Undead Ideas: Rent Control

Richard Nixon instituted Price Controls in 1971, which included rent control.

In these days of economists constantly debating the right way to revive the economy, it seems like there is no way to find consensus among economists.  Economists don’t spend much time debating the issues they agree on, and to them, rent control is about as dead an issue as the earth revolving around the sun.  In 1992, 93% of American and Canadian economists surveyed agreed with the statement “A ceiling on rents reduces the quantity and quality of housing available.” Opposition to rent control among economists spans the political spectrum from Milton Friedman and Walter Block to leftist Nobel Laureates Gunnar Myrdal and Paul Krugman.  In fact, it was the socialist Swedish economist Assar Lindbeck who famously said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing it.” (Assar Lindbeck, The Political Economy of the New Left, New York, Harper and Row, 1972, p. 39)

Never underestimate opportunistic politicians when they smell blood in the water.  With housing prices already falling, politicians want to be seen as champions of the little guy and do something for “affordability” with one side of their mouth, and force housing prices to “recover” with the other.   With the economy in disarray, even widely discredited schemes such as rent control are making a comeback in politician’s playbooks of idiotic moves that please certain constituents.

Rent control was implemented twice on a national scale in the United States.  Rents were first frozen during the difficult years of World War II, and frozen again in 1971 as part of President Richard Nixon’s wage and price controls intended to curb inflation.  After Nixon’s wage and price controls expired, many cities kept some form of rent control intact. Could President Obama resurrect an undead Richard Nixon to implement nationwide rent control in reaction to the impending stimflation?  There’s a 93% chance his economic advisors wouldn’t let him do such a thing.  However, Nixon’s undead corpse has been spotted mumbling “I am now a Keynesian” in places like California and New York City where bad ideas never seem to die.

Despite widespread liberalization of rent control laws, rent control remains a popular idea in many cities and states.  Last June, California voters reaffirmed their support of rent control, by voting down Proposition 98.  In New York, Democrats now control the state legislature and intend to revive some of the rent control laws that have been liberalized over the past few decades.  The legislation would return thousands of previously de-regulated apartments back under regulation; reduce allowed rent increase percentages, even when a tenant moves out; limit owner’s ability to use his regulated apartments for personal use; and crack down on harassment of tenants by landlords to induce eviction.

As Paul Krugman concluded with respect to rent control, “So now you know why economists are useless: when they actually do understand something, people don’t want to hear about it.“ A voting public, better informed by economic consensus, would be less tolerant of these legislative charlatans.  Before resurrecting bad ideas, let us rejuvenate the discussion of why rent control is bad for nearly everybody, particularly the lower and middle-class people politicians are pretending to protect.

As stated by the National Multi Housing Council:

Rents serve two functions essential to the efficient operation of housing markets:

• they compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers; and
• they provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock. In this respect, housing is no different from other commodities, such as food and clothing — the amount producers supply is directly related to the prevailing market price.

Those of us who have studied microeconomics understand the supply/demand consequence of price-controls: a decrease in the supply of a good, and thus shortages at the prescribed price.  But, rent control is much more than just a price control, it’s effects compound over time.

A conventional price control, let’s say on chickens, prescribes that all chickens be sold at a government-determined price.  If a farmer cannot profitably provide chickens at that price, he would likely just stop selling chickens until doing business is feasible again, or simply drown the chickens as many farmers did during the Nixon era price controls.  Now, imagine a price control on chickens where farmers are not only compelled to sell at a prescribed price, but also compelled to offer that rate to all customers who previously bought chickens from that farmer at the same quantity that was ordered previous to the price control.  Regardless of the price the farmer must pay for feed and other costs of raising chickens, he is not permitted to stop producing chickens as he is forced to sell a certain number of chickens indefinitely.

Some might call this a crude form of serfdom, or even slavery, but this is exactly what rent control does to landlords.  Would we be too surprised that suddenly the quality of the chickens have noticeably deteriorated as farmers cut back on the quantity and quality of feed? Would it be shocking if the farmer became rude to his now obligatory customers, or made it difficult for customers to safely pick up their orders?  When such a burden is placed on the ones who provide housing in the first place, it seems inevitable that the long-term effects of rent control on the housing market would be devastating.

Let’s look at some of the more subtle results of rent control:

Hoarding:

Just as price controls on gas in the ’70s caused long lines and hoarding of gas, the same thing happens with rent controlled housing. The tenants of rent-controlled units are not stupid. They know that the supply is artificially limited and will become more limited in the future. They know that if they stay put, they’ll be able to pay about the same rent forever, in real terms. They know that if they were to look for another apartment, and they were fortunate enough to find one, the rent would be significantly greater than what they pay where they are.

So, they don’t move. Well, almost never. Even if their family grows or shrinks. The incentive to stay is just too great, and the wealthy and well-connected are better equipped to take advantage of the situation.  It should be noted that New York’s Governor Paterson, Congressman Charlie Rangel, and various other politically-connected people enjoy landlord-subsidized apartments in the Lenox Terrace luxury apartment complex in Harlem, which happens to be owned by a politically-connected developer.  As Peter Salinas and Gerard Mildner wrote in Scarcity by Design: The Legacy of New York City’s Housing Policies:

To begin with, to earn the maximum benefits from New York’s rent regulations, it helps to occupy an apartment for a long time (because landlords are permitted to raise rents more than usual when an apartment is vacant). Affluent professionals have greater job stability and can, in any case, manage to fake their continued occupancy (in order to sublet) when they must move. Also, influence or good connections are helpful in the search for a desirable rent-regulated apartment.

When rent-controlled apartments become available, family and friends often know about it first and rent up the apartment immediately, knowing that rent-controlled apartments are so hard to come by and the opportunity to rent other vacant apartments may not come for some time.

Of course, this hoarding by existing and new tenants worsens the problems, because those who are shopping for apartments have very few, if any to choose from. The longer this goes on, availability declines further and the incentives to hoard grow exponentially, as do the negative effects.

In fact, one study found that rent control tripled the expected duration of residence in New York City.

The ones who suffer the worst are those who are trying to relocate to the area for job opportunities as vacancies become more rare.

Black Market and Deceptive Acts

As current renters hoard their rent-controlled apartments, it is rare that new apartments become available. Sometimes, tenants would illegally sublet their units at higher rents.
Landlords do under-the table deals or rent to friends and family. New York had to crack down on landlords charging “key fees” as high as several thousand dollars to new renters.

Landlords will often find loopholes that will let them de-regulate a building, just to be released of the financial burdens. For example, in NY landlords will take their rent-controlled building and deregulate it by using the entire building as a residence for a certain number of years. This is space that could otherwise have been rented at a market rate.

Deterioration of Existing Housing Stock

Because of the disincentive to improve and maintain the property, landlords will often become slumlords and allow unhealthy conditions or activities to take place in the apartments. This lack of improvement not only is unpleasant to the current renter, but accelerates the end of the usable life of the apartment building. The Rand Corporation studied Los Angeles’ rent control law and found that 63 percent of the benefit of lowered rents was offset by a loss in available housing related to deterioration and disinvestment.

The burdens of rent-control could become so heavy on a landlord that he may find it beneficial to burn his building down to collect insurance. Of course, this is dangerous to tenants and neighbors, but happened regularly in the Bronx. The Bronx’s arson epidemic led sports announcer, Howard Cosell to proclaim “‘There it is, ladies and gentlemen, the Bronx is burning”, as the TV camera panned over the neighborhood during a 1977 Yankees World Series Games.

Discrimination

The free-market typically disincentivises any discrimination based on factors other than price, quality, and quantity because of the self interest of the participants. However, rent control removes this disincentive.

Since under rent control, the price is set and there are many applicants, a landlord has the incentive to choose tenants based on other factors. A landlord will more carefully examine applicants’ credit history and income, which a good landlord should do, but lends toward biases against younger applicants. A landlord may decide renting families is less desirable, or may prefer to rent to attractive young females. Often times, racial preferences have influenced renting decisions, which traditionally worked against minorities. Thus, rent control can exacerbate segregation problems because landlords choose not to rent to people who would change the demographics of an area.

Mobility

As mentioned above, duration of residence in a rent-controlled apartment has been observed to be three times as long as duration at market-rate apartments. One can see that the incentive to hoard rent-controlled apartments is also disincentive to relocate.

The mobility of both the tenants and newcomers are drastically hampered by rent control. Unless the tenant has the money to rent a second apartment (or Governor’s mansion), it will be difficult for him to relocate closer to better employment. The tenant may rather endure a very long commute in order to maintain the rent-controlled apartment. As Walter Block put it, “They are, in a sense, trapped by the gentle and visible hand that keeps them where they are rather than where they might do better.”

Difficulties are multiplied if the local economy takes a turn for the worse. A downturn in local employment would not be relieved by people relocating for jobs, thus making the unemployment and poverty situation worse.

Employees looking to relocate in the city with rent control are hurt the worst as they will have a difficult time finding available apartments. The drawbacks to the local economy are discussed in the section on regional growth and adaptation.

The reduction in mobility is especially burdensome on families with children, since public schools tend to be local. If the local school is under performing, a family under rent-control will lose it’s reduced rent if it makes the difficult decision to relocate to an area with better schools. To relocate to a better school, a family would also have to find a new apartment, which would be much more expensive and almost impossible to find.

Regional Growth and Adaptation

The hoarding of rent-controlled apartments makes finding an affordable apartment in the the city with rent-control. Not only is this a burden on the newcomer, this makes it harder for a city’s businesses to attract skilled workers. Employers may decide to relocate to other cities, if their recruits consistently can’t find decent housing.

Often times workers who’s industries have relocated will not relocate in order to maintain the rent controlled apartment. In the long-run, this worker’s family may become a burden on the public assistance system as they may not have the skill sets to quickly pick up another profession that pays as well.

Tax Revenues

Rent control reduces the market value of regulated rental property. Typically, this negatively effects the assessed property value relative to unregulated properties, decreasing overall property tax revenues and burdening market properties disproportionately. A study of rent control in New York City in the late 80s estimated reduction in taxable assessed property values attributable to rent control at approximately $4 billion, which costs the city approximately $370 million per year in property tax revenues.

Housing Development

Developers would have very little incentive to build affordable housing if they knew the rents they charge were to be restricted by rent control, or were at risk of being regulated in the future. Thus, almost no new stock of middle and lower class housing is built. Instead, developers may only build “luxury” buildings that are often not regulated.

Thus, affordable housing stock will decrease as older buildings become uninhabitable (or are burned to the ground for insurance money) and no new stock is created. Over a long time, the effects the shortage is devastating.

Gentrification and Class Conflict

As mentioned above, landlords may choose unsavory methods to choose their tenants, since price is not permitted to be the deciding factor. Often, landlords will discriminate against persons of certain ethnicities or religions. This type of discrimination can often be widespread through an area causing tensions between religious or ethnic groups, and in the long-run drive out certain types of people from those areas.

The shortage of affordable housing, and development of only luxury housing a huge gap in the income of a city’s residents. Over time, luxury developments will be confined to certain areas less blighted by rent control, causing segregation and rapid gentrification.

As housing in cities have become less plentiful under rent control and market-rents vary drastically with regulated rents, the incentive grows for landlords to deregulate apartments to market-rates. These tactics have become aggressive as the incentive is extraordinary. A recent NY Times article describe the tension between tenants and management at Stuyvesant Town and Cooper Village in New York:

More than a year after buying Stuyvesant Town and Peter Cooper Village in Manhattan for a record-breaking $5.4 billion, Tishman Speyer Properties has accused hundreds of rent-stabilized tenants of living somewhere other than their apartments, a tactic that residents and their lawyers say is part of an aggressive attempt to drive out low-rent tenants to make way for high-rent ones.
…about 800 rent-stabilized leases have been denied renewal because the landlord believed the tenants had a primary residence elsewhere, according to the company. More than 4 in 10 of those cases were later dropped, while 3 in 10 ended with tenants giving up their apartments.

Another example of class conflict caused by rent control is an apartment building owner in Manhattan who’s rent controlled tenants tried to prevent his family from living in their own building.  Neighbors escalated the class warfare with protests and threats against the lives of the family that only desired to live in the building they owned.  How much of this sense of entitlement to another person’s private property would be acceptable without the explicit endorsement of rent control by the city, and many of it’s leaders.

Conclusion

Rent control is not just a conventional price control, setting the price at which willing renters and landlords are permitted to do business.  It is a coercive act that gives landlords no legal option, but to rent to a tenant, even against his will and often at a financial loss.  Rent control adds a non-voluntary burden to landlords which deepens over time because landlords have no option, but to rent to a tenant at below market rates.

Not only does rent control cause huge distortions in the housing market, but the burdens fall disproportionately on the poor and underprivileged people it’s enactment was intended to benefit. Although particular people are able to live with the comfort of low rent payments, even those renters will see their living conditions deteriorate as landlords neglect repairs and maintenance. As the situation gets worse, middle class residents are able to move away, leaving behind the poorest residents who have become reliant on the reduced rent.

In effect, rent control grants property rights to renters that originally belonged to the original property owners, while retaining the owner’s obligations. Rent control becomes a redistribution of wealth to existing tenants and away from apartment owners, market-rate apartment renters, newcomers to an area, and renters who’s needs change over time. Nonetheless, over time the quality of life decreases for all residents of a city where rent control is imposed.  Essentially, if housing affordability is the objective, strapping additional burden upon providers of housing will only make matters worse.

In conclusion, controls on supply can do as much damage to affordability as controls on price. Eliminating rent control needs to go hand-in-hand with loosening exclusionary zoning and density restrictions in order to allow the market to perform as it should. A truly free-market incentivizes investment in quality affordable housing for all residents by allowing individual decisions to determine living patterns and location preferences based on quality, availability and affordability.

For more reading on rent control, see the section on Rent Control in the Articles and Academic Papers page at Market Urbanism.