Tuesday, 6 September 2016

The Maori Party needs to do Econ 101

Thanks to Mark Hubbard on twitter
I was alerted to this NewsHub article: Maori Party calls for immediate rent freeze.
The Maori Party is calling for a rent freeze to stop struggling families being forced onto the streets.

Co-leader Marama Fox has spent the past couple of weeks at the cross-party inquiry into homelessness, listening to hundreds of "absolutely heartbreaking" tales of how Kiwi families ended up without a roof above their heads.

"These are not people who are just desperate dropkicks. They are just struggling to meet the rent," Ms Fox told Paul Henry on Tuesday morning.
While the idea may make for a great headline, it sounds all very nice, Econ 101 tells us it would help. In fact it would make things worse.

Rent controls are just a big amount of stupid. As Swedish economist Assar Lindbeck once quipped
"next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities"
Increasing rents are just a sign that there is a problem on the supply side of the market. The question to ask is Why? And the people to ask the question of are, usually, the local (and national) government. The problem here is that the market can not adjust, largely due to local and central government interventions in the market. Prices are raising and thus we would expect the quantity supplied to increase. An increase in supply would over time reduce the excess demand in the market and thus reduce price increases.

Except this isn't happening since it's too difficult for the supply to expand in face of the constraints on land supply and building controls.

Putting rent controls in place will only make this problem worse. It will mean there is even less incentive for people to expand the housing supply. If you force the price of housing below the market equilibrium - and there is no point in rent controls if they aren't below equilibrium -  then the quantity demanded goes up and the quantity supplied goes down, relative to equilibrium, and thus the excess demand gets even larger. An excess demand that there is no incentive for people to remove because prices can not adjust.

If the Maori Party really is interested in helping the disadvantaged, rather than just producing nice sounding PR, then it should call for these people to be simply given money. Increasing their "income" so they can pay market rents and letting the market mechanism work for them is way better to deal with the problem than preventing the market from working at all.

In addition the Maori Party should be working to remove the constraints that prevent the supply of houses from growing enough to satisfy demand.

But this doesn't simply involve creating nice headlines and 60 second sound bytes so there isn't much chance of any politician being interested in doing it.

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