Rent Control

Yesterday, I received a survey from a California university asking my opinions about the rent policy on some apartments I own.  From the obvious slant of the questions being asked, it was rather obvious what conclusions the researchers desired.  Some of the questions were so narrowly worded that no matter how I answered, I was confessing to being Simon Legree, gleefully raising the rent on widows and orphans shortly before I evicted them onto the nearest ice floe.

What I could not say in the survey was that in more than two decades of owning those apartments, I’ve never raised anyone’s rent, opting to impose only such increases after a tenant moves out.  (That policy may have to change, however, if the cost of utilities continues to skyrocket.)

The last section of the survey asked my opinion about rent control.  Since none of the multiple-choice responses was suitable, I’ll answer here.  Rent control not only does not work, it harms the poor by raising the cost of housing…while making such housing scarce.  Additionally, in my humble opinion, it violates the “taking clause” of the Fifth Amendment of the Constitution of the United States.  I’ll address each of those points separately.

Rent control is just another form of a price control—a universal stupidity where politicians believe they can somehow change reality.  Price controls have been around for more that 4000 years without a single recorded case of success, but politicians still regularly resort to the measure to placate the uneducated.  It is almost impossible to find an economist who supports the idea, but voters seem to like politicians who promise the impossible.

If the government arbitrarily sets a price below the market price, then the producers are left with few options:  they can lower the quality, sell on the black market, or cease production.  When price controls are placed on housing, the common response is for landlords to cut down on maintenance, to change the rental units into salable condominiums, or to shutter the property.  Far worse, cities that implement rent controls have far lower rates of development.  Or to put that more simply:  only an idiot builds apartments in a city where the government controls what you can charge for rent.  If you are going to invest millions of dollars, you are most likely to do it someplace where you can make at least some profit.

If no one is building new units, it won’t take long for a shortage to exist, forcing up the price of those units not on rent control.  The largest cities in the United States with some form of rent control or rent stabilization are New York, NY; Los Angeles, CA; San Francisco, CA; Oakland, CA; and Washington, DC.  This is not surprising when you consider that nine of the ten cities in the United States with the highest rents all have imposed rent control.  Not one of the cities with the lowest rents has any form of rent stabilization or control.  

Even as rent control keeps the price of some apartments down, the demand goes up while the available supply goes down.  You don’t have to have a Nobel Prize in economics to understand that this raises the price on all non-controlled apartments and increases the likelihood of controlled properties being converted to condos.

New York City has had a 41% price hike on a single bedroom unit in the last 12 months, even after the previous mayor made affordable housing his primary goal for eight years.  Despite more than half of the city’s apartments being rent controlled, available apartments for low-income people are scarce, with the average price of a one-bedroom apartment currently topping $3400.   Newspapers routinely report stories of prospective renters paying exorbitant bribes to landlords to secure a vacancy—a textbook definition of a black market. 

Despite the exodus of several hundred thousand New Yorkers, there is an urgent need for an additional half million apartments according to the city.  When asked, the most common reason developers preferred building in New Jersey or Connecticut was New York City’s policy of over regulation.   So far, both the city’s and the state’s response to the problem has been more restrictions on landlords and developers.

If rent control causes a dramatic increase in the cost of housing, it naturally follows that as rents increase, so does homelessness.  Of the top eight cities with the largest number of homeless people, seven impose rent control.  

A recent study by the Brookings Institute recently found that when apartments came off rent control, property values increased by 40%, creating a windfall profit for the city from property taxes.  The study also revealed a hidden problem with rent-controlled properties, that of “mis-matched housing”:  it’s the propensity of recent empty nesters to continue to live in apartments larger than their current needs because their current rent is cheaper than that of a smaller apartment.  Since tenants continued to occupy multi-bedroom apartments past their actual need, it created a shortage of units and raised the price for such units that were not rent controlled.

Lastly, there is a growing push for the Supreme Court to review decisions by lower courts that have upheld the constitutionality of rent control laws.  The “taking clause” of the Fifth Amendment states “Nor shall private property be taken for public use, without just compensation.”  Since property rights include the right to sell your resources, it can be argued that the government cannot restrain your income from that property without compensation.  

This was exactly the argument used by the state legislatures in the thirty-seven states that have banned rent control.  Since such laws benefit only realtors and populist politicians, hopefully the other dozen or so will learn freshman economics.