|Montreal, July 6, 2002 / No 106||
by Martin Masse
As T. Alexander Smith writes in Time and Public Policy, "Most policy disputes over the proper role of government in the economy are in reality disagreements over the long run or the short run." The problem of rental housing shortages in urban areas provides an excellent illustration of this general observation.
Most people over the course of past centuries did not enjoy what we would
today consider proper housing. They lived in small, dirty, barely heated
houses, sometimes with animals. But extremely low levels of productivity
meant that they were also badly fed, badly clothed, badly educated, and
generally lived near starvation levels.
As capitalism developed and living conditions improved for more and more people, housing also improved. There is nothing special about the good that we call housing; it has to be produced and offered on the market, and people have various needs and desires in terms of what kind of place they want to live in. Just like there are very stylish or modest clothes, or gourmet and fast food, there are products or various size, quality and prices in the market for housing: castles for millionaires, bungalows for middle-class families, or small apartments for single people or low income families.
In a free market, entrepreneurs trying to make a profit by serving customers can do so at the lower end of the market as much as at the higher one. There are only so many millionaires, and contractors cannot just build castles. Although they have less money to devote to their housing needs, middle or low income people make up the bulk of the population. A contractor or landlord will adapt his product to his customers so as to have an acceptable return on his investment.
This means of course that rental units for the poor will be smaller, less comfortable and generally less appealing than housing units for richer families, as is the case for any type of product or service. But the story does not end there. Because they are always looking for profitable opportunities, entrepreneurs have strong incentives to find less costly ways to provide good housing. Since the 19th century, more efficient construction methods have been developed that have allowed real prices to continually go down. The poor are the main beneficiaries of these capitalist innovations, just as they can enjoy the fruits of intensive agriculture or mass-produced clothing and furniture. As families move up the ladder in a dynamic economy and can afford to buy houses, they also free up apartments for those with more modest means. A free market in housing thus offers an optimal choice – and one that is constantly improving in quality – for poor and rich alike.
Why then are there such things as housing shortages for low income families in many North American cities?
In the early decades of the 20th century, "housing activists," "tenants' rights" activists, and socialist defenders of the poor began calling for more radical – that is, quicker – solutions to the plight of poor families living in squalid conditions. Because housing is such a basic need for any human being, many people also began thinking that it is too important to be subjected to the laws of supply and demand. This should especially be the case for rental units aimed at low income families who are not rich enough to buy a house. Allowing landlords to "make a profit on the back of these people" was considered immoral in some way. These calls were heard especially during wartime and depression periods, when the normal improvements in housing and other industries were stalled.
Instead of waiting for the normal accumulation of wealth to answer these needs, activists – echoed by populist politicians – asked for immediate measures, rent control and government construction of "social housing" being the two most popular. These measures are the reason why we have today a shortage of apartments, especially apartments for modest incomes, in Montreal and in many other cities.
Rent control is simply a form of price control and has the same effect here as in any other sector of the economy. In the Soviet Union, the price of bread was extremely low, and citizens had to queue for hours to buy this and other basic items. It is easy to understand why, even though an amazing number of politicians, journalists, and even economists seem not to grasp this logic.
When a ceiling is imposed on the price of a product that is lower than the cost to produce it, it becomes unprofitable to do it. Instead of losing more and more money, the producer stops producing. Even if the price ceiling is slightly above cost for some producers (not all producers have the same costs, some are more efficient than others), the result is likely to be a lower supply as the marginally less efficient producers leave the field. Similarly,
As a quick-fix policy, rent control certainly has some short-term advantages for some people. Tenants who already have an apartment will see their rent lowered or not raised as much as it would in a free market in the years following the imposition of control. Expropriated from a part of their investment, landlords will be the first to suffer. As the sector becomes less profitable, a predictable consequence will be that many will want to leave it and others will be deterred from entering it. Landlords will have less incentives to renovate their apartments, because they know they will not be able to recoup that new injection of capital by raising rents enough in the future.
More importantly, they will have little incentive to build new housing units. Since in comparison with other industries, rental housing now offers pitiful or no returns, investors will put their money elsewhere. They will also try to transform their apartments into condos or other types of building that are not regulated. They may even prefer to leave them empty instead of constantly losing more money.
The long-term result is that in a city where rents are controlled, apartments will gradually become more run-down and fewer in numbers. The rich will always be able to afford a house or a condo, so those who will suffer most are low-income families looking for a first apartment or trying to move to a new one. As apartments become rarer and the shortage grows, some will be forced out in the street. That's when the situation becomes a crisis and when calls become deafening for the government to correct the "defects" of the market and build "social housing."
Again, although it seems to be a logical solution for the government to fill the void in the short-term, long-term effects of a social housing policy are disastrous. There is no reason why bureaucratic agencies could build apartments at lower costs than the private sector. On the contrary, because the profit motive and the incentives to be more efficient are absent, public managers are always less efficient than entrepreneurs. This means the costs of subsidized housing will be borne by all taxpayers, hurting other sectors of the economy.
Social housing units are also less efficiently managed. Tenants are under the impression that they have a "right" to a nice apartment and develop a culture of dependency, with all the psychological and social ills associated with it. Managers, because they have no personal stake in the government-run program they are temporarily responsible of, tend to be less responsive to the needs of their "clients" than real owners who face competition.
Other policies meant to alleviate the crisis in the short term have baneful consequences. Tax breaks and subsidies to private entrepreneurs may boost the construction of apartments. But like all such programs, they tend to foster inefficiency. Why try to contain costs when you get free money? They are also invariably bureaucratized and slow, and often laden with favoritism. Again, taxpayers end up footing the bill, and the unseen effect is that the economy as a whole suffers because of this waste of resources.
When a city's housing market has been in decline for decades because of the distortions caused by rent control and social housing programs, it is very hard to promote the free-market policies that will allow it to eventually be restored to health. To abolish rent control means letting prices go up until it becomes profitable again to invest in housing. To end social housing programs and privatize public housing units means a class of parasites will have to take care of themselves and stop living at the expense of the rest of society.
Of course, those who benefit from present policies will want to hear none of it. The media and lobby groups will focus on the short-term consequences only: What will happen to those whose rents go up? What will happen to those who can't afford the cost of a non-subsidized apartment? What will happen to the poor single mother with three kids?
Tragic things can happen of course in such circumstances but charity organizations are usually there to help. The fact is there is no shortcut to a situation where housing is abundant and relatively cheap again. The choice is between a situation that will continue to deteriorate, on the pretext that short-term consequences are too hard to bear; and another where some have to readjust their lives as bad policies are overturned and the logic of the market reasserts itself, the situation gradually returning to normal over the months and years to come.
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