Economist, a venerable magazine created a century and a half ago to promote free trade, argues against rent controls, which have proliferated in the United States in recent years (“American Cities Want Rent Controls to Rein in Housing Costs: Economists Still Think They’re a Bad Concept,” August 25, 2022). It would be inconsistent to defend international free trade and oppose internal free exchange. It might be too much of a pessimism for me to wonder if opposition to the paper has softened a bit in the past few years (see “Rent Control Will Worse Housing Shortage,” and “Democrats clamor for rent control again,” September 19, 2019).
By weakening the price signal that rental housing has become scarce, rent controls (a form of price control) prevent market adjustment with increased supply. Furthermore, rent controls hurt many poor households, who can avoid the queues created by prices below market equilibrium. For example, wealthier households are more likely to buy apartments that landlords convert into condominiums to avoid rent controls. The newspaper wrote:
Rent control benefits the rich tenants more than the poor. “The benefits of rent control are completely backwards targeting,” said Rebecca Diamond, one of the authors of the Stanford study. He noted that rent-controlled tenants in San Francisco have higher incomes, on average, than those living in unregulated properties.
Another factor often overlooked is that waiting lines increase landlords’ incentives to discriminate against poorer (and more vulnerable) potential tenants. It’s less expensive to discriminate when ten people want your available apartment than it is for only one potential tenant to answer your ad. Defenders of the poor and virtuous promoters of income redistribution are often only proponents of “solutions” that increase government power.
According to the OECD, Sweden suffers from the most restrictive rent controls among its member states. One result is that the average waiting time to rent an apartment in Stockholm is 8 to 10 years Interestingly, the typical waiting time for a new car delivery in the old Soviet empire was 10 years; Only the powerful, including the apparatchiks, were able to jump the queue (see my regulations article “Debunking Supply Chain Myths” and Luminata Gaetzel’s research referenced there).
Note that rent increases are not only a matter of inflation, which also increases wages, but also higher relative prices due to fewer housing units due to zoning regulations, especially in large cities with growing populations. Rent control, which has been demanded by social activists, is in large part a response to the perverse effects of previous government interventions – a frequent phenomenon.
It used to be that Democrats favored rent control while Republicans opposed it. The difference is now less clear:
Enthusiasm for such policies is less partisan today than in the past. For years rent-control laws existed in only five Democratic strongholds: California, Maryland, New Jersey, New York, and Washington. … As of 2019, rent-control laws have been enacted in three additional states—Maine, Minnesota, and Oregon—and are being considered in half a dozen more.
In 2019, Economist observed that it is natural for politicians to respond to vocal discontent with measures that, like rent control, have no apparent cost to the government itself. Economist wrote:
It is unrealistic to expect politicians to ignore the demands of voters. But the danger is that one abuse of power replaces another as a tenant, just like Nimby, campaigning for regulation to lock entrants out of the market. While today’s residents may benefit from limited rent increases, outsiders facing less supply and fewer opportunities will suffer. … Rent control hurts almost everyone because the housing stock deteriorates.
This calls for some additional observations. First, it is really unrealistic to expect politicians to ignore voters’ demands, at least vocal or weighty ones. Second, politicians who introduce rent controls are likely to be the main beneficiaries in terms of political support. Third, it is understandable, and perhaps inevitable, that the average person does not understand supply and demand, not to mention more complex economic phenomena: he has little incentive to learn because his own voting or political participation has almost zero chance of change. Results. This factor explains the popular support for rent control. Fourth, the only acceptable solution is the ability of the government to meet all demands within constitutional or institutional constraints.