The Folly of Rent Control (or, Bad Ideas Never Die) | Print Version
by Adam Allouba*
Le Québécois Libre, May 15, 2013, No 311

The onward march of progress may not be constant, but it is both inevitable and irreversible. After all, what becomes known can never be unknown. Or so I thought until I saw a recent Toronto Star piece entitled “Condo renters pay hefty price for downtown living” decrying the fact that Ontario’s rent control laws only apply to buildings occupied before November 1, 1991. Given Toronto’s ongoing condo boom, a vast number of apartments across the city therefore fall outside the law’s reach. The story’s heroine is a woman whose landlord sought a $150/month rent increase (almost 10%). Kerri McAllister declared herself and her friends “shocked … to find out that we are powerless.” Naturally, the solution is to close this “loophole” by subjecting newer units to the same controls as older apartments.

What astonishes me is that rent control has long been quite literally the textbook example of why price controls are a terrible idea. Last year, only one member on a panel of 42 economists agreed that limiting rent increases has “a positive impact … on the amount and quality of broadly affordable rental housing.” In 1992, over 93% of economists agreed that “a ceiling on rents reduces the quality and quantity of housing available.” The (communist) Vietnamese foreign minister told an Indian audience in 1989 that “the Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.” And (socialist) economist Assar Lindbeck stated in 1972 that “rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.”

The Problem

So what, exactly, is wrong with rent control? As any introductory economics textbook will explain, forcing prices to below-market levels causes a wide range of problems, including fewer new housing units being built, less maintenance on existing ones and landlords picking tenants not for their ability to pay rent, but instead based on anything from race or religion to personal connections to flat-out bribes.

That’s the theory, but what about the real world? Take an example cited by Paul Krugman: a 2000 New York Times article about the difficulty of finding an apartment in San Francisco. A vacancy rate below 1% leads to months of fruitless searching, with one woman claiming to spend “at least six hours a day, six days a week looking.” An available unit draws up to 80 applicants who attend open houses with “resumes detailing their credit and job history, credit reports and references.” They dress professionally and agents advise them to “show enthusiasm” for the apartment. Prospective tenants offer to pay for new floors or to renovate the bathroom; one landlord was offered $5,000 to hold an as-yet unadvertised vacancy. Without knowing anything about San Francisco’s housing market, to Krugman the cause of the problem was “immediately obvious … a technology-fueled housing boom has collided with a draconian rent-control law.”

On the opposite coast, New York City still has about 40,000 units with frozen rents. Unsurprisingly, absurd stories abound. There is the five-bedroom house in Brooklyn for $1,040 per month and the three-bedroom apartment nearby for $76 per month; the 1,200 square-foot apartment in Greenwich Village for $330 a month; the 750 square-foot unit in Brooklyn for $63 a month; and the winners: the adjoining apartments in SoHo for $55 and $77 per month (apartments that would fetch about $2,500 a month each on the open market). And thanks to the succession rights that can allow family members to “inherit” the controlled price, these amounts will grow only more ludicrous over time. The law gives landlords every incentive to find a way, however ugly, to evict their tenants, while giving new tenants every incentive to find a way, however convoluted, to inherit the low rent.

As for the bigger picture, a comprehensive literature review found that rent controls cause tenants to keep the same apartment far longer than they otherwise would – up to 18 years according to one study. Among other problems, this reduced mobility causes longer commutes and therefore lower quality of life and higher fuel consumption. Rent controls also appear to discourage low-level maintenance, encourage condo conversions (diminishing the supply of rental stock), lead to higher rents in uncontrolled units as landlords try to recoup lost revenues, actually increase segregation, and seem to have no effect on homelessness. The author concluded that “economic research quite consistently and predominantly frowns on rent control,” calling it a “no-brainer.”

Given the overwhelming evidence against “hard” rent controls, over time governments have moved to a “soft” version that relies on controlled increases rather than an outright freeze. In Quebec, for example, tenants can challenge rent increases before the rental board, which will require the landlord to justify the difference. Under New York City’s “rent stabilization” rules that cover about one million homes, each year the rental board decrees a maximum percentage increase. While there are countless ways to implement such a scheme, ultimately, the greater the distortion of the free market (in other words, the bigger the difference the regulations actually make in the real world), the more likely it will lead to the problems described above.

Even less intrusive schemes can deter investors due to the threat of future restrictions. Indeed, in response to the Toronto Star article, an NDP legislator described the lack of controls for post-1991 occupancies as “clearly a loophole that was overlooked by this government.” Of course, it was no such thing, but rather a deliberate choice to avoid creating disincentives to building new rental units. When considering a new project, any sensible developer will weigh the risk that political pressure will give rise to new limits on what it can charge future tenants.

So What Gives?

According to the meta-study mentioned above, as of 2001 there were 140 jurisdictions in the US alone with rent controls of some kind. And as reflected by the mini-campaign in its favour run by Canada’s largest newspaper, rent control is far from dead. So why does such a bad idea persist? In two words: political pressure. Like all government distortions of the economy, rent control creates numerous losers – primarily landlords and aspiring tenants shut out of the rental market – but also a few winners: lucky tenants who benefit from lower rents. Sure, the paint might be peeling, your commute longer and the landlord conniving to evict you, but you can’t argue with $55 a month in lower Manhattan (an admittedly extreme example).

But even the winners may not benefit as much as they think. One analysis cited in the literature review found that new tenants in New York’s rent-stabilized units actually started off paying more than those in uncontrolled units. Why? “Tenants forgo low current rent in exchange for low future rent … the system simply altered the timing of payment rather than the total cost of rent.” Moreover, numerous studies found that the benefits of rent controls were in no way targeted to those in need; a household benefiting from rent control was just as likely to be well off as to be in genuine need of assistance. And efforts to means-test such controls are denounced on the grounds that landlords will then rent only to the wealthy.

It’s Not Just Rent

While rent control in particular get a lot of attention, it’s important to remember that no attempts to fix price ceilings ever end well. When the US government responded to the 1973 Arab oil embargo by imposing a maximum price for gasoline, shortages and then rationing quickly ensued. California’s price caps on electricity were so clearly responsible for its rolling blackouts a decade ago that then-governor Gray Davis lamented, “if I wanted to raise rates I could have solved this problem in 20 minutes.” And Venezuela’s myriad price controls, consisting of over 500,000 edicts enacted under Orwellian-sounding Law on Fair Costs and Prices, have produced chronic shortages of just about everything and provide a vivid example of what happens when government fixes the price of everything from food to drugs to cement to consumer goods and, yes, rent.

Given the thousands of years worth of evidence that governments cannot simply repeal the laws of supply and demand, any endorsement of price controls today epitomizes the triumph of hope over experience. One of history’s best-known examples of price controls dates back to the year 301 and the Roman Emperor Diocletian’s Edict on Maximum Prices, the disastrous effects of which were vividly described at the time:

Much blood was shed for the veriest trifles; men were afraid to expose aught to sale, and the scarcity became more excessive and grievous than ever, until, in the end, the ordinance, after having proved destructive to multitudes, was from mere necessity abrogated.

The Solution

The desire to help “the little guy” is a normal one, and is especially understandable when he is pitted against some of society’s archetypal villains: landlords, property developers and big corporations. But rent control is one of the worst ways to go about it. If we must help people through government coercion, simply giving them money from the public purse is a much less economically destructive approach. However, it is best by far to simply allow market forces to operate unimpeded. When rent levels are determined by supply and demand, landlords have every incentive to attract tenants by ensuring that their units are appealing, while property developers have every reason to seek profits by building new units in a variety of price ranges once supply becomes tight. And of course such an approach has the added benefit of respecting property rights rather than telling owners what they can and can’t do with their own buildings.

Some might think that an inherent power imbalance exists between landlords and tenants, one that makes the rental market intrinsically unfair. As any landlord will tell you, however, a good tenant – clean, quiet, reasonable and solvent – is priceless. Quite contrary to Kerri McAllister’s claims, renters in an uncontrolled market are far from “powerless.” As in any free market, if they are unhappy with what is on offer, then they can simply take their business elsewhere. That dynamic, more than anything the state could ever do, is the best guarantor of a fair and efficient rental market.

* Adam Allouba is a business lawyer based in Montreal and a graduate of the McGill University Faculty of Law. He also holds a B. A. and an M. A. in political science from McGill.