Rent control is back. 93% of economists say it rewards a few privileged beneficiaries (often not the ones who really need help) but is bad for most others.
Those in favour of rent control argue it protects tenants, helps them remain in their homes long term, creates more affordable housing, reduces inequality, promotes lively cities, advances the social interest in mixed-income neighbourhoods, has no effect on the construction of new housing, and curbs the market power of landlords.
They would like it introduced by lunchtime tomorrow. If not sooner.
This view is typified by a writer to NZ Herald columnist Mary Holm, who said:
“With accommodation being one of life’s staples, surely some stronger form of regulation should be set on rents. We would not sit idly by if the price of bread climbed steadily higher due to a temporary increase in demand. Regulation would also have the added effect of keeping house prices from soaring out of all reason because investor buyers would not be able to count on renters to bail them out of sticky financial situations.”
Labour pushed for rent control in post-earthquake Christchurch. In 2012 Christchurch East Labour MP Lianne Dalziel was reported by The Press as saying that Christchurch’s housing shortage had hit breaking point and was rapidly snowballing into an “extreme crisis”. “The Government has to intervene,” she said.
“They have a moral obligation to intervene and ensure people are not racking up rents to take advantage of the current market,” Dalziel said, adding that there needed to be a cap on rent increases to stop landlords taking advantage of quake-hit residents.
Rapidly-rising rents have been seized upon by the pro-control lobbyists as further proof that something needs to be done. That ‘something’ is more regulation and control. Rent control.
To be fair, there have been some big rent increases around the country in the year to November 2019 according to Trade Me data…
- Manawatu/Wanganui +15%
- Wellington +10%
- Nelson/Tasman +10%
- Gisborne +9%
- Waikato +8%
- Taranaki +8%
- Northland +8%
- Bay of Plenty +7%
With rental increases of that magnitude, and the noble goals of the pro-control camp in wanting to protect tenants and reduce inequality, it all sounds very kind and kumbaya. How could one not agree with such ‘nice’ Jacinda-like sentiments.
The planets are aligned for Labour and Green politicians and others of a socialist persuasion to win accolades from the downtrodden and inner-city liberals by raging against those “greedy landlords”.
The other side of the argument, however, is driven more by logic than ideology.
An economic consensus
Robert Beren, Professor of Economics at Harvard University, likes to introduce students to economics with topics about which there is a professional consensus. Of the 14 propositions he cites, to which most economists subscribe (based on various polls of the profession), the highest level of consensus is on this one…
- A ceiling on rents reduces the quantity and quality of housing available. (93% of economists agree)
The consensus amongst economists cuts across the political divide, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the ‘right’ to their fellow Nobel laureate Gunnar Myrdal, an important architect of the Swedish Labor Party’s welfare state, on the ‘left’. Myrdal said:
“Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”
His fellow Swedish economist (and socialist) Assar Lindbeck says:
“In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.”
Rent control simply replaces rationing by price with rationing by queuing
Tim Worstall writes, “It’s a standard point among economists, that rent control doesn’t work. In the sense that if you have rent control then you’ll end up with less affordable housing than if you didn’t have rent control: and, since rent control’s very idea is to create more affordable housing that’s a pretty good definition of ‘does not work’ right there.”
“What really happens when there is rent control is that we replace rationing by price with rationing by queuing.
“As the man said, socialism is when you wait for bread and capitalism is when the bread waits for you.
“As the man said, socialism is when you wait for bread and capitalism is when the bread waits for you.”
Worstall opens up on his experience queuing in Soviet times:
“Further, dependent upon the time you’ve got to spend queuing for whatever it is, and the value you place upon that time, it’s not obvious at all that it’s a net increase in human utility. And as someone who has queued in Soviet times to buy that daily bread it would be very difficult indeed for someone to convince me that it was an increase in human utility.”
Governments cannot order lower prices but that didn’t stop Muldoon who imposed rent controls in 1982. They were a disaster, along with his price and wage controls.
Getting back to the post-earthquake Christchurch situation, the problem then was that many homes had been destroyed, rental properties and privately owned homes alike. All those displaced needed somewhere to live.
You don’t need to be a rocket scientist to know what happens when supply decreases and demand increases. The inevitable result is nothing to do with greed and all to do with simple market economics.
Define the problem
Correctly defining a problem is the most important step in solving the problem.
The problem in Christchurch was that the supply of housing had been decimated, but the demand hadn’t, thus leading to a supply/demand imbalance.
The market’s response was to ration by price rather than ration by queuing. This led to more people per household, people living in creative spaces, etc.
The socialist intervention approach of rent control would have led to some people living in cheap houses and others with nowhere to live. Since when was that a ‘kind’ solution?
The correct solution is to address the supply problem, not impose rent control on the few houses left standing.
As National MP Gerry Brownlee said at the time:
“A rent freeze doesn’t increase supply and will never encourage new stock to come in. We won’t be moving to regulate rents but we most certainly are actively providing new housing.”
Trade Me data at the time showed that demand for rental properties in Christchurch had increased +42%, supply had dived -40% and rents had increased 15%.
Supply had dived 40% and Labour’s solution was a rent freeze! Anyone who has studied economics beyond primary school could tell Lianne Dalziel that a rent freeze was not going to increase the supply of rental properties.
What’s happened since the post-earthquake building boom in Christchurch is proof of the efficient market hypothesis. Now that more houses have been built and the supply problem fixed, rents in Canterbury in the year to November 2019 increased a mere +2.5%. That’s only 1% more than inflation and rather proves that ‘the market’ works efficiently when allowed to do its job.
In Wellington, on the other hand, where NIMBYism and local government regulations impose so much friction and cost that the supply of housing is not able to keep up with demand, we see 10% rent increases year on year. Rent freezes ain’t gonna fix that.
Mary Holm says rent control doesn’t help the poor
Responding to the writer referenced at the beginning of this article, Mary Holm responded:
“If the price of bread did rise, I’m sure new bakers would enter the market promptly, offering a cheaper product. In the same way, we must let market forces set rents. Rent control is another one of those nice ideas that does more harm than good.
“How come? If we limit the rent landlords can charge, fewer people will invest in rental property and there won’t be enough rental housing to go around. What’s more, those who stay as landlords will feel less obliged – and less able – to maintain their properties. In one study, 29% of rent-controlled housing in the United States had deteriorated compared with 8% of uncontrolled housing. The numbers are similar in England and France.”
And US economist Walter Block says:
“Rent control has destroyed entire sections of sound housing in New York’s South Bronx.”
“It has led to decay and abandonment throughout the entire five boroughs of the city.”
Why then do rent control advocates say it has no effect on the construction of new housing?
The data shows that in areas subject to rent control, there is more building. Miriam Zuk, director of the Urban Displacement Project in San Francisco, wrote:
“When we looked at housing production numbers from 2007 to 2013, the six cities that had rent control in the Bay Area actually produced more housing units per capita than cities without rent control.”
That’s absolutely true but totally disingenuous. Here’s why…
California state law exempts residential rental units built after 1995 from rent control ordinances. The law was seen as a tool to facilitate the purpose of local rent control laws – promoting safe and affordable housing for renters, while also encouraging the development of new rental units.
Digging into the data we find that areas with rent control had more residential rental units built after 1995 than areas without it. Why?
In areas with rent control, owners’ returns ended up falling way below market. They either leave the buildings to rot, or demolish them and build new ones that are not subject to rent control. Good for construction companies but not the environment.
In areas with no rent control, owners have no need to tear down perfectly good buildings and build a replacement to get a market return on their investment.
If you need proof, a study by a group of Stanford University researchers shows that San Francisco’s rent-stabilisation efforts failed.
It’s true that rent control kept some residents’ rents lower. But landlords responded by converting their buildings into condos they could sell or business properties they could lease without rent-control restrictions – or by demolishing their old buildings and replacing them with new ones that were not subject to rent control. Effects such as these drove down the supply of rental housing and, therefore, drove up rents across the city.
The idea that landlords can be told not to charge so much is silly and should be resisted – with forceful protest if necessary. After all, since when could government order lower prices? Didn’t Muldoon here and communists in the Soviet Union try that kind of thing with, shall we say, mixed results?
Reducing red tape and costs and friction in all its forms to encourage more building, and recognition of the harm wrought by NIMBYism (residents campaigning against nearby developments) would go a long way to addressing the supply problem.
But resurrecting the rotten idea that is rent control will make things worse for property market outsiders and only protect a favoured few residents. The economists are right, and the populists are wrong.
[Image Credit: Scanned from an original in Olly Newland’s personal collection of property-related cartoons, this Bromhead cartoon appeared in the Auckland Star on 3/11/83 in response to Robert Muldoon’s latest imposition.]