prize-winning professor of economics:[1]

The analysis of rent control is among the best-understood issues in all of economics, and among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that "a ceiling on rents reduced the quality and quantity of housing." Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand.

Some economists go even further in their critique. Rent control is "the most effective technique presently known to destroy a city – except for bombing," according to celebrated and prominent Swedish economist Assar Lindbeck.[2]

Even leaders of communist countries have become disenchanted with rent control. "The Americans couldn’t destroy Hanoi, but we destroyed our city by very low rents and controls. We realized that it was stupid and that we must change policy," Vietnamese revolutionary, diplomat, and politician Nguyen Co Thach has said in a well known quote.[3]

Economic theory[edit]

The economic theory of why rent control, and all price controls for that matter, are bad ideas is pretty straightforward. If you forcefully lower the price of a good or service below its market price, the demand for said good or service increases, because it’s cheaper, and the supply decreases, because producers and providers are less willing to produce or provide the good or service. This leads to what is called a shortage, where the quantity demanded outstrips the quantity supplied.

Rather than allowing for more people to get housing, all you’ve done is change the method of allocating housing from a price-based one to a luck and 'first come, first serve' one, reducing the quality of life of the vast majority of people involved. Housing also reduces in quality, as there is no need to attract people by offering decent quality housing, since there’s a shortage — everyone will just get whatever they can find.

Empirical evidence[edit]

Impact on demand[edit]

Something that many often overlook when considering the impact of rent control on demand is reduced housing turnover. Housing turnover refers to how often people change housing depending on their life conditions. If you enter into a relationship with someone, you might move into an apartment to accommodate that; if you have kids, you might move into a bigger apartment to accommodate that; when they leave for college or university, you might move into a smaller apartment; etc. This is often done because of the cost of housing: if you have a cheaper option for housing that fulfills your needs the same way, then you might take it to save yourself money.

With rent control, housing turnover decreases, as housing is relatively cheap either way. This leads to a situation where people who need certain housing, or would at least be best served in certain housing, cannot get it because it’s occupied by those who don’t need it. A 2001 study in San Francisco showed that 49% of the city’s rent controlled housing had only a single occupant, meanwhile there was a severe housing shortage.[4] A census report showed that nearly 46 percent of all households in apartments in Manhattan where nearly half of all apartments are under some form of rent control were occupied by just one person, compared to 27 percent nationwide.[5][6]

New York City has had rent control longer and more stringently than any other major American city. One consequence of this is that the annual rate of turnover of apartments is less than half the national average, and the proportion of tenants who have lived in the same apartment for 20 years or more is more than double the national average.[7]

Impact on supply[edit]

Nine years after the end of World War II, not a single new apartment had been built in Melbourne, Australia. Rent control laws there had made such buildings unprofitable.[8] After rent control was implemented in Santa Monica, California in 1979, building permits declined to less than one-tenth of what they were 5 years earlier.[9] A housing study in San Francisco in 2001 found that ¾ of its rent controlled housing was more than 50 years old and 44 percent was more than 70 years old.[10]

Despite a severe housing shortage in New York, San Francisco, and other cities with rent control, a nationwide survey in 2003 found that the vacancy rates in buildings used by businesses and industry to be nearly 12%, the highest in more than 2 decades.[11] This is because developers move into the business and industry sector when the housing sector becomes unprofitable, thus causing an oversupply of business and industry buildings. The same is true for luxury housing. A study of rent control in various countries concluded: "New investment in private unsubsidised rental housing is essentially non-existent in all the European countries surveyed, except for luxury housing."[12] Under rent control in England and Wales privately built rental housing fell from being 61% of all housing in 1947 to being just 14% of all housing in 1977.[13] During 8 years of rent control in Washington during the 1970s, the city’s available rental stock declined absolutely, from just over 199,000 units to under 176,000 units.[14] After rent control was introduced in Berkeley, California, the number of private rental housing units available to students at the university there declined by 31% in five years.[15] Within 3 years of rent control being imposed on Toronto, Canada in 1976, 23% of all rental units in owner-occupied dwellings were withdrawn from the housing market. In 5 years affected building values fell by over 40%.[16] In 1975, when rent control in England was extended to cover furnished rental units, according to The Times of London:[17]

Advertisements for furnished rented accommodation in the London Evening Standard plummeted dramatically in the first week after the Act came into force and are now running at about 75 per cent below last year’s levels.

Diamond, McQuade, and Qian (2018) finds that rent-controlled buildings were 8% more likely to convert to a condo than buildings in the control group. Consistent with these findings, they find that rent control led to a 15% decline in the number of renters living in treated buildings and a 25% reduction in the number of renters living in rent-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by converting existing structures to owner-occupied condominium housing and by replacing existing structures with new construction. This 15% reduction in the rental supply of small multi-family housing likely led to rent increases in the long-run, consistent with standard economic theory. In this sense, rent control operated as a transfer between the future renters of San Francisco (who would pay these higher rents due to lower supply) to the renters living in San Francisco in 1994 (who benefited directly from lower rents). Furthermore, since many of the existing rental properties were converted to higher-end, owner-occupied condominium housing and new construction rentals, the passage of rent control ultimately led to a housing stock that caters to higher income individuals.[18]

Homelessness[edit]

The degree to which rent control impacts homelessness on-net is rather small, with the results of a 1995 study showing that the "existence of a rent control law is predicted to increase a city’s shelter population by .03% and its street population by .008%, ceteris paribus."[19][note 1] This is likely because rent control impacts homelessness, both positively and negatively, through various effects.[20] Overall it has a positive impact on homelessness i.e. leads to more people being homeless. That is not a good thing.

New Jersey[edit]

Many proponents of rent control cite New Jersey as a successful example of rent control. However, the state's rent control laws are very, very lax,[21] and they're not even that effective at achieving the goals proponents of rent control seek to attain:[22]

Like Gilderbloom and Ye (2007), our findings show a minimal — if any — impact of rent control on median rents in New Jersey cities. Despite the median monthly contract rent being $1027 in rent-controlled cities as compared to $1090 in cities without rent control, the difference in rents is statistically insignificant. Perhaps the inability of rent control to significantly affect rents is due to the non-restrictive nature of moderate rent controls. In New Jersey communities, rent control policies lack the teeth of past approaches that created firm price ceilings. New Jersey ordinances provide "fair" returns on investment for landlords and thus do little, on a macro scale, to positively or adversely affect the rental housing markets. To use Gilderbloom and Ye’s (2007, p. 216) terms, moderate rent controls are more "symbolic" than "distributional" housing reforms.

So, the reason why New Jersey’s rent control hasn't been an absolute disaster is that it doesn't actually implement a price ceiling; it doesn't actually lower rent below the market value of housing.

What is to be done?[edit]

With all this being said, the housing affordability crisis is a serious problem, and solutions should be discussed. There are probably many options one can think of, but there are two that really just pop out at you as making sense and having empirical backing. The first involves removing and loosening restrictions on the supply of housing. Reducing excessive environmental regulations and zoning/land-use regulations as a whole are a couple of ways this can be achieved.[23] Houston, Texas, for instance, doesn't have a zoning code and has much more affordable housing than other major American cities,[24][25] and while criticism has been levied against its lack of zoning, it largely hasn't held up under scrutiny.[26] Reducing the impacts on demand as well would have an effect, and this can come in the form of eliminating housing benefits and reducing immigration, although this likely wouldn't be necessary. Overall, this would create a regulatory environment in which the supply of housing can respond to its demand, allowing for prices to be flexible and affordable for most people.

Another option is to simply do what Singapore did: that is, nationalize virtually all housing.[27] Singapore's experience with this surpasses the vast majority of not just public housing projects, but housing in general. However, it's unclear whether its results can actually be replicated elsewhere, as it is an island city-state, rather than a large country.

See also[edit]

Notes[edit]

  1. "Ceteris paribus" literally translates from Latin as "holding other things constant," but it's commonly translated into English as "all else being equal."

References[edit]

  1. Paul Krugman, Reckonings; A Rent Affair, New York Times (June 7, 2000)
  2. Assar Lindbeck, The Political Economy of the New Left (New York: Harper and Row, 1972); cited in Sven Rydenfelt, "The Rise, Fall and Revival of Swedish Rent Control," in Rent Control: Myths and Realities, Walter Block and Edgar Olsen, eds. (Vancouver: The Fraser Institute, 1981), pp. 213, 230.
  3. See, for example, Britain Goes Wild as Ed Miliband Proposes Rent Controls, Forbes April 27, 2015
  4. Bay Area Economics, San Francisco Housing DataBook (Berkeley, CA: Bay Area Economics, 2002), p. 21
  5. Mike Schneider and Verena Dobnik, "Solo Living Drops in Manhattan, Rises Elsewhere," Associated Press & Local Wire, September 6, 2011
  6. Marc Santora, "Rent-Stabilized Apartments, Ever More Elusive," New York Times, July 8, 2012, Real Estate Desk, p. 1
  7. William Tucker, The Excluded Americans: Homelessness and Housing Policies (Washington: Regnery Gateway, 1990), p. 275
  8. Institute of Public Affairs, "Post War Confusion: Rent Control," Rent Control, edited by Robert Albon, p. 125
  9. William Tucker, The Excluded Americans: Homelessness and Housing Policies (Washington: Regnery Gateway, 1990), p. 162
  10. Bay Area Economics, San Francisco Housing DataBook (Berkeley, CA: Bay Area Economics, 2002), p. 56
  11. Ray A. Smith, "Study Sees Record Industrial Space Vacancies," Wall Street Journal, January 7, 2004, p. B6
  12. Joel F. Brenner and Herbert M. Franklin, Rent Control in North America and Four European Countries (Washington: The Potomac Institute, 1977), p. 69
  13. Joel F. Brenner and Herbert M. Franklin, Rent Control in North America and Four European Countries (Washington: The Potomac Institute, 1977), p. 4
  14. Thomas Hazlett, "Rent Controls and the Housing Crisis," Resolving the Housing Crisis: Government Policy, Decontrol and the Public Interest, edited by M. Bruce Johnson (San Francisco: Pacific Institute for Public Policy Research, 1982), pp. 282–283
  15. William Tucker, The Excluded Americans: Homelessness and Housing Policies (Washington: Regnery Gateway, 1990), p. 163
  16. William Tucker, Zoning, Rent Control and Affordable Housing (Washington: Cato Institute, 1991), p. 21
  17. Diana Geddes, "The Doors Have Closed on Furnished Accommodation," The Times of London, January 24, 1975, p. 11
  18. Diamond, Rebecca, Tim McQuade, and Franklin Qian. "The effects of rent control expansion on tenants, landlords, and inequality: Evidence from San Francisco." American Economic Review 109, no. 9 (2019): 3365-94. https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.20181289
  19. Grimes, P. W., & Chressanthis, G. A. (1997). Assessing the effect of rent control on homelessness. Journal of Urban Economics, 41(1), 23-37.
  20. Early, D. W., & Olsen, E. O. (1998). Rent control and homelessness. Regional Science and Urban Economics, 28(6), 797-816.
  21. Mary Gallagher, "Allowable Rent Increases for New Jersey Tenants", Sapling. https://www.sapling.com/7884374/allowable-increases-new-jersey-tenants
  22. Joshua D. Ambrosius et al., Forty years of rent control: Reexamining New Jersey’s moderate local policies after the great recession, (Cities, 2015), p. 121-133. https://www.sciencedirect.com/science/article/abs/pii/S0264275115001122
  23. Glaeser, E. L. (2017). Reforming land use regulations. Brookings Center on Regulation and Markets.
  24. Britschgi, Christian (2020). "Is Houston's Affordability Just a Myth?". Reason Magazine.
  25. Housing Affordability Index. Houston Government
  26. Grabar, Henry (2017). "Don’t Blame Houston’s Lax Zoning for Harvey’s Destruction". Slate.
  27. "How Singapore Solved Housing". PolyMatter