A subscriber asks if rent control helps out renters

Government intervention always costs more in the long run

Does rent control work? I see CA [California] and OR [Oregon] pushing these laws into effect. Many cities already have rent control. Does it work?

Geoff

This is a very good question. It would be logical to assume that controlling the spiraling costs of rent would help out renters, but let’s take a look at the economic ramifications of rent control in the aggregate.

As rents drop below equilibrium, landlords restrict supply and renters demand more units. Huge distortions result. The renters of units not covered under rent control pay the difference as their rents rise much higher as a result

While people who manage to secure a rent-controlled home will benefit substantially in the long run, these policies can cause landlords to make choices that can exacerbate income inequality. A research paper from Stanford University researchers, which was published on National Bureau of Economic Research’s website, nber.org, examined the fallout from a successful 1994 ballot initiative in San Francisco that created rent control protections for small multifamily buildings built before 1980. Here is what the researchers found:

  • People who lived in homes that became subject to rent control rules were between 10% and 20% more likely to remain at that address, versus people who weren’t in rent-controlled units.
  • The economic benefit to people living in rent-controlled units averaged between $2,300 and $6,660 per person each year.
  • Meanwhile, landlords were 10% more likely to convert their building into condos if it became rent controlled. Overall, the rental supply in San Francisco dropped by 6% following the expansion of rent control.
  • Rents throughout the city increased by 5.1% as a result — the researchers calculated the total cost to tenants from rent hikes to be $2.9 billion, nearly half of which was paid by residents who moved to San Francisco following the establishment of rent control.
  • The researchers found that rents for apartments that were exempt from rent control policies grew much more substantially as a result.

What does this say? Those who are able to obtain a rent-controlled apartment benefit at the expense of those who could not.

Other research has suggested that rent control policies may actually contribute to a deterioration in the quality of rental housing and may inhibit construction of new rental housing. I lived in Manhattan for 14 years and know first hand that much of the housing stock regulated by rent control was substandard and in poor condition. The tenants were afraid to raise issues to the landlord and the landlord rarely put money into these units.

Of course, we will never win an argument with someone who supports rent control. They are either demagogues and politicians who are trying to appeal to a certain voting demographic or are the renters who are hoping to get a break on their monthly rent payment. Most people like to get something for nothing, and social welfare and spending are based on this premise.

There is no such thing as a free lunch, and if someone is benefiting from rent control, that benefit is coming at someone else’s expense.