At the Mont Pelerin Society meetings at the Hoover Institution last month, I had a conversation with a man who lives in Santa Monica. (I have his permission to tell his story but without his name.)
He was telling me about the horrors of rent control in Santa Monica. In case you didn’t know, voters in Santa Monica voted in rent control in April 1979 and it has been in force ever since. According to the Santa Monica government’s web site, they voted it in “in response to a shortage of housing units, low vacancy rates and rapidly rising rents.” I leave the economically literate reader to find the irony in the use of those first two reasons as an argument for rent control.
The fact that it has been in force so long means that the regulated rents are way out of whack with what the market rents would be. You might think that this man doesn’t like rent control because he’s a landlord and it hurts him. Wrong. He’s a tenant, not a landlord. And rent control helps him.
He has lived there a long time and he and his wife pay $1,800 a month for a 3-bedroom, 2-bathroom apartment in a nice area. He pointed out to me that some students pay as much as $6,000 a month for something comparable.
The man telling me the story is the son of a well-known free-market economist and I’m guessing that had something to do with his more general concern for others.
Rent control gives a huge benefit to people who are there when, or shortly after, it is imposed and hurts people who are footloose. That fact applies not just to Santa Monica, but to rent control in general.
READER COMMENTS
Benjamin Cole
Feb 3 2020 at 6:46pm
I think at least a mention of the restrictive effects of property zoning on supply is warranted.
From this post, a reader would gather that property zoning is hardly worth the mention but rent control is a great sin.
Michael Stack
Feb 6 2020 at 12:00pm
I disagree, it seems totally irrelevant to the point being made, which is that if housing supply is low, rent control is one of the last policies you’d want.
Obviously if you want to tackle the problem of low supply more broadly you need to look at factors beyond rent control. But when you’re down in a hole, the first thing you should do is to stop digging, not upgrade your shovel.
Dylan
Feb 4 2020 at 8:14am
Full disclosure: I’m one of those beneficiaries that moved into a building that came to be rent controlled a couple of years after I moved in. I’m still against rent control, for all the usual reasons cited by economists, but this is a classic case of seen vs. unseen, and I’ve become a lot more sympathetic to the first part of that after having lived on both sides.
By the time I came under rent control I’d moved 3 times in NYC, moving after big rent increases came in once my lease expired. The direct cost in moving always seemed to be even more than the cost of increased rent for a year, not to mention the time investment, but staying seemed impossible as well. In my current place, I managed to sit through a couple of lease renewals, this is when the economy was tanking, so I managed to negotiate them down from the 15% they started with asking, to less than half of it, but it was always stressful, and it felt like I spent about half of my time keeping an eye out for places we could afford to live. I had a constant background stress about our living situation, and being one rent increase away from having to move and figuring the next move would force us out of the city entirely and where would we move, and what would we do for work.
Not having to worry about that brought a sense of stability that I’d never had before. Growing up I never lived anyplace longer than a few years, and many times it was more like a few months. I didn’t mind that as a child, and I’m glad I had the experience of moving to new places, but as an adult, I definitely see the appeal of staying in one place for awhile. It’s definitely something of a mixed blessing though, as I now feel more tied to NYC than is probably good for me, because if I was to move for a job I would almost certainly end up paying a lot more in rent than I currently do.
Looking more broadly, rent control seems to achieve a lot of what incumbents usually want, it makes things more affordable for the people already here and also has the benefit of making it more expensive for outsiders. That keeps growth rates below what they otherwise would be (which is good!) and makes it so the people that move here are the ones that want it enough to put up with living 7 people to a loft with one bathroom. The idea being that if you stick it out long enough in those conditions, the NYC gods will smile on you, and you too can get a broken down studio with intermittent heat for $1400 a month.
Jon Murphy
Feb 4 2020 at 9:06am
Rent control certainly is great for those who benefit from it.
Dylan
Feb 4 2020 at 9:37am
Generally though, I think the economic literature underplays that point, and makes it seem like a nonsensical idea that eventually does more damage than fire bombing Dresden (IIRC the analogy). But to a local, it doesn’t really look like that:
My rent doesn’t increase at all, or at least only increases at a predictable rate I can afford. (Win)
Developers stop trying to build more housing in my neighborhood which would otherwise bring in a bunch more outsiders and change the character of the neighborhood. (Win)
My landlord may stop being interested in keeping the place up, which is a loss, but that also means they’re going to care a lot less about what I do to the place, which is a win. If you’re reasonably handy that can end up being a bit of a win (People in my building have done build outs that would not come anywhere close to being allowed in a more normal apartment building, with some putting in what amounts to a treehouse inside the apartment, and one person that I know even put in a second bathroom) (neutral to win)
And, a lot of the negatives that come with it, like a disincentive to build new housing, is already there since NIMBYism is going to make it next to impossible to build enough housing to keep up with demand, regardless of whether there is rent control or not. Which makes me surprised that rent control isn’t even more pervasive than it already is.
David Henderson
Feb 4 2020 at 11:04am
Dylan,
I’m not saying you’re denying this, but I want to point out that what you said about “wins” is all “wins” for you. So it eloquently makes Jon Murphy’s point.
Dylan
Feb 4 2020 at 2:08pm
David,
Absolutely, but not just for me as an individual, almost everyone who rents at the time that rent control is put in place ends up a winner. It’s a horrible policy for landlords, and for anyone that would like to move to the city, but can’t because they can’t afford market rates on the few places available…but there’s not a huge political constituency for either of those groups. What I find strange is, given that fact, why don’t we see a ot more rent control? I’m guessing that is mostly because most places don’t have a large enough population of people that rent, and expect to rent long term? But, with the renting share of the population at nearly a 50 year high, I’m not surprised to see a number of places adopt, or at least talk about adopting some form of rent control.
Not sure what is to be done about that, especially since so many people seem to have a pretty strong preference for trying to freeze their neighborhood in amber. The California approach of trying to push the decision making process on building out of local hands seems like one solution to the political problem, but even a pretty watered down version failed recently. I’m pretty skeptical that local residents will tolerate anything that upsets the status quo too rapidly.
David Seltzer
Feb 4 2020 at 5:00pm
Dylan, rent control is good for current tenants and bad for landlords, as you rightly point out. I lived in NYC’s Upper West side. Rent control meant, at least in my building, deferred maintenance. Often tenants had no hot water as aging water heaters failed. Replacing them sometimes took a week. When property taxes increased, lights that burned were not replaced for weeks. As a safety issue, tenants replaced them. The average rate of elevator repairs increased as well. It seems with rent control, one gets what one pays for.
Dylan
Feb 4 2020 at 5:42pm
I’m probably biased by my demographic and the part of Brooklyn I’m in, but around here, the dream seems to be to live in the most photogenic burnt out and abandoned factory possible. When we moved into our place there wasn’t even a kitchen or shower until we built them, so a few burnt out bulbs in the hallway would really just add to the ambience.
David Seltzer
Feb 4 2020 at 6:38pm
Dylan, even with those challenging issues, I loved living there.
Best,
David
Jon Murphy
Feb 5 2020 at 11:10am
If I am reading you right, Dylan, you are saying that economists spend an undue amount of time on the costs of rent control and don’t really discuss the benefits.
It is certainly correct that economists emphasize the costs of rent control (and price controls in general). Perhaps we even do that to a fault. But it is out job to draw out the unseen.
The benefits of rent control are indeed obvious. They are very much seen, which allows the erroneous conclusion that the rent control is beneficial to the poor. We must harp on the unseen costs because they are unseen, because they are not obvious. What isn’t seen is the poor people kept out of decent housing, or the depreciation of housing units. What isn’t seen is the perpetual shortage of units. Or, to the extent these things are seen, they are blamed on the market and used to justify more intervention, as though the government has done nothing.
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
David Seltzer
Feb 5 2020 at 1:10pm
Jon, Monsieur Bastiat could not have made it more clear than you. Of course, in time, we see the deleterious effects of rent control.
Dylan
Feb 5 2020 at 2:54pm
Jon,
Not exactly the point I was trying to get at. Let me try a different way. The harms of rent control is often given as an example where economists of all political stripes agree. Maybe it was me that was misunderstanding the argument, but I’d taken that even the people that it was supposed to help, eventually ended up getting harmed because of the lack of maintenance and deteriorating housing stock. The implication being, residents that demanded rent control were economically illiterate.
But, if the effects of the rules mostly end up hurting those that don’t live here yet, and therefore have no say in the policy, while being a big help to a big chunk of current residents, that seems like a thing that a rational self-interested renter is going to lobby for.
I’m not a fan of this. I think policies that help typically rich incumbents at the expense of poorer outsiders are unjust. But, I’m curious how you make the political argument against rent control.
Jon Murphy
Feb 5 2020 at 3:12pm
Ah ok, yes I see your point now. I agree 100%; those who benefit from rent control will lobby for rent control, just like those who benefit from tariffs will lobby for them.
Depends on why they advocate it. If they advocate rent control “in response to a shortage of housing units, low vacancy rates and rapidly rising rents,” then yes I would call them economically illiterate. If they do it out of self-interest, then I would say no they are not.
Dylan
Feb 5 2020 at 4:14pm
The difference being, with tariffs, the majority of the citizenry is harmed and only a few benefit. You’ve got the difficulty of diffuse harms and concentrated gains, but that seems like the kind of thing that education can help with if you can get normal people to oppose tariffs in general, rather than having to have the energy to fight each one individually.
Rent control feels different in that the gains are concentrated among the people that get to vote for the politicians who enact these policies. I don’t think you get very far by saying “people, this is going to disincentivize the building of new housing and make it even more expensive for people from the Midwest to move here.”
And I think it depends on what you mean by a “response.” If you mean that the policy is likely to lead to building more housing units or increasing vacancy rates, then I’d agree with you. But, if you believe that building enough new housing to keep up with demand is undesirable and/or politically impossible regardless of what rent control policies are in place, then rent control seems like a pretty good response to “rapidly rising rents.” Or at least my rapidly rising rent.
Jon Murphy
Feb 7 2020 at 10:45am
I agree with everything you said, Dylan. Back to my original comment: rent control is great for those who benefit. And those beneficiaries are not passive. There are a lot of interesting public choice issues like what you bring up.
shecky
Feb 4 2020 at 7:06pm
This man has my sympathy. If he finds it so objectionable, he can simply move to another dwelling in the same neighborhood every time he finds his rent is unconscionably low. Or alternatively, he can offer another $4000+ a month to his landlord.
Look, I don’t disagree with what this guy professes to believe, but this guy won a lottery. “Help! My rent is too damn low!” reads more like something you read from The Onion. The bigger question is, how much is he willing to go to win over converts?
Michael Stack
Feb 6 2020 at 12:15pm
The problem is that if he were to move out, somebody would take his place (since there is a price ceiling) and it would have zero impact on the effects of price control. This assumes (reasonably enough, I think) that the ceiling is binding.
Under normal circumstances, if you were to move out of a rented apartment, the market would shift ever so slightly as a result of the new vacancy, and prices would adjust (at least stochastically).
Jon Murphy
Feb 6 2020 at 12:38pm
This line of reasoning tends to lead to Catch-22 type arguments: if he stays in his apartment, he’s a hypocrite. If he leaves, then he doesn’t know what it is like to live in rent control, so he should have no opinion. Because of this tendency to form Catch-22s, ad hominum approaches like what you advocate here are discounted in formal reasoning circles.
Gary Lee
Feb 5 2020 at 3:46pm
Any good is worth the present value of its future benefit stream, in this case shelter. Condos and apartments are close substitutes, the major difference is how the benefit is paid for. When apartment owners couldn’t capture the value through rent they converted them to condos and sold them, thereby reducing the availability of apartments in Santa Monica.
Michael Stack
Feb 6 2020 at 12:38pm
I think Dylan makes an interesting point about the politics of rent control. It reminds me of high city taxes on hotels – policy tailor-made to target people who do NOT live in the city.
I think rent control is actually worse than Dylan’s analysis – it’s not just bad for the folks who don’t yet live in the city. I think it’s bad for people who do, though that’s in the medium to long run, not the immediate short run (and unfortunately, it is mostly the short run that is the focus of politicians).
I think it was Bryan Caplan who observed that the puzzle isn’t why policy is so bad – it’s why it isn’t so much worse.
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