Bernie Sanders and the disastrous rent control plan

Rent controls really are a bad idea.

There isn’t much disagreement among economists about what a national rent control policy would do to harm renters, housing prices, housing stock, and the incentive to build new housing. Nonetheless, Bernie Sanders persists. Ryan Bourne comments.

The effects of rent controls

The example of Mumbai, India.

In this video, from Marginal Revolution University, Alex Tabarrok discusses the effects of rent controls on the supply of rental properties in Mumbai.

Rent controls have always and everywhere ended in failure

Or so argues Kristian Niemietz at the IEA blog. He writes,

No doubt, the issue of escalating rents is real. UK rents are the highest in Europe, both in absolute terms and relative to incomes. On average, private tenants in the UK pay between 40 and 50 per cent more than their counterparts in the Netherlands, Belgium, Germany and France. It is only when we include Monaco in the rent level rankings that the UK is pushed into second place, and even then, Inner London is in the same league as that playground of the rich and famous.

So clearly, there is a problem here, and this is not just a problem for tenants. It is a problem for taxpayers, employees, employers and consumers as well.

High rent levels beget high levels of spending on housing benefit, which costs the taxpayer £24.3bn every year – that is £870 per household. Then, since the problem is worst in those parts of the country which have the best jobs and earnings prospects, high rents reduce labour mobility, and thus economic productivity. Further, the problem is not limited to residential property, but affects commercial property no less, adding to the cost of doing business. This is the main reason why grocery prices in the UK are about a fifth higher than in comparable countries. The list goes on.

Rent controls, however, are not the solution. In a market economy, prices, including rents, are just messengers of scarcity. Rents are high in the UK because rental properties are in high demand and in short supply. Controlling rents, then, is like shooting the messenger – just far worse. It is more like hijacking the messenger and forcing him to tell a comforting lie. A controlled rent is a messenger who tells us, at gunpoint, that there are plenty of rental properties to go round.

This is just Econ 101. 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.

A simple question to ask is, What would happen if rent controls were introduced?

On the supply side, London, in particular, is full of what we could call “reluctant landlords”. These are people who did not purchase a property with the express intention of becoming landlords. They became landlords when they realised that, in London, every underused room represents foregone income. This is why London has so many basement flats and converted studio flats.

If rents were capped at a level noticeably below market rates, a lot of these reluctant landlords would be among the first to take their properties off the market, and simply use them for themselves and their families. On the demand side, a lot of people who live in shared accommodation would look for a place of their own. More people would chase fewer properties, making the gap between supply and demand even wider.

The basic takeaway on rent controls is

Rent controls have a terrible track record. They have always and everywhere ended in failure, which is why over nine out of 10 economists oppose them.

Swedish economist Assar Lindbeck's famous quip should not be ignored.

next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities

The Maori Party needs to do Econ 101

Thanks to Mark Hubbard on twitter

Perhaps Maori Party might like to read econ 101. The unintended consequences of rent controls are basic knowledge. https://t.co/YmNZYrzea3

— Mark Hubbard (@MarkHubbard33) September 5, 2016

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.

Other comments on rent control

A couple of comments by other economists on rent controls:

• Tyler Cowen asks How bad is rent control when housing supply is artificially restricted by law?
• David Henderson on Misallocation under Rent Control

Some stupid just never dies

Conor Dougherty writes in the New York Times that,

After years of punishing rent increases, activists across Silicon Valley and the San Francisco Bay Area are pushing a spate of rent control proposals, driven by outrage over soaring housing prices and fears that the growing income gap is turning middle-class families into an endangered species. Those campaigns, if successful, would lead to the largest expansion of tenant laws since the 1970s.

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"

Dougherty continues,

Nevertheless, a group called the Mountain View Tenants Coalition is collecting signatures for a voter initiative in hopes of putting rent control on the November ballot. One of the group’s leaders and its chief spokesman, Evan Ortiz, is a 29-year-old Google employee who works in ad sales.

But

Thomas K. Bannon, chief executive of the California Apartment Association, a landlords’ group, said his members were mobilizing a statewide response and planning to spend millions of dollars — he would not estimate exactly how many millions — to beat back the initiatives one city at a time. The members’ message: Don’t blame landlords. Blame cities for making it so hard to build new housing. (Emphasis added.)

The highlighted sentence is the important one, as anyone in places like Auckland should be able to tell you.

Dougherty adds, inline with Lindbeck's view, that,

Economists have an almost universally dim view of rent control because it does nothing to attack the underlying problem here, which is that more people want to live in the Bay Area and Silicon Valley than there are housing units to put them in.

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 government.

Rent controls are efficient

Or so says Cameron Murray at the Fresh Economic Thinking blog. And whats more he claims to have 17 million reasons for it being so! Well I have only one reason for him being wrong, a below equilibrium price. Given that at such a price you have an excess demand, its hard to see how this can be called efficient.

Murray points to a situation in the US where one Herbert Sukenik was paid US$17million in 2005 to leave his rent-controlled NYC apartment by a developer who wanted to redevelop the Mayflower Hotel, in which Sukenik lived, adjacent to Central Park. The building was occupied by many long-term tenants under New York’s rent-control laws. This meant that tenants could only be evicted upon mutual agreement. Most tenants accepted offers ranging from $650,000 to $1million to leave but Sukenik held out for a US$17million lump sum payment, in addition to the developers offering him another apartment to live in for the rest of his life for a peppercorn rent of $1 per month.

What I don't get this how this shows rent control is efficient. Or says anything much about rent control at all. To me what this shows is that in low transaction situations where bargaining is between just a few people the Coase theorem holds. If one party, the developer, values an asset more highly than the current holder of the asset, the tenant, then the higher valuing party can buy the property rights to the asset from the lower valuing party. The price paid is just a transfer between the parties with no implications for efficiency.

The question that economists  would ask is, Should there be rent control in the first place? No this question most, more than 90% of economists according to surveys, would have grave doubts. Economist Assar Lindbeck went so far as to say, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” In fact those apossed to rent control range from Milton Friedman and Friedrich Hayek to Gunnar Myrdal. Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” And its not often you get Friedman, Hayek and Myrdal agreeing!!

Walter Bock outlines some of the issues economists have with rent control,

Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, fewer repairs, and less maintenance. For example, Paul Niebanck found that 29 percent of rent-controlled housing in the United States was deteriorated, but only 8 percent of the uncontrolled units were in such a state of disrepair. Joel Brenner and Herbert Franklin cited similar statistics for England and France.

The economic reasons are straightforward. One effect of government oversight is to retard investment in residential rental units. Imagine that you have five million dollars to invest and can place the funds in any industry you wish. In most businesses, governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing?

This line of reasoning holds not just for you, but for everyone else as well. As a result, the quantity of apartments for rent will be far smaller than otherwise. And not so amazingly, the preceding analysis holds true not only for the case where rent controls are in place, but even where they are only threatened. The mere anticipation of controls is enough to have a chilling effect on such investment. Instead, everything else under the sun in the real estate market has been built: condominiums, office towers, hotels, warehouses, commercial space. Why? Because such investments have never been subject to rent controls, and no one fears that they ever will be. It is no accident that these facilities boast healthy vacancy rates and relatively slowly increasing rental rates, while residential space suffers from a virtual zero vacancy rate in the controlled sector and skyrocketing prices in the uncontrolled sector.

Although many rent-control ordinances specifically exempt new rental units from coverage, investors are too cautious (perhaps too smart) to put their faith in rental housing. In numerous cases housing units supposedly exempt forever from controls were nevertheless brought under the provisions of this law due to some “emergency” or other. New York City’s government, for example, has three times broken its promise to exempt new or vacant units from control. So prevalent is this practice of rent-control authorities that a new term has been invented to describe it: “recapture.”

Rent control has destroyed entire sections of sound housing in New York’s South Bronx and has led to decay and abandonment throughout the entire five boroughs of the city. Although hard statistics on abandonments are not available, William Tucker estimates that about 30,000 New York apartments were abandoned annually from 1972 to 1982, a loss of almost a third of a million units in this eleven-year period. Thanks to rent control, and to potential investors’ all-too-rational fear that rent control will become even more stringent, no sensible investor will build rental housing unsubsidized by government.

So the landlord may have a tough time of it but what about the effects on the tenants, it has to be good for them, right?

Existing rental units fare poorly under rent control. Even with the best will in the world, the landlord sometimes cannot afford to pay his escalating fuel, labor, and materials bills, to say nothing of refinancing his mortgage, out of the rent increase he can legally charge. And under rent controls he lacks the best will; the incentive he had under free-market conditions to supply tenant services is severely reduced.

The sitting tenant is “protected” by rent control but, in many cases, receives no real rental bargain because of improper maintenance, poor repairs and painting, and grudging provision of services. The enjoyment he can derive out of his dwelling space ultimately tends to be reduced to a level commensurate with his controlled rent. This may take decades, though, and meanwhile he benefits from rent control.

And then there is the "old lady effect".

Consider the case of a two-parent, four-child family that has occupied a ten-room rental dwelling. One by one the children grow up, marry, and move elsewhere. The husband dies. Now the lady is left with a gigantic apartment. She uses only two or three of the rooms and, to save on heating and cleaning, closes off the remainder. Without rent control she would move to a smaller accommodation. But rent control makes that option unattractive. Needless to say, these practices further exacerbate the housing crisis. Repeal of rent control would free up thousands of such rooms very quickly, dampening the impetus toward vastly higher rents.

So some tenants gain from rent controls  while others lose, what determines who wins and who doesn't?

If the building in which he lives is in a good neighborhood where rents would rise appreciably if rent control were repealed, then the landlord has an incentive to maintain the building against the prospect of that happy day. This incentive is enhanced if there are many decontrolled units in the building (due to “vacancy decontrol” when tenants move out) or privately owned condominiums for which the landlord must provide adequate services. Then the tenant who pays the scandalously low rent may “free ride” on his neighbors. But in the more typical case the quality of housing services tends to reflect rental payments.

If local or central government thinks that some high social end is served by allowing tenants to sit on someone else's property in perpetuity at below market rents, then it should use public funds, after proper democratic deliberation, to buy or lease the premises for market value which it can then lease out to people they believe are in need. Or they could use public funds to supplement these people's income. Tax increase would at least get across to voters the idea that low cost housing does indeed cost rather than hiding that cost by forcing it upon a subset of society, landlords.