Rent Control
Rent control is basically government price control on a
specific item, namely the placing of a ceiling on domestic housing
rentals. Along with the
other perennial favourite, wage control, rent control is a constantly
recurring example of the potential for political opportunism and
economic ignorance to triumph over sound principle.
Rent control is perhaps the single most agreed-upon and least
controversial issue in economics. Economists
of all persuasions are united in their view that it is a destructive,
pernicious and undesirable policy, not to be adopted in virtually any
circumstance. In a famous
poll, conducted in 1992 by the American Economic Association 93% of its
members agreed that “ a ceiling on rents reduces the quality and
quantity of housing”. In
1988, over 95% of Canadian economists polled reached the same
conclusion.
Economic literature throughout the ages is replete with
pronouncements from economists of all persuasions speaking out against
the introduction or continuation of any policy of rent control.
In modern times they have included economics Nobel Laureates from
the right, such as Milton Friedman and Friedrich von Hayek and from the
left, such as Gunnar Myrdal. Some
of the more noteworthy quotes include the following;
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“In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing” Asser Lindbeck- noted Swedish socialist economist.
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“ The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.” Vietnam Foreign Minister Nguyen Co Thach 1989
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“ Rent control has in certain Western countries constituted , maybe, the worst example of poor planning by governments lacking courage and vision” Gunnar Myrdal -architect of the Swedish welfare state
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“ If this account seems to boil down to a catalogue of inequities to be laid at the door of rent control, that is no mere coincidence, but inevitable.” Friedrich von Hayek – noted free market economist
The lesson as follows does not purport to present any outline
of the arguments for or against the introduction or continuation of a
policy of rent control. They
are many and varied. Rather
it will endeavour to set out briefly an economic analysis of the
principles involved and the likely results of any such policy.
A Housing Shortage
The principal immediate result of the implementation of rent
control is to precipitate a housing shortage.
This is simply a consequence of the law of supply and demand,
something, which is or should be known to any first year student of
economics. If the price of
an item is set artificially low then more of the item will be demanded
than would otherwise be the case and conversely less will be supplied.
Rent control will put a brake on the tendency of the market to
move towards equilibrium, leaving a portion of demand unsatisfied.
Not only is the immediate effect the creation of a shortage;
the consequent effect is ongoing and growing.
The reduction in supply means that with the passage of time fewer
dwellings will be available to replace the existing stock as it wears
out and needs to be replaced, or to cope with any natural increase
caused by an expansion in population.
The result is an ever-increasing shortage leading to a deepening
crisis.
Reduction in Existing Stock
A further consequence of rent control is the reduction that
occurs in the existing stock of residential housing available for rent.
This follows for a number of reasons.
Those with two or more residences who would have previously been
prepared to let out a holiday home or townhouse when it was not needed
personally will no longer find it worthwhile to do so and instead will
prefer to leave it empty. Similarly
parts of houses or empty rooms will not be let out as owners who would
previously have done so find it now to be too much trouble for too
little reward.
Again some landlords who had previously let out housing for
rent will decide to opt out of the industry and will sell their rental
residences to owner-occupiers. When considering the effect of rent
control it is important to remember that in economics what is
significant is what occurs at the margin.
Whilst the effect of rent control on the bulk of landlords may be
minimal its effect on those who are marginal will be significant and
likely to mean the difference as to whether they continue as landlords
or not.
Deterioration of Existing Stock
As rent control places restraint on the profit to be made
from rental property, landlords will look for ways to reduce their
expenses in order to maintain their return.
Maintenance will tend to be reduced.
Given the existence of a residential shortage arising from rent
control, landlords will not have to provide superior properties in order
to attract tenants as shabby or poorly maintained properties will still
be easy to let.
As maintenance continues to be neglected the quality of
rental properties generally will become worse and worse.
The tendency thus is for rent control to create slums.
In New York City for example, which has effectively had rent
control since WW2, [ the relevant legislation is the War Emergency
Tenant Protection Act], large areas have become devastated.
As landlords have ceased to expend anything at all on
maintenance, entire urban blocks have deteriorated to the point where
they are virtually uninhabitable.
A Rogue Industry
Rent control effects the nature of the residential letting
industry in a negative but predictable way, somewhat akin to Gresham’s
Law; the good and law-abiding landlords tend to be driven out and to be
replaced by the bad and those contemptuous of the law.
There are
numerous ways for rent controls, including the necessary accompanying
controls on eviction, to be avoided.
The honest landlord is confronted by the constant temptation to
succumb, particularly when in many instances desperate would-be tenants,
otherwise unable to find accommodation, are urging him to do so.
Typically, a would-be tenant is as likely to offer so-called
‘key-money’ as a landlord is to demand it.
However the landlord who accepts it in effect becomes a criminal.
Those unwilling to do so will be likely to sell out, often to
those willing and able to make a profit operating outside of the law.
The effect is to create a class of ‘slumlords’.
Ultimately rent control creates perverse effects.
Tenants enjoying protected rents and paying a fraction of
otherwise market rental enjoy a bonanza.
Often however they are established, reasonably well off people
who would otherwise be able to pay a market rental.
Whilst many, perhaps a majority, of the beneficiaries of rent
controlled tenancies are indeed poor and/or disadvantaged, the real
victims of rent control are the large numbers of the poor and/or
disadvantaged who are too poor or otherwise unable to work the system to
overcome the chronic shortage of rental accommodation and who as a
result are left with nowhere to live.
San Francisco 1906 ----
A Case Study
In 1946, American Chicago School economists Milton Friedman
& George Stigler published what has become a famous article “
Roofs or Ceilings ?”. As
part of the article they noted the history of the famous San Francisco
earthquake and resulting great fire of 1906 which virtually destroyed
more than half of the city. Of
the population of 400,000 about 225,000 were left homeless. Allowing for
those who left the city or were accommodated in camps the remaining half
of the city was required to provide shelter for many months for
approximately 80,000 thousand extra people.
Yet by all accounts this was done and without any apparent
shortage. The owners and
occupiers of the surviving buildings opened up and let out their spare
space at a market rental.
The authors contrast the disaster of 1906 with that of 1946.
On the later occasion the war had caused San Francisco’s
population to increase by 200,000.
Again the existing housing stock was required to accommodate a
large increase in those seeking a home, but the increased number was
only a small percentage of that which had occurred in 1906.
Yet the city was in crisis and undergoing a significant housing
shortage. To the authors
the reason was simple; on this occasion the city authorities had imposed
rent control.
David Sharp
25
September 2007