September 2019
September/29/2019 16:27
Rental Control Sounds Like the Answer, But Is it?
Jay Izienicki September 29, 2019
There are numerous ways that the federal government intervenes in the economy in an attempt to create fairness, also called economic equity, among the classes. Simply put, economic equity is a distribution of assets, resources, and tax liability among the people in a nation or society that is considered fair and just(1); everyone wins, and no one loses. This sounds really good to most people who don’t understand how the government meddling in certain economic matters really makes things worse. But what sounds good and what is good are two entirely different things.
On September 14, 2019, in Las Vegas, presidential hopeful Bernie Sanders unveiled his new rent control plan that sounds like it is the solution to the problem. In fact, Sanders proposal is perhaps the most ambitious, and costly, plan to address homelessness, rising rent costs and housing shortages(2). It is hard to argue that this sounds like a much-needed plan, one that can helps our nations growing homeless and skyrocketing rent problems. This is a real issue given that in 2017 rent prices were double that of what they were in 1995(3), and over 550,000 people were experiencing homelessness on any given night in 2018(4). Here is the rub, Sanders plan requires $2.5 trillion over the next decade2. So, before jumping on the bandwagon it is important to understand just how rent control works.
Rent control is defined as a government regulation of the amount charged as rent for housing and often also of eviction(5). In essence, this means that it would become illegal to charge more than the maximum price set by the government, and also to evict people in an effort to get another tenant willing to pay more. What we are talking about, in economic terms, is a price ceiling, or a limit on the price of a good or service imposed by the government to protect consumers by ensuring that prices do not become prohibitively expensive(6).
Shown below is a graphic of what a simulated free market supply and demand model for rentals would look like. In this supply and demand model it is easy to see that as demand increases, supply and price go up; the opposite is also true.
Shown below is the graphic of a simulated rent control supply and demand model for rentals and what it would look like. This model demonstrates that when a price ceiling is put in place, demand increases while supply simultaneously goes down.
The idea behind rent control is pretty straight forward; establish the maximum price for a rental property so those that need and want a roof over their head can afford one and no one goes without. It’s hard to argue this wonderful theory, but the facts don’t actually support it.
In the United States, rent control began during World War II. The reasons, in part, were due to the fact that there was a decrease in new housing development during wartime, all available resources needed to go to the war effort and after the war soldiers were returning home and needed places to raise their families. Add in normal population growth and you can begin to see how a shortage in the supply of housing would begin to develop. In an effort to curb the increasing rental prices, due to a shortage in supply of housing, the federal government instituted price controls. In America’s largest city, New York, rental properties were included in the federal policies in 1943. Even though these federal policies expired in 1950, New York City codified rent control for all rental units built before 1947(7), ushering in the modern-day rent control struggles.
The impact of mandating a rental price lower than what the free market will bear means that there is less incentive for those individuals and companies that build, buy and offer rental properties in the market. Rental properties are typically investment properties, and when there is a limit on the return they can make, in the form of rent control, property owners will not participate in that rental market, ultimately driving the number of units available down. If the intent of rent control was to make housing more affordable and available, then the expected results should be high vacancy rates, but that is not the case. In 2018 there were 3,469,140 total units of housing in New York City and vacancy rates were most recently recorded at 3.63% (79,000 units). This is considerably lower than the national vacancy rate of 6.9%(8). Clearly, rent control does not make house more accessible, it only makes it less expensive and harder to find. If a person is homeless and cannot find a home, what difference does the cost make?
Shown below again is the graphic of what a simulated free market supply and demand model for rentals would look like. In this free rental market, the average number of rental units available to rent is 2 million units and the average rental rate for those unit is $1,000 per month; this is the market equilibrium.
Shown below is the graphic of a rent control supply and demand model for what rentals would look like. In a rent-controlled market, the average rental rate is set by the government at $800 per month. As a result, there are only 1.8 million units available. Since prices have gone down, making units more affordable to more people, the demand for these units has increased to 2.2 million units.
Since there is little incentive for investors to build more or keep rental inventory, in the form of less return on their investment, they simply stop building or sell what they already have, and the supply of available rental units decreases. The rent-controlled market has now created a shortage of 400,000 units, leaving more individuals homeless or looking for long periods of time, the complete opposite of the good intentions of politicians and community activists.
Reduced vacancy rates are but one of the many pitfalls of rent control. Since rental rates are limited, landlords begin to reduce the number of repairs and general upkeep of their properties in order to shore up their financial returns on their properties. This means that as rent control is enacted, the quality of rental units will go down. Because of the limited number of units available landlords become far more selective in their tenants and income and credit worthiness become that much more important to secure the limited inventory. Also, with rent control lowering the price of rental units, those that can afford to keep the units for second homes because the costs are so low, do so and drive vacancy rates down. In the end, the people that rent control was designed to help are negatively impacted in the most disproportionate way. In fact, poor families suffer a marked decline in existing housing as the quality of existing housing falls in response to reduced maintenance expenditures. The middle class can move out; for many reason, poorer families lack this option(9).
There is clearly a need to attempt something to curb the rapidly rising rental costs that might help those in, or on the verge, of homelessness, but rent control is not the answer. The evidence clearly shows that this policy of the government intervening in the free rental market has a far reaching and overwhelmingly negative impact on those that it is intended to help, and does nothing to solve the problem of rising rental costs and lack of affordable housing, Regardless of one’s political affiliation, and looking at this from a purely economic standpoint, the idea of spending $2.5 trillion to solve the problem of high rent and homelessness, as put forth by Bernie Sanders, is one of the most expensive and ineffective proposals any candidate could ever float to the American voter. In fact, as Swedish socialist Economist Assar Lindbeck once famously stated, “In many cases rent control appears to be the most efficient technique presently known to destroy a city, except for bombing it.”(10)
Jay Izienicki September 29, 2019
There are numerous ways that the federal government intervenes in the economy in an attempt to create fairness, also called economic equity, among the classes. Simply put, economic equity is a distribution of assets, resources, and tax liability among the people in a nation or society that is considered fair and just(1); everyone wins, and no one loses. This sounds really good to most people who don’t understand how the government meddling in certain economic matters really makes things worse. But what sounds good and what is good are two entirely different things.
On September 14, 2019, in Las Vegas, presidential hopeful Bernie Sanders unveiled his new rent control plan that sounds like it is the solution to the problem. In fact, Sanders proposal is perhaps the most ambitious, and costly, plan to address homelessness, rising rent costs and housing shortages(2). It is hard to argue that this sounds like a much-needed plan, one that can helps our nations growing homeless and skyrocketing rent problems. This is a real issue given that in 2017 rent prices were double that of what they were in 1995(3), and over 550,000 people were experiencing homelessness on any given night in 2018(4). Here is the rub, Sanders plan requires $2.5 trillion over the next decade2. So, before jumping on the bandwagon it is important to understand just how rent control works.
Rent control is defined as a government regulation of the amount charged as rent for housing and often also of eviction(5). In essence, this means that it would become illegal to charge more than the maximum price set by the government, and also to evict people in an effort to get another tenant willing to pay more. What we are talking about, in economic terms, is a price ceiling, or a limit on the price of a good or service imposed by the government to protect consumers by ensuring that prices do not become prohibitively expensive(6).
Shown below is a graphic of what a simulated free market supply and demand model for rentals would look like. In this supply and demand model it is easy to see that as demand increases, supply and price go up; the opposite is also true.
Shown below is the graphic of a simulated rent control supply and demand model for rentals and what it would look like. This model demonstrates that when a price ceiling is put in place, demand increases while supply simultaneously goes down.
The idea behind rent control is pretty straight forward; establish the maximum price for a rental property so those that need and want a roof over their head can afford one and no one goes without. It’s hard to argue this wonderful theory, but the facts don’t actually support it.
In the United States, rent control began during World War II. The reasons, in part, were due to the fact that there was a decrease in new housing development during wartime, all available resources needed to go to the war effort and after the war soldiers were returning home and needed places to raise their families. Add in normal population growth and you can begin to see how a shortage in the supply of housing would begin to develop. In an effort to curb the increasing rental prices, due to a shortage in supply of housing, the federal government instituted price controls. In America’s largest city, New York, rental properties were included in the federal policies in 1943. Even though these federal policies expired in 1950, New York City codified rent control for all rental units built before 1947(7), ushering in the modern-day rent control struggles.
The impact of mandating a rental price lower than what the free market will bear means that there is less incentive for those individuals and companies that build, buy and offer rental properties in the market. Rental properties are typically investment properties, and when there is a limit on the return they can make, in the form of rent control, property owners will not participate in that rental market, ultimately driving the number of units available down. If the intent of rent control was to make housing more affordable and available, then the expected results should be high vacancy rates, but that is not the case. In 2018 there were 3,469,140 total units of housing in New York City and vacancy rates were most recently recorded at 3.63% (79,000 units). This is considerably lower than the national vacancy rate of 6.9%(8). Clearly, rent control does not make house more accessible, it only makes it less expensive and harder to find. If a person is homeless and cannot find a home, what difference does the cost make?
Shown below again is the graphic of what a simulated free market supply and demand model for rentals would look like. In this free rental market, the average number of rental units available to rent is 2 million units and the average rental rate for those unit is $1,000 per month; this is the market equilibrium.
Shown below is the graphic of a rent control supply and demand model for what rentals would look like. In a rent-controlled market, the average rental rate is set by the government at $800 per month. As a result, there are only 1.8 million units available. Since prices have gone down, making units more affordable to more people, the demand for these units has increased to 2.2 million units.
Since there is little incentive for investors to build more or keep rental inventory, in the form of less return on their investment, they simply stop building or sell what they already have, and the supply of available rental units decreases. The rent-controlled market has now created a shortage of 400,000 units, leaving more individuals homeless or looking for long periods of time, the complete opposite of the good intentions of politicians and community activists.
Reduced vacancy rates are but one of the many pitfalls of rent control. Since rental rates are limited, landlords begin to reduce the number of repairs and general upkeep of their properties in order to shore up their financial returns on their properties. This means that as rent control is enacted, the quality of rental units will go down. Because of the limited number of units available landlords become far more selective in their tenants and income and credit worthiness become that much more important to secure the limited inventory. Also, with rent control lowering the price of rental units, those that can afford to keep the units for second homes because the costs are so low, do so and drive vacancy rates down. In the end, the people that rent control was designed to help are negatively impacted in the most disproportionate way. In fact, poor families suffer a marked decline in existing housing as the quality of existing housing falls in response to reduced maintenance expenditures. The middle class can move out; for many reason, poorer families lack this option(9).
There is clearly a need to attempt something to curb the rapidly rising rental costs that might help those in, or on the verge, of homelessness, but rent control is not the answer. The evidence clearly shows that this policy of the government intervening in the free rental market has a far reaching and overwhelmingly negative impact on those that it is intended to help, and does nothing to solve the problem of rising rental costs and lack of affordable housing, Regardless of one’s political affiliation, and looking at this from a purely economic standpoint, the idea of spending $2.5 trillion to solve the problem of high rent and homelessness, as put forth by Bernie Sanders, is one of the most expensive and ineffective proposals any candidate could ever float to the American voter. In fact, as Swedish socialist Economist Assar Lindbeck once famously stated, “In many cases rent control appears to be the most efficient technique presently known to destroy a city, except for bombing it.”(10)
Resources
1. What is Economic Equity? definition and meaning. (n.d.). Retrieved from http://www.investorwords.com/16385/economic_equity.html
2. Appleton, R. (2019, September 14). Bernie Sanders reveals national rent control plan in Las Vegas. Retrieved from https://www.reviewjournal.com/news/politics-and-government/bernie-sanders-reveals-national-rent-control-plan-in-las-vegas-1848660/
3. It's Not Just You: 5 Signs Rent Is Totally Out of Control. (n.d.). Retrieved from http://money.com/money/4830674/rent-afford-increase-prices/
4. State of Homelessness. (n.d.). Retrieved from https://endhomelessness.org/homelessness-in-america/homelessness-statistics/state-of-homelessness-report/
5. Rent Control. (n.d.). Retrieved from https://www.merriam-webster.com/dictionary/rent control
6. Price Ceiling - Definition, Rationale, Graphical Representation. (n.d.). Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/economics/price-ceiling/
7. A Brief History of Rent Regulation in New York: Michael Cavadias: The Hypocrite Reader. (n.d.). Retrieved from http://hypocritereader.com/81/rent-regulation-nyc
8. NYC Vacancy Rate Explains Why It is So Hard to Find a Rental: Naked Apartments. (2018, October 1). Retrieved from https://www.nakedapartments.com/blog/nyc-vacancy-rate/
9. The High Cost of Rent Control. (n.d.). Retrieved from https://www.nmhc.org/news/articles/the-high-cost-of-rent-control/
10. QUOTES BY ASSAR LINDBECK: A-Z Quotes. (n.d.). Retrieved from https://www.azquotes.com/author/32078-Assar_Lindbeck