What? Has the ShortWoman lost her mind? The purpose of rent control is to keep housing prices reasonable!
Well it doesn’t work.
Last week, frequent commenter Jukkou-san sent me an article entitled Americans becoming increasingly house poor; Census data shows percentage of income spent on dwelling up in 49 states. It’s an interesting article, and well worth your time to read it. But the short version is that all over the nation, people are spending more of their income on a place to live — regardless of whether it is purchased or rented — than ever before. The finger pointing begins at “why.” It’s higher interest rates, say some. It’s higher house prices, say others. No no the real culprit is that incomes are stagnant, say still others. Frankly all these points of view are valid.
But as the article drifted into warnings about overextended homeowners and the interesting mortgage products that allowed them to get that way, I got distracted by the maps. And it occured to me that there was the same red/blue distribution I discussed in July. Another phenomenon common (though not universal) to these hot housing markets are rent controls. Unfortunately, the only actual list of cities with rent control that I could find is for the state of California, but you can’t help but notice California is one of the states with the biggest problem. I don’t often agree with the Cato Intstitute, but rent controls drive the price of housing up over the long term.
To illustrate, let me use a fictional example, Utopia City. We will use as the underlying assumption that everybody needs a place to live. We can agree on that, right?
Utopia City has a thriving economy. A half dozen large companies employ about a third of the workforce, new jobs are created on a regular basis, the schools may not be world class but they are better than most urban school districts, the cost of living is decent. However, as the city grows, they are finding that they are having big city problems. They have attracted many new residents, and as a result, housing is becoming scarce. Now, any good capitalist knows that when something becomes scarce, it is possible to raise prices, right? And that is exactly what the apartment complexes of Utopia City did.
So rents went up. House prices went up too, but somehow that wasn’t a big deal. After all, weren’t houses supposed to go up in value? Ok, so maybe they were going up faster than the national average, but that’s because the local economy is good. More to the point, with house prices there is not a small number of management companies that laypeople think effectively control prices that everyone can point to as being a “problem.”
At some point there was a city council meeting where somebody mentioned that with housing prices going up, they were going to have a problem attracting people to be teachers and policemen and firemen and nurses in Utopia City. They always put it this way, rather than talking about the barristas, janitors, waiters, grocery cashiers, painters, and seamstresses that could really benefit from reduced housing prices. Somebody suggested a tax incentive for building “affordable” housing. Somebody else criticized that as a short term fix for a long term problem. No, this person went on, what we need is a way to control what housing costs. And since they couldn’t control what Joe and Jane Average were selling their house for — if it occured to them at all — they declared that there would be rent controls beginning at the first of the new year.
Well the obvious thing that happened was that landlords raised rents all through the 4th quarter, so that rents would be relatively high by January 1. They had to do this because who knew when they would next have the chance to raise them? The second obvious thing that happened is that a large percentage of the apartment complexes under construction suddenly became “condominium communities.” Some apartment complexes began the process of becoming condos, trying to sell units to the current residents. Applications for building permits to build new apartments dropped drastically. The few applications that were made were for ultra-luxury high-end high-rent communities.
Supply of rental housing had already dropped, and the regulation was brand new. The people of Utopia City still had to live somewhere; if there was no rental property, they would just have to buy. And this in turn drove house prices up. But that was just the beginning.
Over the next ten years, multifamily housing construction continued to lag. The supply of existing multifamily housing declined as landlords converted properties to condos, or bulldozed them to sell the land to home builders. The quality of rental housing declined, as inflation caused gross margins to decrease — leaving less money leftover for maintenance. The combination of less rental property and lower quality of that rental property caused people to have a higher-than-average desire to purchase a home. Again, house prices rose.
As your shampoo bottle probably says: “Lather, Rinse, Repeat.”
In closing, Religion has no need of your puny Regulations; as many as 20% of resumes may contain lies (and just so you know, I actually will call your previous employer!); Krugman on Hastert; and finallly choosy moms choose a good economy.