Rent control is in the news again. Huh.
This is dumb and should not happen.
Price ceilings like rent control are more appealing than taxes because it seems like nobody is being taken from, which is nice, but in reality, ceilings are just taxes where the government doesn’t get any money.
I’m sure you’ve already heard the theory: In big cities, there are tons of places to rent from. That means that if I, a landlord, try to charge above what a person could profitably offer, then someone else will offer that, and you’ll go live there. No individual owner can substantially limit buyers’ choices, so no one will rent from over-chargers. This means that if we have a ceiling of, say, $100 a month, if there were enough landowners who could profitably rent out at $100 a month to all the people who want apartments, then rents were already no higher than $100. Otherwise, landlords would undercut each other until the rate was achieved. Thus, when you cap rents, you can’t escape landlords leaving the market and real housing costs rising. Yet is the theory…true?
It is! This is a rare and delicate species in economics: something which is rigorously proven must happen, and actually does. Study after study and test after test confirm that rent control raises rents and restricts supply.
The biggest effect is landlords leaving the market. If residential renting has a maxed price, landlords will offer office space or sell out because condominium sales and commercial renting don’t have price limits. This offers a solution to governments: Set price limits on these as well. However, this exacerbates the other issue with rent controls: No one builds. This has been observed repeatedly. There’s no way to get around it. If you stop people from making money by doing something, they will not do it.
The government can, of course, fill this gap by constructing housing itself. But if the government resolves the rent-control induced shortage in the supply of rental units by increasing supply until it meets demand, why mandate limits on rent in the first place? Prices will be the desired level anyway. Controls add nothing to the policy mix except limiting the supply of higher-end apartments for which public housing is not a substitute. The end result is either 1) mid-high income people move to cheaper cities where they are less productive or 2) mid-high income people move to the suburbs, buying more energy-intensive homes and driving energy-intensive commutes.
Another trouble with rent control is that it is extremely hard to make sure that it happens. There are more fees on heaven and Earth than are dreamt of in your legislature, and landlords will find and charge them. Eternal legal whack-a-mole is a high-cost game for both the government and landlords to play, but it will occur, and it will raise real housing costs.
But the real reason not to use rent control is that there are better options. To consider what they are, let’s clarify what problems rent control exists to solve.
The first is that we don’t think that poor people have enough money to live.
The second is that we, Wesleyan graduates, want to live in New York City but can’t find apartments we would like and can afford.
The 2.5th is that we wish to prevent “developers” from making money because we believe them exploitative. I too hate the rich, but we must remember to steal from them in ways that do not hurt ourselves.
The third—and this is trickier—is that moving costs are high enough that residential churn imposes costs on evicted people, such that only a cap on annual rent increases will protect them from unexpected costs.
The last issue, luckily, is something markets solve well. People’s preferences on security differ. Some people would pay for a guarantee that they will not have their rent increased in the future, some would not. Though they’re spending money now, they know they’re safe from eviction. This guarantee is essentially a long-term lease. Its most extreme form is called ownership. A cap on annual changes in rent of current tenants effectively forces everyone to buy these leases, because when renters first move in, the landlord will charge them a higher rent to cover the risk of losing a better deal in the future. Now, why force everyone to buy this product?
The second issue, that I want to live in New York City and can’t have a nice apartment, is one that will soon seem less important when people I hate start constantly posting on Facebook from their brilliant homes that I could neither find nor afford and for which they pay pennies.
The first issue is really the heart of almost all public policy. Poor people don’t have enough money to afford things that we think Americans deserve. But there’s an easy solution. Give it to them. Or give them money conditional on working. Or give them money if they’re children.
If you don’t want people to have money, you can give them non-tradable housing credits. This can come in roughly two forms. The first is public housing. This is the option for you if you like brutalist architecture and long-term poverty. The other option is subsidizing private units, either by mandating mixed-income construction or passing out housing vouchers. Either is fine.
If you do subsidize housing, be careful not to only do it in expensive, low-elasticity-of-supply cities. This has effectively been the policy in the United States, because the same polities that shudder at front-facing garages and growth similarly shudder at the poor being priced away. The upshot is that many people receive multi-thousand dollar annual housing subsidies in New York or San Francisco but would probably prefer a $500 credit to live in Nashville or Atlanta. This is a great loss to all. Ahem, presidential candidates, you know what to do.
Tom Hanes is a member of the class of 2020. He can be reached at email@example.com.