Rent Control Part 1: Microeconomics Lesson & Hoarding

This post has been released as the first in a four part series:
Rent Control Part One: Microeconomics Lesson and Hoarding
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict
Rent Control Part Four: Conclusion and Solutions

Opposition to rent control among economists spans the political spectrum, including over 90% of American and Canadian economists.  In fact, Swedish socialist Economist Assar Lindbeck famously said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing it.” (Assar Lindbeck, The Political Economy of the New Left, New York, Harper and Row, 1972, p. 39)

Without getting into the morality of restrictions on property rights, I will discuss the more subtle consequences of rent control over a series of posts.

Quick Microeconomics Lesson:

As stated by the National Multi Housing Council:

Rents serve two functions essential to the efficient operation of housing markets:

• they compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers; and
• they provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock. In this respect, housing is no different from other commodities, such as food and clothing — the amount producers supply is directly related to the prevailing market price.

Those of us who have studied microeconomics understand the near-universally accepted supply/demand consequence of rent-control: a decrease in the quality and supply of rental housing over time. But, for those who need a refresher or quick intro lesson, Professor Alex Tabarrok of George Mason University and the popular Marginal Revolution blog explains the microeconomics of rent control in this video:

When you have some spare time, watch this more in-depth lecture on price controls. (windows media) The first 45 min of the [1:25:30] is dedicated to rent control. Includes segments on how a landlord became a “serf” to his tenants, “Bomb Damage or Rent Control?”, and celebrity beneficiaries of rent control.

93% of economists agree that rent control reduces the supply and quality of affordable market housing as the videos explain. But that’s not all! The burdens of rent control only increase exponentially the longer they are in place. Let’s look at some of the more subtle aspects of rent control:

Hoarding:

Just as price controls on gas in the ’70s caused long lines and hoarding of gas, the same thing happens with housing. The tenants of rent-controlled units are not stupid. They know that the supply is limited and will become more limited in the future. They know that if they stay put, they’ll be able to pay about the same rent forever, in real terms. They know that if they were to look for another apartment, and they were fortunate enough to find one, the rent would be significantly greater than what they pay where they are.

So, they don’t move. Ever. Well, almost never. Even if their family grows or shrinks. The incentive to stay is just too great, and the wealthy and well-connected are better equipped to take advantage of the situation.  As Peter Salinas and Gerard Mildner wrote in Scarcity by Design: The Legacy of New York City’s Housing Policies:

To begin with, to earn the maximum benefits from New York’s rent regulations, it helps to occupy an apartment for a long time (because landlords are permitted to raise rents more than usual when an apartment is vacant). Affluent professionals have greater job stability and can, in any case, manage to fake their continued occupancy (in order to sublet) when they must move. Also, influence or good connections are helpful in the search for a desirable rent-regulated apartment.

When rent-controlled apartments become available, family and friends often know about it first and rent up the apartment immediately, knowing that rent-controlled apartments are so hard to come by and the opportunity to rent other vacant apartments may not come for some time.

Of course, this hoarding by existing and new tenants worsens the problems, because those who are shopping for apartments have very few, if any to choose from. The longer this goes on, availability declines further and the incentives to hoard grow exponentially, as do the negative effects.

In fact, one study found that rent control tripled the expected duration of residence in New York City.

The ones who suffer the worst are those who are trying to relocate to the area for job opportunities as vacancies become more rare.

Continue on to Rent Control Part 2: Black Market, Deterioration and Discrimination To make sure you don’t miss future parts, subscribe to the feed or sign up to receive posts in your email.