A Swedish economist once remarked that rent control “appears to be the most efficient technique presently known to destroy a city—except for bombing.” Unfortunately, we may soon see the destructive consequences of laws limiting rent increases running rampant in St. Paul, Minnesota.
The city just approved a rent control measure that will limit landlords’ ability to increase rents on its 65,000+ rental properties. They will not be able to increase prices by more than 3 percent each year under the new law. Controversially, the initiative does not account for inflation and applies to new construction, not just existing properties. This makes the St. Paul rent control measureone of the strictest in the US—if not the world.
Opponents of the measure made all the usual critiques. They pointed out, for example, that a supermajority of economists, 81 percent per one survey, oppose rent control because of its long-run consequences. Yes, some renters save money in the short term by enjoying artificially low rents. But the restricted prices limit future construction and housing supply which ultimately leads to a housing shortage and less affordable housing in the long run.
In St. Paul, these consequences are already starting to materialize.
“Less than 24 hours after St. Paul voters approved one of the country’s most stringent rent control policies, Nicolle Goodman’s phone started to ring,” the Star-Tribunereports. “Developers were calling to tell the city’s director of planning and economic development they were placing projects on hold, putting hundreds of new housing units at risk.”
“We, like everybody else, are re-evaluating what — if any — future business activity we’ll be doing in St. Paul,” major developer Jim Stolpestad told the newspaper.
Critics of the rent control initiative, understandably, feel vindicated. But this is just the beginning. If nothing changes, investment and construction of new housing will continue to collapse thanks to this short-sighted reform.
There is still hope, though. The new law doesn’t go into effect until May 1, 2022. That means St. Paul still has 5 months to correct its grave mistake.
When you see a headline that begins with “Florida man…,” you know it’s more likely to be about some guy trying to take down a tornado with his Colt Python than it is that a resident of the Sunshine State has cracked cold fusion. In public policy circles, the words “California policymakers…” appearing in a headline are attaining a similar status.
The latest ill-conceived policy from California is a statewide rent cap. As the New York Times reported this week:
The bill limits annual rent increases to 5 percent after inflation and offers new barriers to eviction, providing a bit of housing security in a state with the nation’s highest housing prices and a swelling homeless population.
The Consensus Is Overwhelmingly against Rent Controls
Economists are a famously fractious bunch. Fiscal policy or monetary policy? Stimulus or austerity? Such debates play out among the profession with a level of bitterness that amazes the layman.
So it is always worth paying attention when you get something like consensus. But that is pretty much what we have on the issue of rent control. In 2012, economists were polled with the following question:
Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, 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.
The analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.”
If consensus is how you do your science, rent control is a dead duck.
Rent Controls Solve the Symptom, Not the Problem
Why are economists so overwhelmingly against rent controls? One reason is that they mistake the symptom for the problem.
Look again at the Times quote. It identifies two problems: “the nation’s highest housing prices and a swelling homeless population.”
Regarding the first, we must ask ourselves why prices are high. They are high because the demand for housing in California is high relative to the supply of it. And why is that? As I wrote in February:
The bizarre story of Bob Tillman’s five-year, $1.4 million legal battle to turn his coin-operated laundromat into an apartment building shows how regulations constraining supply coupled with rising demand have driven house prices ever higher. Again, when politicians in the Golden State complain about the lack of affordable housing, they themselves are in large part responsible for that lack in the first place.
Regarding the second problem, the “swelling homeless population,” rent control will do nothing whatsoever for these folks. The problem, remember, is too many people wanting to live in a given stock of housing. Capping the price of that housing by government decree will do nothing to solve that problem. What would help is getting rid of the government regulations that restrict the supply of housing.
Prices are not problems; they are signals of problems. Trying to solve the problem by treating the signal is like trying to slow down your car by fiddling with the speedometer.
Rent Controls Have Unintended Consequences
A second reason economists overwhelmingly oppose rent controls is that they always have unintended consequences. Rent controls are the opposite of minimum wage laws. Where minimum wage laws are price floors, rent controls are price ceilings.
Economic theory is pretty clear about what the effects of a price ceiling will be. As Figure 1 shows, at equilibrium rents are $600, and 300 units of housing are both supplied and demanded. If you cap the rent at $400, however, you decrease the number of homes supplied to 200 and increase the number of homes demanded to 400. You now have an excess of demand over supply of 200 (demand of 400 minus supply of 200). If you were motivated by a concern for a shortage of housing, congratulations, you just made it worse. It wasn’t intended, but it was a consequence.
This might sound a little wacky. How can the supply of housing fall? Landlords don’t demolish their houses in response to a fall in rents, so shouldn’t the demand curve be vertical? In this case, a reduction in rents would see no consequent fall in the number of homes available.
But, wacky as it might sound, the supply of housing is responsive to price changes—it is “price elastic,” in the jargon. An old but excellent and still sadly relevant book titled Verdict on Rent Control examines episodes from a number of countries and finds:
[I]n every country examined, the introduction and continuance of rent control/restriction/regulation has done much more harm than good in rental housing markets—let alone the economy at large—by perpetuating shortages, encouraging immobility, swamping consumer preferences, fostering dilapidation of housing stocks and eroding production incentives, distorting land-use patterns and the allocation of scarce resources—and all in the name of the distributive justice it has manifestly failed to achieve.
[L]andlords of properties impacted by the law change respond over the long term by substituting to other types of real estate, in particular by converting to condos and redeveloping buildings so as to exempt them from rent control. This substitution toward owner occupied and high-end new construction rental housing likely fueled the gentrification of San Francisco, as these types of properties cater to higher income individuals. Indeed, the combination of more gentrification and helping rent controlled tenants remain in San Francisco has led to a higher level of income inequality in the city overall.
Again, it wasn’t intended, but it was a consequence.
Rent controls propose using government regulation to solve the symptom—high prices—of a problem—a shortage of housing—which government regulation created in the first place. As public policy, it as ineffective as trying to take down a tornado with a Colt Python.
Policymakers should remember that a price is just the intersection of supply and demand. If you alter the price, but don’t alter the supply or the demand, the problem doesn’t go away; rationing just shows up in different forms. There will still be too many people who cannot find housing in your area.
Worse still, price controls actually make the scarcity worse. They increase demand — who wouldn’t want to live in New York City in a $600-a-month apartment? Meanwhile, price ceilings reduce the supply because they decrease the incentive to build, and can make it downright imperative to remove rental housing from the market and turn it to some other use — condos, warehouses, anything that won’t trigger the rent controls.
And in the long run, the situation for the very low-income people you’re trying to help probably gets worse. After all, if you take price signals out of the market, something has to ration the limited supply of housing: years-long wait lists, or personal friendships, or credit scores, or side payments to people lucky enough to have some housing. The wider the gap between supply and demand gets, the worse that rationing will be. And the people left out by those forms of rationing will be every bit as needy and deserving as the people currently being forced out by higher rents; given the deleterious effects on the supply of rental housing, possibly more so.
If politicians actually want to make sure everyone who needs a place to rest their head has one, there’s only one way to do it: Build more housing. Which means, in turn, loosening the legal restrictions and community veto points that make it so hard to add supply. Because there’s no way to escape the fundamental math: Unless you build enough housing to shelter the people who want to live in your city, a whole lot of people will be left out in the cold.
As the graphical Supply/Demand analysis above of rent control illustrates very clearly, rent control laws that artificially force the rental price of housing (P1 above) below the market-clearing equilibrium price (P0) are guaranteed to create a housing shortage by: a) increasing the number of rental units demanded at the artificially low rents (QD) and b) decreasing the number of rental units supplied to the market (QS).
You can artificially restrict the amount of rent a landlord can legally charge for a rental unit, but you can’t force developers, builders, and landlords to build or supply more rental housing in the future. And the supply of rental housing in markets with rent control is guaranteed to decline.
If a perverse public policy goal was, in fact, to guarantee that there would be a continued and worsening supply of rental housing, there would be no more effective way to ensure that outcome than a government rent control law. And despite the best of intentions on behalf of policymakers to promote more affordable housing with rent control laws as a way to combat high housing prices, the reality is that those very laws are guaranteed, with 100 percent certainty, to do the opposite by making affordable housing as scarce as possible.
Price controls aren’t the answer. Building more housing is the only real solution to increase the supply of affordable housing.
