Of the many unsuccessful attempts public officials have made to alleviate financial hardships for the working class, rent control is undoubtedly a contender for one of their most documented failures. In a nutshell, rent control is when legislators enact price ceilings to cap the amount landlords can charge their tenants. It has been so well-documented that, in fact, economists across the board have deemed it bad economics, including the Keynesian champion Paul Krugman. After the policy’s many failures and lackluster results, economists have concluded that these seemingly well-intentioned proposals amount to a decrease in both the supply and quality of housing units. Unfortunately, this has not stopped politicians in their attempt to revamp the unsound policy.
Even with rent control’s historically horrid outcomes, progressive politicians like Senator Kamala Harris of California continue to announce their preference for the policy. Ironically, cities located in her state of California, like Berkeley and Santa Monica, are commonly utilized as case studies that reflect the failure of the policy. During the late 70s until the early 90s, Berkeley maintained some of the strictest rent control policies in the country, and saw a supply drop of 14%. Additionally, Santa Monica’s rental supply fell by 8%.
These outcomes are not exclusive to cities in California. For example, New York adopted these price controls decades before, and in 1968 their vacancy rate, the percentage of available rental properties, fell to a mere 1.23%. Also, our northern neighbors in Canada enacted the same damaging policies, and received burdensome repercussions that restricted the supply of rental housing. Like cities in the United States, their rental unit supply dwindled due to the price ceiling.
These examples are nothing more than the fundamental principle of supply and demand. When a price ceiling is enacted, a shortage ensues. This is because the market price being artificially lowered creates excess demand with a simultaneous decreased supply.
Naturally, if there is a restricted supply, the producer simply raises the price to ensure the shortage is limited and acts as a market function for distribution. “Raising the price? Those greedy capitalists!” I’ll stop you right there.
This situation only comes about in the short run, as fierce competition has not manifested quite yet. In the long run, investors will observe the profitable industry and seek to construct new units to meet consumer demand, and this competitive atmosphere will in turn drive down the prices. However, if landlords are only allowed to increase their tenant’s rent to a particular price, the venture may become unprofitable, or can even cause losses. This disincentive incites landlords to suppress investment into rental properties, construct new properties, and disregard the maintenance of existing properties.
The idea that rent control destroys the value of rental properties is evident by observing the urban decay of cities and neighborhoods that were disadvantaged by it.
For instance, in New York, “Over 200,000 rental units were abandoned in the 1960s and ‘70s as rent control restrictions, along with other policies, reduced the South Bronx and parts of Bedford-Stuyvesant and Harlem to rubble.”
With the decrease in profits, landlords are without incentive to maintain acceptable living conditions and install the necessary updates to ensure a respectable standard of life. The cost to maintain these units simply outweighed the potential profits by the investors, and it was perhaps in their best interest to either liquidate or abandon their investments altogether.
A decrease in supply and quality are not the only unintended consequences of rent control. These policies have a tendency to help the wealthy, and those who already maintain tenancy in the rented buildings, which discriminates against poor or future renters. A study conducted by the Citizens Budget Commission found that households with incomes greater than $75,000 received nearly double housing subsidies compared to those with incomes below $10,000. In New York, where do you assume rent control benefited individuals the most? Harlem? The Bronx? No, it was Manhattan — one of the wealthiest boroughs.
Regarding long term tenancy, let’s say a college student is renting an apartment in an urban area that practices price ceilings. He pays a total fixed rate of $800 per month for his rental building. Upon graduation, he accepts a job offer at an accounting firm with an annual salary of $80,000. Being financially savvy, who is to say the graduate will not simply remain a tenant in the rent-controlled area for the next decade in order to save vast amounts of money? Not only is the ceiling now supporting a high-wage earner, the restricted supply and lack of available housing now discriminates against low-waged earners seeking a home.
Like the many other politically-expedient policies legislators utilize to appeal to the working class, the enacted proposals have a tendency to apply the opposite effect and harm those they seek to assist.
There are various routes that would ensure the financially handicapped are not rent-burdened other than resorting to price controls. These include loosening bureaucratic zoning laws, substantially cutting building regulations and codes, decreasing taxes that significantly encroach on a wage earners’ income, or perhaps even offering tax relief for landlords who offer lower rent to the needy. Unfortunately, these measures being implemented are doubtful. If there is one observable fact, it is that the government is stubbornly reluctant to scale back their operations policies, and instead prefers to increase them.
Latest posts by Logan Davies (see all)
- Are Reparations Justified? – Eccentric Economics - April 14, 2019
- Rent Control: Politically Expedient, Economically Disastrous – Eccentric Economics - April 7, 2019
- Stop Blaming the Free Market for Modern Business Cycles – Eccentric Economics - March 24, 2019