- Rent control is a policy option post-COVID - should Australia go down this path?
- History and evidence suggests that rent control is bad economic policy.
- The main issue with rent control is it discourages future supply of housing.
In 1977, prominent economist, Assar Lindbeck asserted, “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”
Although some may think the statement is hyperbole, it may not be far from the truth.
Rent control is a form of government regulation that decrees the maximum amount a landlord is legally allowed to charge a tenant for rent. Such programs look on the surface to be an attractive policy, aiming to provide affordable rental housing to those with lower-income.
But the good intentions of activists and policymakers do not necessarily translate to good outcomes. And unfortunately, history has shown the policy to be rife with unintended consequences, causing far more harm than good.
Fortunately, in Australia there seems to be no widespread outcry or clamour for rent control (at least prior to COVID) compared to states in the US such as California, New York and Oregon. However, the Residential Tenancies (COVID-19 Response) Act has effectively introduced rent control temporarily, banning rent increases until March 2021.
Even if these measures are only to remain in place as an emergency (much like how Australia adopted rent controls during wartime), as we begin a return to normalcy, and if rental stress continues to become a more prevalent issue in major cities post-COVID, rent control is likely to gain popularity as a longer-term policy option. But we must consider the dangers such policy poses if implemented on a large scale.
Unintended consequences
As with most goods and services, the rental housing market is a function of supply and demand. What rent control does – as is the case with all price ceilings – is artificially push down the price of rent below what would have otherwise prevailed in a free market. This creates a phenomenal rise in the quantity of rentals demanded while discouraging the quantity of rentals supplied.
The immediate result is a shortage of rental accommodation. This creates long waiting lists. Sure, rent control is great for those who already occupy units, but this comes at the expense of everybody else on the outside, who must now compete for the limited remaining stock.
What can also occur the longer rent controls are in place is a mis-match between tenants and rental units. Normally if there is a shortage of accommodation, people will economise on space until the shortage is relieved. But under rent control this doesn’t tend to happen.
Imagine someone who already occupies a rent-controlled apartment. What incentive do they have to give up their accommodation, even if their circumstances change which would normally prompt them to move out or downsize? Not much at all. Hence, rent control lets people off easy with wasting space, leading to a misallocation of apartments. The result? Likely overtime that families will be crammed into small studios while singles secure family-size units.
Research in 2018 from the Brookings Institute found this happened in San Francisco after a 1994 ballot initiative which extended rent controls – the beneficiaries who were able to secure a rent-controlled apartment were 19 per cent less likely to have moved to a new address, even though evidence suggested a large share would have left had they not been covered by rent control.
Rent control not only creates a shortage of housing, but can overtime reduce the quality of rent-controlled units.
Research in 2020 from the Manhattan Institute explains that “rent control leaves owners with a limited ability to recoup operational costs and investments through rents of an appreciation of their building’s value. As a result, the quality of rent-controlled housing generally decays through a lack of investment in maintenance and improvements,” reducing the quality of life for tenants.
Owners can also be incentivised to convert their rental units to accommodation that yields greater profitability, namely that of condominiums, office towers, and commercial spaces: real estate which is not subject to rent control laws.
A 2019 study from the American Economic Review found that rent-controlled units in San Francisco were 8 percentage points more likely to convert to a condo, consistent with overall findings that rent control led to a 15 percentage point decline in the number of renters living in treated buildings and a 25 percentage point reduction in the number of renters living in rent-controlled units, relative to 1994 levels.
Rent control is likely to only worsen the situation of the housing market the longer it remains in place. Developers are discouraged from building more low-rent housing, making the shortage of rental apartments more severe. This further damages housing affordability, hurting those people which the policy originally intended to help.
Concluding remarks
Unlike other policy issues, ranging from minimum wage laws to monetary policy, rent control is the least debated among professional economists. In fact, there is a strong consensus.
In 2012, a survey of leading economists on the effectiveness of rent controls implemented in San Francisco and New York City found that only 2 per cent agreed the policy had a positive impact on the quantity and quality of affordable housing.
Furthermore, the large body of evidence (in addition to the studies referenced in this article) on rent control looks to be resoundingly clear: despite providing short-term relief to those able to secure a rent-controlled apartment, in the long-term, it disincentivises residential construction, decreases affordability, fuels housing deterioration, and creates a misallocation between tenants and rental units.
~~
Sources (in order of reference in article):
Brookings Institute. 2018. What does the economic evidence tell us about the effects of rent control?
Manhattan Institute. 2020. Rent Control Does Not Make Housing More Affordable.
American Economic Review. 2019. The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco.
Chicago Booth. 2012. Survey of economists on the effects of rent control.
