Cam Slater: Greens’ Rent Controls Will Do the Opposite of What They Claim

The dopey Greens have announced a rent-control policy. But they seem to have no inkling that rent-controls have never worked anywhere in the world, unless their idea of a successful rent-control policy is to, in the long run, decrease housing affordability, fuel gentrification and create negative spillovers on the surrounding neighbourhoods.

Green Party co-leader Marama Davidson said rent controls were needed because the unaffordability of rents was causing “so much harm” and tenants were struggling.

Its policy would cap rent rises at three per cent, the rate of inflation, or one per cent less than annual wage growth – whichever of those three figures was the lowest.

Davidson said the Greens had settled on a three per cent cap as the maximum limit because that was the upper end of the band within which the Reserve Bank tries to contain inflation.

“For far too long, inaction by successive governments has forced thousands of people to pay through the roof to live in cold, damp and unhealthy homes that are making them sick,” she said.

“The rental market more closely resembles a game of monopoly than a public good and it is landlords who hold all the cards.”

Stuff

These people are economic saboteurs and vandals. They have no idea about basic economics and so are unlikely have considered any of the many studies into rent controls that show they are, without exception, a complete and utter failure anywhere they’ve been instituted.

Steadily rising housing rents in many of the US’s large, productive cities have reignited the discussion whether to expand or enact rent control provisions. Under pressure to fight rising rents, state lawmakers in Illinois, Oregon and California are considering repealing laws that limit cities’ abilities to pass or expand rent control. While rules and regulations of rent control vary from place to place, most rent control consists of caps on price increases within the duration of a tenancy, and sometimes beyond the duration of a tenancy, as well as restrictions on eviction.

New research examining how rent control affects tenants and housing markets offers insight into how rent control affects markets. While rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification and creates negative spillovers on the surrounding neighborhood.

A substantial body of economic research has used theoretical arguments to highlight the potential negative efficiency consequences to keeping rents below market rates, going back to Friedman and Stigler (1946). They argued that a cap on rents would lead landlords to sell their rental properties to owner occupants so that landlords could still earn the market price for their real estate. Rent control can also lead to “mis-match” between tenants and rental units. Once a tenant has secured a rent-controlled apartment, he may not choose to move in the future and give up his rent control, even if his housing needs change (Suen 1980, Glaeser and Luttmer 2003, Sims 2011, Bulow and Klemperer 2012). This mis-allocation can lead to empty-nest households living in family-sized apartments and young families crammed into small studios, clearly an inefficient allocation. Similarly, if rental rates are below market rates, renters may choose to consume excessive quantities of housing (Olsen 1972, Gyourko and Linneman 1989). Rent control can also lead to decay of the rental housing stock; landlords may not invest in maintenance because they can’t recoup these investment by raising rents. (Downs 1988, Sims 2007).

Brookings

There are literally hundreds of articles investigating the failure of rent controls, and almost none on how successful they are. Bloomberg reported in 2018:

Rent control is one of the first policies that students traditionally learn about in undergraduate economics classes. The idea is to get young people thinking about how policies intended to help the poor can backfire and hurt them instead. According to the basic theory of supply and demand, rent control causes housing shortages that reduce the number of low-income people who can live in a city. Even worse, rent control will tend to raise demand for housing – and therefore, rents – in other areas.

Rent control, the Econ 101 student learns, helps a few people, but overall does more harm than good.

Over the years, rent control has acquired a special bogeyman status among economists. Assar Lindbeck, a Swedish economist who chaired the Nobel prize committee for many years, once reportedly declared that rent control is “the best way to destroy a city, other than bombing”.

In the real world, of course, things rarely work exactly as they do in Econ 101. Labor markets don’t seem to follow the basic supply-and-demand model. Minimum wages don’t seem to throw many people out of work. Building more highways often increases traffic. Given the existence of all these cases where simple models break down, might economists’ negative view of rent control be unjustified?

Bloomberg

Shame the Greens are nowhere near 101-level when it comes to economics; they are still in kindy.

As with so many questions, the answer can only come from looking at data. Economists Rebecca Diamond, Timothy McQuade and Franklin Qian have a new paper that looks at the effects of rent control in San Francisco, a city notorious for high housing costs. They find that the effects of rent control are pretty much what economics textbooks would predict.

Many studies rely on patchy or incomplete data, but not this one. Diamond and her colleagues used data from a private company that was able to combine public records to track the addresses of all San Francisco residents between 1980 and 2016, even if they moved out of California. This allowed them to study the effects of a change in San Francisco’s rent control policy in 1995. Previously, all small multi-family buildings were exempt from rent control, but since 1995, only buildings built after 1980 are exempt.

How did this large increase in rent control affect renters? Predictably, people subject to the new policy became less likely to move — between eight and nine per cent less likely, over the medium to long term.

But not all renters benefitted equally. The new policy created a powerful incentive for landlords either to convert rental units into condominiums or to demolish old buildings and build new ones. Either course forced existing tenants — especially younger renters — to move. Landlords affected by the new 1995 policy tended to reduce rental-unit supply by 15 per cent.

Bloomberg

So, the Greens are actually planning to cause a 15 per cent drop in available rentals. If only they read Bloomberg, or even basic economics text books.

They are fools and dolts. But watch the sycophantic media all produce reports about how fantastic this will be. By the time people realise they’ve been had, the current crop of Greens will be sipping their decaf soy lattes made with almond milk while snacking on their cicada salads.

A vote for Labour is a vote for the Greens to wreck your city by the second most effective method after carpet bombing: rent controls.

There is no case for rent controls, and plenty of evidence they don’t actually work. Ask anyone pushing this to show you their workings.

Cam Slater is a New Zealand-based blogger, best known for his role in Dirty Politics and publishing the Whale Oil Beef Hooked blog, which operated from 2005 until it closed in 2019. This article was first published HERE