President Biden recently announced a plan to impose a 5% cap on yearly rent increases by large-scale landlords. Rent control is a notoriously counterproductive policy. The reason is simple: rent control disincentivizes the construction of new housing units because it makes that construction less profitable. And a reduction in housing supply is precisely what we don’t want if our goal is widespread affordable housing. Indeed, only 2% of surveyed economists agree that rent control has had a positive effect on “the amount and quality of broadly affordable rental housing in cities that have used them.”
In an effort to avoid this outcome, Biden’s proposed price cap wouldn’t apply to new units. At first glance, it looks like this policy would deliver the best of both worlds. It aims to lower the price of existing units without discouraging the construction of new units. Yet while this proposal is an improvement over old-fashioned rent control, it suffers from two problems.
First, it threatens to produce policy uncertainty. Imposing rent control with an exemption for new units still shows that policymakers are willing to cap rents on old units. Crucially, though, new units become old units. If developers are concerned that policymakers will continue to favor caps on rental increases for old units, they have reason to fear that any new units they build will eventually be subject to a cap. As a result, they will be disincentivized from building new units because their expected long-term profitability is lessened.
Second, even if new construction is not disincentivized, rent control misallocates housing. Markets route resources to their highest value use. Suppose a seller has one bag of ice left. Alice needs the ice to chill her son’s insulin. Bob needs the ice to chill his daughter’s Mountain Dew. All else equal, Alice will outbid Bob for the ice—and this is the efficient outcome. It’s better that her son have chilled insulin than that Bob’s daughter have chilled Mountain Dew. But if price controls cap the amount that Alice is able to offer for the ice, she’s not able to outbid Bob and he may well end up with the ice instead.
Housing is no different. Suppose Caroline is an extraordinarily talented surgeon who has received a lucrative job offer at a big city hospital. She’s looking for nearby housing. Dave is a professional Youtuber who films his content in an apartment near the hospital, although he could do his job anywhere. Without rent control, Caroline could outbid Dave for the apartment, which, again, would be the efficient outcome. It’s more important that a surgeon live near the hospital so that she can perform surgeries than that a Youtuber live near the hospital because he enjoys the local coffeeshops. But if rent controls cap the amount that Caroline is able to offer for the apartment, she’s not able to outbid Dave and he may well end up with the apartment instead. And if Caroline is unable to secure nearby housing, she may be unable to accept the job. This outcome is not only bad for her, it’s also bad for the patients who would have benefited from her surgical expertise. So while rent control with exemptions is better than rent control without exemptions, it is still unable to match the productive and allocative virtues of a free market.
Christopher Freiman is a Professor of General Business in the John Chambers College of Business and Economics at West Virginia University.
READER COMMENTS
nobody.really
Jul 31 2024 at 6:04pm
1: Another challenge of price controls is that the producer can often evade them by simply changing the product. Thus, a landlord who lacks the power to increase the rent can instead insist that new tenents mow the lawn or paint the house. Moreover, tenents who realize that they’re in competition for a house can initiate such offers: Providing baked goods. Painting the landlord’s abode. Walking the landlord’s dog. Providing sexual favors.
Or, faced with many equivalent applications, the landlord can elect to choose on the basis of his personal preferences. Yes, discriminating on the basis of sexual attraction. Or racism. Or classism. Or religious discrimination, Or whathaveyou.
2: Nevertheless, even if price controls are counterproductive in the long run, most of the people who perceive themselves as having an interest in the matter may well think the policy advantages them. That is, I supsect most of the people who perceive themselves as having an interest in this question are renters who already have a regular, “permenant” abode. Whatever interest they perceive in encouraging the construction of new housing will be subordinate to the interest they percieve in controlling the cost of the housing they currently occupy.
Moreover, people who complain about the cost of government programs tend to look at line items in budgets and government deficits. Price controls may not enter into those analyses, so this kind of policy may seem artificially attractive.
Craig
Jul 31 2024 at 7:13pm
Is entrepreneurship safe in America? This, among many reasons, even if it doesn’t itself come to fruition, suggests the answer is ‘no.’
MarkW
Aug 1 2024 at 5:28am
It’s also bad for incumbency and lock-in effects. Suppose Dave, the youtuber is living in Manhattan in a rent-controlled unit he inherited from his aunt. He’s paying a small fraction of the market rate. He’s unwilling to move to further his career or, really, move for almost any reason, since he has such a sweet deal that’s only getter sweeter over time. Meanwhile, various Carolines don’t even seek out job offers in NYC because rents for new entrants are so ruinously expensive. Or they leave after a few years for the same reason. I know a young couple who moved away from NYC during the pandemic, but moved back in part because they missed all of their New York friends. But, then, in the space of a year and a half, nearly all of good their friends left New York because they wanted to start families and the housing situation is so bad.
David Seltzer
Aug 1 2024 at 9:13am
Christopher: The real threat, Biden’s “plan” interferes deplorably with voluntary private exchange between landlord and tenant. What’s next? Arbitrary caps on any number of trades or comp packages? Here in the South, I’ve heard it said, “you can’t fix stupid or crazy.”
Richard W Fulmer
Aug 1 2024 at 10:51am
If I own an apartment complex with hundreds of units, what’s to prevent me from selling off blocks of, say, 48 units? Rent will go up since each block will require a separate set of managers, but each block will be below Biden’s 50-unit cutoff and therefore exempt from the proposed controls.
John
Aug 5 2024 at 6:53pm
Another way to evade the residential-rent-controlled problem is to rent out newfound-ex-apartments as newborn “non-residential” offices for rent to stay-at-home workers (who would be now literally “living at the office”).
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