Rent Control Again?
The Biden Administration is exploring imposing rent control nationwide via executive order. This is yet another questionable policy measure by our governments. Despite the joke, “if you line up all economists end to end, they still wouldn’t reach a conclusion,” economists largely agree on the effects of rent control, minimum wages, and student debt cancellation.
Progressive groups like the National Low Income Housing Coalition have pressed this issue. The White House issued a “Blueprint for a Renters Bill of Rights” in January. While cities normally enact rent control, the Administration is contemplating using federally backed mortgages as a means.
The effects of rent control are well understood. Rent control is a price ceiling, or legal maximum price. A rent control set below the market or equilibrium price reduces the number of rental units available and creates a shortage, which worsens over time. A newly constructed apartment building will not be torn down if rent control is enacted today, but new construction slows, sometimes dramatically. Building permits for new apartments fell by 80 percent after St. Paul passed rent control in 2021. Developers will only build apartments if they can charge rent covering their costs and providing a return on investment.
Rent controls, like other price controls, are subject to evasion because renters shut out of the market will pay more than the allowed rent. A landlord can get around a $700 per month limit by charging for parking, laundry, or even keys. An applicant might offer a bribe to move up a waiting list.
Persistent shortages negatively impact tenants. Landlords reduce maintenance, leading to lower quality (e.g., broken elevators). In a normally functioning market, tenants flee poorly maintained building; this is impossible with an apartment shortage. Families might have to double up on accommodations or live far from jobs increasing commuting time and costs.
Rent control fails in delivering affordable housing. Economist Thomas Sowell explains the flawed thinking of advocates still pushing this deficient policy. People think that arbitrary choices by businesspeople, not the interplay of demand and supply, set prices. “A volitional view of economics enables the intelligentsia … to dramatize economics, explaining high prices by ‘greed’ and low wages by a lack of ‘compassion,’ for example. … By regarding prices as merely arbitrary social constructs, some can imagine that existing prices can be replaced by prices controlled by government, reflecting wise and nobler notions, such as ‘affordable housing’ or ‘reasonable’ healthcare costs.”
Many cities turning to rent control today have been restricting housing construction for decades. Zoning, for example, limits the construction of multifamily dwellings. Historical preservation laws prevent replacement of older apartments with new high-rises. Environmental reviews lengthen construction time, increasing developers’ costs.
Artificially limiting the housing supply allows rents (and home prices) to exceed construction costs. Rent control can moderate these prices but do not address the restrictions on construction.
Progressive cities often mandate inclusion of “affordable” units when allowing any construction. If 20 percent of units must be basically given away to low-income renters, construction costs must be covered by the other 80 percent of units, further boosting rents.
Proponents of affordable set-asides fear that only luxury apartments will be built, not helping low-income families. Yet building luxury apartments benefits all renters. To see why, suppose that the 1,000 richest renters in a city live in the fanciest complex. After a developer builds an even fancier 1,000-unit complex, these richest renters all relocate. The new complex might be more expensive, but rents at the prior nicest complex will fall. So too at the prior second nicest place, and so on. Approve enough new units and all rents eventually fall to reflect building costs.
Politicians cannot lower costs but can increase them and limit the supply of housing. Rent control has a zero budgetary cost for government and politicians hope voters think their decree makes apartments cheaper. The solution to high rents is letting supply increase to meet demand.
Daniel Sutter is Affiliated Senior Scholar at the Mercatus Center and Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University.