Do rent controls work?

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E.H.
economist.com
Sunday, August 30th

Politicians, particularly those on the centre-left, and some policy wonks favour forms of rent regulation, such as rent control (which is the placing of a cap on the rent that can be charged) or rent stabilisation (which sets limits on how much rent can be raised over time). Supporters argue that introducing controls helps ensure that the non-rich are not squeezed out of cities in which housing costs are soaring. In many booming cities, growth pressures have pushed up housing rents, and over time the composition of many neighbourhoods has changed in favour of those who can afford the higher prices. Speaking to the Guardian, Carl Weisbrod, the chairman of the New York City planning permission, argued that regulating rent “is essential for the future of the city”. Supporters of rent control often point to Germany, where the charging of rent 20% higher than that on similar properties is often illegal. Around 50% of people rent in Germany; almost 90% of all Berliners do, many in pleasingly spacious, well looked-after apartments. Soaring rents around the rich world have driven interest in rent-control policies. In the ten years to 2014 the proportion of British households headed by someone aged between 25-34 which rented privately rose from 22% to 44%. In Seattle, rents for one-bedroom apartments increased by nearly 11% between 2010 and 2013. A case could be made that rent controls provide long-term security for renters, and also tilt the balance of power away from landlords towards tenants. That, some reckon, makes for a more just urban housing market, in which households with lower incomes cannot easily be pushed aside by landlords keen to “gentrify” the neighbourhood.

But economists, on both the left and the right, tend to disagree. As Paul Krugman wrote in the New York Times in 2000, rent control is “among the best-understood issues in all of economics, and—among economists, anyway—one of the least controversial”. Economists reckon a restrictive price ceiling reduces the supply of properties on the market. When prices are capped, people have less incentive to fix up and rent out their basement flat, or to build rental property. Slower supply growth actually exacerbates the price crunch. Those landlords who do rent out their properties might not bother to maintain it, since both supply and turnover in the market are limited by rent caps; landlords have little incentive to compete to attract willing tenants. Landlords may also become choosier, and tenants may stay in properties longer than makes sense. Interestingly some evidence shows that those living in rent-controlled flats in New York also tend to have higher median incomes than those who rent market-rate apartments. That may be partly down to the fact that controlling rent does not mean that those with more resources are not better positioned to find good housing; households of means may in some cases find it easier to track down and secure rent-stabilised properties. The example of Germany is also an imperfect one: many cities there have seen declining populations and low (or falling) house prices over the past two decades, although the latter is now changing in several cities.

In places where demand to live in the city is rising (as in London, New York and Seattle) a more effective policy would be to build more housing. The number of houses being built each year in Britain peaked in 1968 (at 352,540 dwellings). Since 2008 there has been a particularly bad slump, while a constrictive “green belt” around the edges of the city restricts growth. Meanwhile many developers sit on the land, watching its value grow. According to McKinsey, some 45% of land which is due to be developed in London remains idle. House-building rates are even lower in Germany, says Kath Scanlon of the London School of Economics. Restrictive zoning laws, in places such as San Francisco (which also has rent control) could also be loosened, while others in Seattle have called for the council to build more low-cost housing. In order to keep a city liveable politicians will have to take on the NIMBYs, not just the landlords.

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