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Posts Tagged ‘Rent Control’

Identifying the worst government policy would be a challenge. Would it be minimum wage laws, which deprive low-skilled workers of a chance for employment and upward mobility? Would it be class-warfare tax rates that generate large amounts of economic damage compared to potential (if any) revenue?

Those are tempting choices, but there’s a strong case that nothing is as foolish as rent control.

Here’s a map showing which states impose or allow this destructive form of intervention.

California politicians are very susceptible to bad ideas.

True to form, as reported by the New York Times, they actually want to impose statewide rent control.

California lawmakers approved a statewide rent cap on Wednesday covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5 percent after inflation and offers new barriers to eviction… a momentous political swing. For a quarter-century, California law has sharply curbed the ability of localities to impose rent control. Now, the state itself has taken that step. …Economists from both the left and the right have a well-established aversion to rent control, arguing that such policies ignore the message of rising prices, which is to build more housing. Studies in San Francisco and elsewhere show that price caps often prompt landlords to abandon the rental business by converting their units to owner-occupied homes. And since rent controls typically have no income threshold, they have been faulted for benefiting high-income tenants.

I’m glad the article included the evidence from economists, especially since the headline is grossly inaccurate. If we care about evidence, it’s far more accurate to say that rent control will exacerbate the state’s housing problems.

Which is why the Wall Street Journal opined that this type of intervention is especially destructive.

California already boasts the highest housing costs in the country, and even liberals have come around to acknowledging that not enough homes are built to meet demand. The state has added about half as many housing units as needed to accommodate population growth, and more than half of Californians spend 30% of their income on rent.Blame a thousand regulatory burdens. Local governments limit what housing developers can build and where. They layer on permitting fees, and then there are the state’s high labor costs and expensive green-energy mandates and restrictions that opponents can exploit to block projects for years. …The upshot is that an “affordable” housing unit in California costs $332,000 to build and nearly $600,000 in San Francisco, according to state budget figures. Developers can’t turn a profit on low- and middle-income homes… And now Democrats want to constrain housing prices by fiat. Mr. Newsom and Democratic legislators are pushing a law to limit annual rent increases across the state to 5% plus inflation. …Building permits in the first seven months this year have fallen 17% compared to 2018 despite an increase in state subsidies. …California’s progressive regulatory complex is contributing to this housing slowdown by driving businesses and people from the state. More than 700,000 residents have left since 2010.

By the way, the politicians in Albany already made the same mistake.

And, as you might expect, the Wall Street Journal‘s editorial page had the correct response.

Law by law, Gov. Andrew Cuomo and Democrats are chipping away at the policies that made New York City livable after decades of decline… Democrats this week are ramming through rent-control bills that…effectively dictates rents for one million or so rent-regulated apartments and restricts landlords’ ability to evict tenants who don’t pay. …Once a tenant moves out—which doesn’t happen often since folks can pass on the entitlement to friends and relatives—landlords would be required to offer the unit to another tenant at restricted rates. …Nor could they raise rates by more than 2% annually to pay for improvements or evict a nonpaying tenant who “cannot find a similar suitable dwelling in the same neighborhood.” Since landlords would have less incentive to make fixes, more apartments will deteriorate and come to resemble New York City’s squalid public housing. …One result will be less housing investment… Progressives are vindicating CEO Jeff Bezos ’s decision to pull Amazon’s second headquarters out of New York. Don’t be surprised if other businesses follow.

You won’t be surprised to learn that politicians in other nations sometimes make the same mistake.

The U.K.-based Guardian wrote about how rent control has backfired in Sweden.

Half a million are on the waiting list for rent-controlled flats in Stockholm, meaning a two-tier system, bribes and a thriving parallel market… the system is experiencing acute pressures. Building of rental homes almost dried up after a financial crisis in the early 1990s, and there is a dire shortage of properties. Demand is such that it is almost impossible to get a direct contract. With nearly half of all Stockholmers – about 500,000 people – in the queue, it can take 20 or 30 years to get to the top of the pile. …The result is a thriving rental property black market, with bribes of as much as 100,000 kronor per room to obtain a direct contract, McCormac says. Many people sublet space in their rental apartments. …“Rent controls were supposed to enable people to live in central locations, but now it is having the opposite effect,” McCormac says. “People without social connections will have a very hard time finding a flat,” says Kleberg.

And Germany is making the same mistake – even though it should have learned from the mistakes under Hitler’s national socialism and East Germany’s communism.

…the kinds of ideas traditionally associated with planned economies are gaining more and more support all over Germany. …Substantial numbers of people have moved to Germany’s major cities…the supply of housing has failed to keep pace with these significant developments, and this is largely because construction approval processes are so long-winded and the latest environmental regulations have made building prohibitively expensive. …In Germany’s capital, Berlin, …it now takes 12 years to draft and approve a zoning plan, which in many cases is a prerequisite for the development of new dwellings. …An initiative in Berlin calling for the expropriation of private real estate companies has collected three times as many signatures as it needed to initiate a petition for a referendum. …Kevin Kühnert, chairman of the youth organization of the center-left SPD…has gone as far as calling for a complete ban on private property owners renting out their apartments. …Berlin’s Senate approved the main components of a rent freeze in the German capital. …Advocates of such central economic planning react sensitively when they are reminded that it has already been tried… An earlier rent freeze was approved in Germany on April 20, 1936, as a gift from the National Socialist Party to the citizens of Germany on Adolf Hitler’s 47th birthday. The National Socialists’ rent cap was adopted into the GDR’s socialist law by Price Regulation No. 415 of May 6, 1955, and it remained in force until the collapse of the GDR in 1989.

Now let’s review some economic research.

Three Stanford professors researched the issue, looking specifically as San Francisco’s local rent control rules.

Using a 1994 law change, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants and landlords. Leveraging new data tracking individuals’ migration, we find rent control limits renters’ mobility by 20% and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15% by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law. …In the long run, landlords’ substitution toward owner-occupied and newly constructed rental housing not only lowered the supply of rental housing in the city, but also shifted the city’s housing supply towards less affordable types of housing that likely cater to the tastes of higher income individuals. Ultimately, these endogenous shifts in the housing supply likely drove up citywide rents, damaging housing affordability for future renters…it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. …rent control has contributed to widening income inequality of the city.

To be fair, rent control is just one of several bad policies that mess up the city’s housing market.

Now let’s shift to the other side of the country.

Jeff Jacoby of the Boston Globe shared evidence from a disastrous experiment in Massachusetts.

…a handful of Democratic lawmakers want to bring the horror of rent control… This isn’t happening only in Massachusetts. …Oregon’s governor just signed a statewide rent-control law and efforts to overturn rent-control bans are underway in Illinois, Colorado, and Washington state. …the folly of rent control is so well-established that to deny it requires, as Hillary Clinton might say, a willing suspension of disbelief. Massachusetts and most other states have banned rent control because the harm it causes far outweighs any benefit it confers. When politicians impose a ceiling on rent, the results are invariable: housing shortages, depressed real estate values, increased decay, less new construction. …The longer rent control persists, and the more harshly it is enforced, the worse the problem grows. …in New York City, where strict rent controls date back to World War II, the annual rate at which apartments turn over is less than half the national average, while the share of tenants who haven’t moved in more than 20 years is more than double the national average. …Acknowledging the damage caused by rent control is neither a right- nor left-wing issue. …the communist foreign minister of Vietnam…made…the…point in 1989: “The Americans couldn’t destroy Hanoi,” Nguyen Co Thach remarked, “but we have destroyed our city by very low rents.” …When Massachusetts voters struck down rent control in 1994, it was in the teeth of preposterous fearmongering by hardline tenant activists… What happened in reality was that tens of thousands of apartments were decontrolled with no ill effects… When tenants were analyzed by occupation, it was high-earning professionals and managers who predominated among the beneficiaries of rent control; semi-skilled and unskilled workers lagged far behind. Rent control always ends up benefiting the young, strong, and well-to-do at the expense of the old, weak, and poor.

Meanwhile, Meghan McArdle opined in the Washington Post about the perverse economic consequences of rent control.

…there are a few questions where there’s near unanimity, and rent control is one of them. Pretty much every economist agrees that rent controls are bad. …the policy appears to be making a comeback. …City governments may have to relearn why their predecessors pruned back rent-control policies. Rent control is supposed to protect poor, deserving tenants from the depredations of greedy landlords. And it does, up to a point. …The problem is that rent control doesn’t do anything about the reason that rents are rising, which is that there are more people who want to live in desirable areas than there are homes for them to live in. Housing follows the same basic laws of economics as other goods that consumers need… rent control also reduces the incentive to supply rental housing. …an actual solution to skyrocketing rents: Build more housing, so that the rent controls won’t be necessary… To do that, cities would need to ease the costly land-use regulations that make it so difficult for developers to fill the unmet demand. …Alas, that’s not going to happen… Declining housing stock is just one of the many potential costs of rent controls; others include a deteriorating housing stock as landlords stop investing in their properties, and higher rents. Yes, higher, because rent control creates a two-tier housing market. There are cheap, price-stabilized apartments that rarely turn over, because why would you give up such a great deal? Then there are the uncontrolled apartments, which everyone else in the city has to fight over, bidding up the price. …the people getting the biggest benefit are white, affluent Manhattanites.

By the way, you hopefully have noticed a pattern.

Rich people generally get the biggest benefits under rent control.

Let’s close with a look at how economists from across the philosophical spectrum view rent control

Here’s some survey data from the University of Chicago.

Incidentally, there’s an obvious reason why politicians persist in pushing bad policy. In the case of rent control, it’s because tenants outnumber landlords.

So even if politicians understand that the policy will backfire, their desire to get votes will trump common sense. Especially if they assume they can blame “greedy landlords” for the inevitable housing shortages and then push for government housing subsidies as an ostensible solution.

Another example of Mitchell’s Law.

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People sometimes ask me how I’ve managed to write a column every single day since November 2009.

Sadly, the answer has a lot to do with politicians having a vote-buying and power-grabbing incentive to produce a never-ending supply of bad policies.

Consider what just happened in Oregon.

Oregon Gov. Kate Brown signed into law a first-in-the-nation rent control bill Thursday…Senate Bill 608′s rent control and eviction protections go into effect immediately. …The law caps annual rent increases to 7 percent plus inflation throughout the state, which amounts to a limit of just over 10 percent this year. …The bill passed quickly through the House and Senate amid a Democratic supermajority.

This is spectacularly bad policy.

  • My first reaction is that such laws should be unconstitutional since politicians are violating a provision of the Bill of Rights by taking part of the value of private property without compensation.
  • My second reaction is that such laws will backfire because they address (in a bone-headed fashion) the symptom of rising rents rather than the (usually government-caused) problem of inadequate housing supply.
  • My third reaction is that price controls never work, regardless of the market or sector, so limits on rent will exacerbate housing problems.

By the way, economic illiteracy is not confined to Oregon. Or even to the United States

Berlin is contemplating rent control as well.

…local politicians here have proposed a radical idea to tackle the problem: introducing a rent cap that would freeze all existing rents for the next five years. …By freezing existing rents for five years, Zado said, the city could help prevent massive increases. …but there could also be significant downsides. Such a policy could exacerbate the city’s existing housing shortage: some experts say it might lead developers to seek buyers, not renters, for their new apartments. …said Michael Voigtländer of the German Economic Institute in Cologne. “That lack of housing won’t be solved if the rents are capped.” …head of the German Housing Industry association, told German newspaper Die Zeit it could even keep developers from building additional housing in the coming years: “A rent stop would lead to our member companies building about 50,000 fewer apartments in the next five years,” he said.

The national government also is acting in a self-destructive manner.

Germany has taken nationwide action in recent years to begin grappling with this problem: in 2015, parliament passed a law restricting how much landlords could raise rents. Under that legislation, the rental price on a new contract should be no more than 10% higher than the average price in that particular neighbourhood.

Let’s see what experts have to say about this issue.

We’ll start with the perspective of landlords, which was included in this New York Times report.

…landlords say that the legislation will compel owners to take their properties off the rental market because they will no longer be able to earn enough rent from them — deepening the housing crisis rather than easing it. …Mr. DiLorenzo said his primary fear was that lawmakers would ultimately bar rents from rising more than a bare minimum, which would prevent landlords from meeting their expenses and eventually drive them out of business. The real solution to rising rents, he said, is to make it easier to build decent and affordable housing in Oregon by eliminating a multitude of fees and regulations.

Landlords have an obvious interest in this issue, so let’s now share some insights from people who don’t have a dog in the fight, but who understand economics.

Megan McArdle debunks this inane example of price controls.

Serial experimentation with this policy has repeatedly shown the same result. Initially, tenants rejoice, and rent control looks like a victory for the poor over the landlord class. But the stifling of price signals leads to problems. …incomes rise, and rents don’t. People with higher incomes have more resources to pursue access to artificially cheap real estate: friends who work for management companies, “key fees” or simply incomes that promise landlords they won’t have to worry about collecting the rent. …lucky insiders come to dominate rent-controlled apartments, especially because having gotten their hands on an absurdly cheap apartment, said elites are loathe to move and free up space for others. The longer the rent-control policies remain, the more these imbalances grow. …Deprived of the ability to make a profit, landlords skimp on maintenance and refuse to build new housing.

Megan also explains that the damage of rent control is compounded by policies that restrict the development of additional housing.

Rent control is one of the most effective ways to destroy a city’s housing stock, but it’s far from the only one. You can also enact extremely strict building codes, with lengthy and highly bureaucratic processes, which will restrict the supply of housing. This is what has happened in many American cities… policymakers should remember that a price is just the intersection of supply and demand. If you alter the price, but don’t alter the supply or the demand, the problem doesn’t go away; rationing just shows up in different forms.

Mark Hemingway, originally from Oregon, explains in the Wall Street Journal what is happening in the state.

Virtually every mainstream economist, from Paul Krugman to Thomas Sowell, has condemned rent control as bad policy. Oregon’s problem isn’t rising rents. It’s the lack of affordable housing… the state remains resistant to new development. Oregon adopted widely hailed “smart growth” policies in the 1970s, imposing “urban growth boundaries” around cities to prevent sprawl. …This has artificially inflated the price of land within the boundaries. …On top of all this, Oregon has a red-tape problem that skews developer incentives. “Systems and development charges and permit fees for even a 500-square-foot unit in the city of Eugene right now are close to about $20,000 per unit,” says real-estate agent James St. Clair. “There’s no incentive to build small affordable units…” Rather than addressing the lack of housing supply, legislators have seized on rent control.

For those who prefer videos over words, here’s a succinct video from Johan Norberg on the folly of rent control.

Mark Perry of the American Enterprise Institute summarize the real problem in a column for the Foundation for Economic Education.

…rent control is making a comeback in response to rising housing prices in urban areas across the country in states like California, Illinois, Washington, and Massachusetts. …As the graphical Supply/Demand analysis…illustrates very clearly, rent control laws that artificially force the rental price of housing (Pabove) below the market-clearing equilibrium price (P0) are guaranteed to create a housing shortage by: a) increasing the number of rental units demanded at the artificially low rents (QD) and b) decreasing the number of rental units supplied to the market (QS). You can artificially restrict the amount of rent a landlord can legally charge for a rental unit, but you can’t force developers, builders, and landlords to build or supply more rental housing in the future. And the supply of rental housing in markets with rent control is guaranteed to decline. …Price controls aren’t the answer. Building more housing is the only real solution to increase the supply of affordable housing.

Here’s Mark’s graph.

In another column for FEE, Luis Pablo de la Horra summarizes why rent control is so misguided.

Rent control is one of those policies that continues to attract the favor of the public despite the fact it has repeatedly proven to be ineffective when it comes to improving the lives of those it is aimed at. …Rent controls often lead to a shortage of rental houses since landladies and landlords find it unprofitable to rent out their apartments at capped prices. In addition, the stock of dwellings tends to deteriorate because home-owners will have little incentive to invest in the maintenance and refurbishment of their houses. …here is some empirical evidence. A 2017 paper published by three Stanford economists shows that rent controls in San Francisco reduced rental housing supply by 15 percent, which in turn increased rental prices in the other parts of the city by around 5 percent. Another recent paper blames restrictions on the use of land (the so-called zoning) for the increasing housing prices in large US cities.

Let’s see what the other side has to say on the topic. Unsurprisingly, the New York Times is on the wrong side.

Here are some excerpts from an editorial that is a case study of economic illiteracy.

New York’s system of rent regulation, limiting how much landlords can charge tenants, began in the 1940s to help a growing middle class. There are about one million apartments covered under rent-restricting regulations now… here are some actions lawmakers can take: …Return control of the rent laws to New York City… Landlords’ ability to raise the rent by 20 percent every time an apartment is vacated is a perverse incentive… Lawmakers should scrap this incentive entirely. …the state agency that enforces rent laws…needs more funding… require landlords to submit receipts for improvements to individual apartments to the agency and the tenant.

This is remarkably bad. And sad as well. The New York Times in recent memory was actually economically sensible, endorsing a flat tax and urging elimination of the minimum wage.

Now it fully embraces policies that even rational left-leaning economists condemn.

Indeed, you can probably tell a lot about the ethics of your left-wing friends if you ask them about rent control.

The ones with good intentions will reject rent control while the demagogues (and the ignorant) will applaud this foolish example of price controls.

Minneapolis provides a good example of ethical leftists, as Elliot Kaufman explains in the Wall Street Journal.

Earlier this month the City Council overwhelmingly approved an ambitious plan to encourage higher-density development and increase the supply of housing. …The Comp Plan would allow the construction of duplexes and triplexes in areas once reserved for single-family homes, rezoning areas near public transportation for larger apartment buildings, and doing away with parking requirements for new housing. …The Comp Plan takes a market-based approach but proclaims left-wing goals. It vows to “eliminate” racial and economic disparities and aggressively fight climate change. …The Comp Plan promotes denser development, which urbanists on both left and right see as the solution to a host of problems. More density in a city like Minneapolis could help renew both geographic and economic mobility.

We’ll close with this great quote from a Swedish economist.

P.S. Rent control can be a great scam for privileged insiders.

P.P.S. Rent control also rewards and empowers unscrupulous and reprehensible people.

P.P.P.S. Amazingly, California voters actually rejected a state referendum to allow rent control (though this isn’t stopping one of their politicians from trying to muck up rental markets).

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I’ve never met Robert Murphy, but he is a reprehensible person. I don’t know if he’s as bad as Michael Wolfensohn, but he’s definitely a sorry excuse for a human being.

For all I know, Mr. Murphy goes to church every day, volunteers at a homeless shelter, reads books for the blind, and picks up litter in the local park. But he’s still a crook being because he thinks it is perfectly okay to steal so long as the government is the middle man.

You can tell me whether I exaggerate after reading these details. Mr. Murphy has been living for 30 years without a lease in a rent-controlled apartment in San Francisco. Every day he remains in the unit, he is stealing value from the owner, Wayne Koniuk, who would prefer to exercise his property rights by letting one of his sons live in the building. Here are the pertinent details from a local news source.

By trade, Koniuk fashions artificial limbs for amputees. By habit, he fits prostheses at no charge for people who cannot pay. This has left him a less-than-wealthy man. But he does have one substantial asset: a Divisadero Street building that his father, Walter, an orthotist, bought in 1970 and gave to his only son in 2001 so Wayne could run his business on the ground floor and Wayne’s adult children would always have a place to live. …Koniuk desperately wants to move his younger son into the building’s other four-bedroom apartment, he cannot. He is exploring legal options. Robert Murphy, who has lived there for 30 years without a lease, remains, paying $525.82 a month. Last spring, Koniuk offered Murphy $45,000 to move out. Murphy’s lawyer demanded $70,000, a sum Koniuk says he does not have. Meanwhile, the city’s Rent Board notified Koniuk that he was allowed to increase Murphy’s monthly rent this year by $2.63.

Not surprisingly, the government intervention that allows Mr. Murphy to steal from Mr. Koniuk is having terrible effects on San Francisco’s housing market.

In San Francisco, one of the toughest places in the country to find a place to live, more than 31,000 housing units — one of every 12 — now sit vacant, according to recently released census data. That’s the highest vacancy rate in the region, and a 70 percent increase from a decade ago. …Increasingly, small-time landlords like Koniuk are just giving up. One of his Divisadero Street neighbors has left two large apartments on the second and third floors of her building vacant for more than a decade, after a series of tenant difficulties. It’s just not worth the bother, or the risk, of being legally tied to a tenant for decades. …Perversely, that is hurting the city’s renters as well, as a large percentage of the city’s housing stock is allowed to just sit vacant, driving up rents that newcomers pay for market-rate housing.

I’ve mocked San Francisco in the past and I certainly enjoy a heaping dose of Schadenfreude when I see the failure of statist policies. But I also hate when big government and greedy interest groups screw over ordinary people. If I was Mr. Koniuk, I would visit this website to get some ideas on how to make life more…interesting…for the thieving Mr. Murphy.

(h/t: Greg Mankiw)

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Whether we’re looking at TARP bailouts, Obamacare, or tax loopholes, a common theme is that politicians implement a policy by arguing they want to help the less fortunate. When the dust settles, however, it is often the case that politically well-connected rich people are the big beneficiaries. The overall economy tends to be weaker, meanwhile, and the specific sector suffers because of resource misallocation, so poor people actually fall farther behind. A good example is rent control. The Wall Street Journal has an editorial citing the case of Bianca Jagger to illustrate how the law has become a giant rip-off that deprives landlords of their property rights while lining the pockets of the elite. Those lower on the income scale, by contrast, suffer because of a housing market crippled by government intervention.
Jetsetter and social activist Bianca Jagger has lost her legal bid to keep her knock-down-price rental at 530 Park Avenue. A New York state judge last week ordered Mick’s ex to pay $708,600 in back rent and other fines to her landlords. Ms. Jagger spent nearly 20 years in the two bedroom apartment—rent-stabilized at $4,600 a month. But then she complained about poor upkeep. The landlords in turn noted that Ms. Jagger, in the U.S. on a tourist visa, shouldn’t pay the lower rent since New York isn’t her “primary residence,” one of the criteria under rent control laws. A state appeals court sided with them in 2008 and last week another court upheld the decision and said she could be evicted. As part of the fine, the judge ruled that Ms. Jagger owes $246,468 for the “fair market use and occupancy” over the years she was in dispute with the landlords. They said the apartment would have gone on the open market for $8,800 a month. The case sums up the insanity of regulating prices in one of the world’s most competitive and dynamic real estate markets. Rent control, a “temporary” World War II-era measure that survives into this century, creates housing shortages, drives up prices for non-rent control real estate and contributes to middle class flight. As Ms. Jagger perhaps found out with her moldy apartment, artificially keeping down rents gives landlords the rational financial incentive to skimp on upkeep. Worse than that, rent control disproportionately subsidizes the affluent. A Harvard University study in the late 1980s found that rent-controlled apartments were in some of the cities best neighborhoods, that 94% of its tenants were white and roughly three-quarters were families without children.

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