Introduction to Economics                   Lesson 15 / 07


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;

  • “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.

  • “ 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

  • “ 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

  • “ 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




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