On his way out of office, Joe Biden has made headlines in revealing a proposal to impose a kind of rent control policy for the claimed purpose of controlling cost of living for low-income Americans. [Editor’s note: legislation was introduced this year, Senate Bill 225, which would grant local governments the power to enact rent control.]
The plan is a bit more complicated than a simple policy enforcing a maximum rent. It is, however, still a rent control policy. The proposal makes it such that landlords who have more than 50 rental units in their portfolio will lose tax credits if they raise rents by more than 5 percent in a given year.
Let’s begin by explaining why this is rent control. If the rent on an apartment is $1,500, a 5 percent increase would mean raising rent to $1,575. So, if a landlord decided to raise rents to $1,600, he would be punished with higher taxes.
At this point, defenders of the policy may argue that landlords could still choose to raise rents above 5 percent. They’re not forbidden—they’ll just lose a tax credit.
But of course, if the tax credit lost is greater than the extra revenue generated by the rate increase, the landlord has effectively been forbidden from making that rate increase. It would be like if you found a $20 bill on the street, and a person standing next to it told you that he would let you pick it up if you paid him $30. The choice is technically there, but it isn’t much of a choice at all.
It’s easy to get lost in the details and exceptions in this plan, but a simple maxim can help us avoid unnecessary confusion: insofar as this plan causes rents to increase by less than they otherwise would, it is a rent control. And slowing the increase of rent is clearly the goal of the policy.
Why Rent Control Is Bad
One response to all this might be the simple question: What’s wrong with rent control?
To understand the issue, you first need to understand how markets and prices work.
It’s tempting to believe that prices are determined by businesses, but that isn’t really true. If landlords could determine rent prices unilaterally, why wouldn’t they set rent prices at $50,000 per month? It’s simple—if landlords tried to fleece renters this way, the renters would pursue other options. Renters would buy property themselves or live with friends. Alternatively, different landlords could undercut the fleecing landlords by offering more reasonable rent prices.
The point is, despite the fact that landlords can advertise their rents to be any price, they cannot require them to pay any price.
So if landlords don’t determine rent, how is it determined? The answer is markets. Imagine that the price of a one-bedroom apartment in New York City is $200 per month. What would happen? A lot of people would want to move to New York City if rent is that low, and very few people would be willing to rent their space out. Quickly, the number of apartment applications would greatly exceed the number of apartments being offered.
When the quantity of a good demanded exceeds the quantity supplied, economists call that a shortage. How would the market deal with a shortage of apartments? Well, renters would compete for the scarce apartments by bidding up the price. As the price goes up, more building owners would be willing to rent out space. The price would continue to rise until no shortage existed.
This highlights the main issue with rent control.
Let’s say that population increases lead to a higher demand for apartments. How would Biden’s policy impact things if, say, rent were $3,500, but a population increase caused the market-clearing price to rise to $3,750? Well, since a 5 percent rent increase would only bring the price to $3,675, this means that the price wouldn’t be able to increase enough to alleviate the shortage. In other words, the number of renters demanding apartments would be greater than the number of apartments supplied by landlords.
Given that house down payments are prohibitively costly for many (especially in a place like New York City), a shortage in housing means many people would be choosing between moving out of the city and being homeless.
Rent control proponents might argue that it doesn’t make sense that rental supplies would decrease if prices weren’t allowed to rise. What are landlords going to do with their rental properties except rent them out? Surely a lower price is better than nothing, right?
The problem with this thinking is that owners of rental properties do have alternative uses of their properties. Rental houses and apartment complexes can be sold for cash which can be invested in the market to make a decent return. Housing can be converted into office space. Buildings with hefty maintenance costs can be knocked down and replaced with new commercial buildings.
In Roofs or Ceilings, a short book written for FEE in 1946, Nobel Prize-winning economists Milton Friedman and George Stigler document this exact thing happening. They compare cases in 1906 and 1946 where there were large housing shortages in San Francisco. In 1906, the shortage was alleviated by market forces. In 1946, rent control prevented this. They write:
During the first five days of the year there were altogether only 4 advertisements offering houses or apartments for rent, as compared with 64 in one day in May 1906, and 9 advertisements offering to exchange quarters in San Francisco for quarters elsewhere. But in 1946 there were 30 advertisements per day by persons wanting to rent houses or apartments, against only 5 in 1906 after the great disaster. During this same period in 1946, there were about 60 advertisements per day of houses for sale, as against 19 in 1906.
With rent controls there was a shortage of apartment rentals, and a surplus of houses for sale. When rent controls are put in place, landlords get out of the game and sell their units instead.
Economists and Rent Control
Professional economists are practically unanimous on this point. In 2012, the Clark Center for Global Markets polled 41 leading economists on whether rent controls “have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”
Only one of 41 agreed to this. Five either said “uncertain” or did not answer. The other 35 economists disagreed or strongly disagreed with the statement that rent control had positive impacts on affordability. The evidence is so overwhelming that even left-leaning economists are reluctant to support rent control.
Rent controls have secondary negative effects as well. If you’re lucky enough to be a person who secures an apartment in a shortage scenario, you’re very reluctant to give it up. That means that landlords have more leverage to under-maintain apartments or generate extra fees for the apartments. In some cases, black markets may arise with rental prices which, due to constrained supply, are even worse than they otherwise would be.
Governments can try to make laws preventing this, but ultimately this just generates an endless game of regulatory cat and mouse.
Rent control is a politician siren song of sorts. Politicians can promise voters lower bills, and, by the time the consequences of housing shortages hit, the election season has already passed. Furthermore, not all voters are experts in economic policy, and since voters are unlikely to determine election outcomes with their individual vote, they often don’t have an incentive to learn about the negative consequences of these policies.
Politicians, whether it’s Trump, Biden, or whoever replaces Biden, should avoid the siren song of rent controls. Regardless of how complicated the form they take, the damage is undeniable.
The preceding article originally appeared on July 31, 2024 at the Foundation for Education’s website and is made available here for educational purposes only. This constitutes a ‘fair use’ of any such copyrighted material as provided for in Title 17 U.S.C. section 106A-117 of the U.S. Copyright Law.
