[Gunnar] Myrdal stated, “Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.” His fellow Swedish economist (and socialist) Assar Lindbeck asserted, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
This is from Walter Block, “Rent Control,” in The Concise Encyclopedia of Economics.
Unfortunately, Lindbeck was wrong.
NEW DELHI—A “romantic conception of socialism” … destroyed Vietnam’s economy in the years after the Vietnam war, Foreign Minister Nguyen Co Thach said Friday.
Addressing a crowded news conference in the Indian capital, Mr. Thach admitted that controls … had artificially encouraged demand and discouraged supply…. House rents had … been kept low … so all the houses in Hanoi had fallen into disrepair, said Mr. Thach.
“The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy,” he said.
—From a news report in Journal of Commerce, quoted in Dan Seligman, “Keeping Up,” Fortune, February 27, 1989.
This is also from the Block entry on rent control.
This is apropos of Oregon’s state government imposing rent control statewide. The rent control measure, fortunately, has a lot of slack. This, for example, from the Seattle Times news story:
Landlords are now limited to increases once per year that cannot exceed 7 percent plus the change in the consumer price index, which is used to calculate inflation.
So the really bad effects we generally associate with rent control may not show up.
READER COMMENTS
Micke
Mar 6 2019 at 6:04am
The one argument for rent control that has some merit to it is that everyone needs a place to live, and it is much harder to manage a sudden rent increase than virtually any other price increase. If you live with almost no margins and your rent increases by 50% overnight, you truly have problems.
Thus, a reasonable form of “rent control” is that rent increases will have to be advertised a long time in advance, say six months or so. That will give tenants an opportunity to find alternatives. In the long run, market prices will prevail. In the short run, no one will have their credit crashed (or be evicted) due to a rapid change they couldn’t see coming.
Dylan
Mar 6 2019 at 7:55am
Agree with this. For all the incredibly bad effects that rent control has, I think it is at least important to acknowledge the stress of knowing you might have to move every year. My first few years in NYC were a series of getting places I could just barely afford, because they were the cheapest I could find. Then having the rent go up 10%, and spending weeks trying to find something else that was still affordable. Of course when you added in all the moving expenses, I probably spent more in time and money than I saved on rent over the year, so it was just digging myself into a bigger and bigger hole. When I found my current place, the first couple of years were met with steep increases, but I stayed, and then we got lucky and a newly passed law had the effect of freezing the rent for our unit. Over the next 3-4 years rents in our neighborhood went up by 150% before stabilizing somewhat in our area, but continuing to increase a lot in the outer areas. I have friends who moved here who every year have to figure out what more from their already thin budget they can cut out so they can afford the $200 a month increase in the rent.
I know that rent control is one of the reasons that rent increases elsewhere are so high, but it is not the only one. Regulations that make it incredibly difficult and expensive to add more housing stock is a big contributor, and I don’t see those going away.
Aaron McNay
Mar 6 2019 at 1:56pm
Is that not what a lease is for? Don’t people sign agreements with their renter so that both parties agree to pay a set amount for a given amount of time? It seems like the private market has already addressed this issue with no need for “rent control.”
Michael Makovi
Mar 6 2019 at 3:17pm
“Is that not what a lease is for?”
Indeed, I’m confused as well. With my landlord, I sign a lease every year, with every month’s payment stipulated in advance. My landlord is contractually unable to raise my rent mid-lease.
And I sign a new lease several months before the current lease expires. Thus, I always have several months left on my current lease by the time I find out what next year’s leasing terms are going to be.
I don’t know why people in New York or Oregon would do differently – unless zoning restrictions or other restrictions have made it infeasible for landlords to offer yearlong leases.
Dylan
Mar 7 2019 at 6:35am
That is indeed what a lease is for, and it has worked that way in my experience in NYC also, with the exception of that I normally would only get a new lease to sign maybe 6 weeks or so before the old one was up. The other difference was that it used to be really hard to find an apartment in the city at a good price without a broker who you would pay one months rent to as a fee. Landlords of course knew this, so they were pretty safe raising your rent by around that much, knowing it would cost you more to move then you would pay in increased rent over the course of a year.
This doesn’t justify rent control, but I have to say I get the rationale a lot more now then I did when I studied the issue in college where it was possible to get a nice apartment for $600 a month. Rent control ends up being an immediate windfall on existing renters in a city, with the massive downsides felt mostly by newcomers that I don’t much want to move to my city anyway.
Micke
Mar 7 2019 at 4:01am
“Is that not what a lease is for?”
If that is how a lease is typically done, I’m all good. Where I live (not in the US), this is not the case, though.
dennis miller
Mar 8 2019 at 2:01am
In Oregon, and probably other states as well, it is not a requirement that you renew your Rental Agreement on a regular basis. Instead once the initial term expires (typically 1 year) then the agreement automatically converts to a month-to-month agreement. I think most landlords do this rather than redo needless paperwork over and over. And that’s fine as long as both landlord and tenant agree to that. On a month-to-month basis the tenant is not guaranteed housing for the long term but only for the next month. The person could be asked to move out with a 30 day notice without any reason other than the whim of the landlord (which seldom happens if you’re a good tenant). Likewise rent is not fixed for the long term, but it can be changed after a 30-day notice. The new Oregon law has made month-to-month more complicated for the landlord, which means rents probably need to be raised to cover the cost of complying with the law.
Liam
Mar 10 2019 at 10:52pm
In California, leases are valid for the first year, then often go month-to-month after that.
Mark Z
Mar 6 2019 at 8:46pm
The exact same arguments against rent control in general apply to your proposal as well. By locking landlords into a price regardless of whether the market price (or costs) change, you make leasing riskier and less profitable, ultimately reducing supply. Say you’re a landlord and the cost of maintaining residential units unexpectedly goes up, making your property unprofitable at current prices. If you can’t change prices in response, then instead you may just stop leasing units. If you can’t evict people in the short term, then the whole arrangement just serves as an additional deterrent from owning residential units in the first place, which makes it more costly and harder for people to find a place who don’t already have one. Much like how restrictions on firing people or changing their pay, which work to the advantage at people who already have jobs at the expense of those who don’t, reducing overall employment, so do would this kind of restriction harm people looking for a place to the benefit of those who have one. I see no reason why we should favor the interests of those who have stuff at the expense of those who are looking for stuff.
Ricardo
Mar 6 2019 at 2:31pm
What’s the over/under on how long it stays at 7 percent plus CPI? This is the thin end of the wedge.
David Seltzer
Mar 6 2019 at 6:13pm
In addition to deferred maintenance by property owners, there seems little incentive for new construction. As current housing stock decays, supply becomes more limited. In NYC, city, state, and federal taxes are about 50%. Zoning restrictions coupled with rent control make the problem more difficult. Finally. There is a shadow market for rent controlled apartments. Some long time tenants kept their below market priced apartments, moved to Hoboken and leased new apartments financed by subletting their NYC dwellings to others at a higher rate.
That worked for a while until Hoboken became the de facto “Sixth Borough.”
When rent controls were imposed by Hoboken and Jersey City, those former rentals were converted to condominiums further reducing rental stock.
dennis miller
Mar 8 2019 at 2:13am
Regarding Oregon’s law, I’m not sure if I can heartily agree with the last line in the article, that bad effects will not show up. I would agree that the “7% per year plus” is a generous amount and is hardly a limitation on rent increases. However the law includes other issues. Many rental agreements default to month-to-month after the initial term (typically 1 year). After that it is hard to ask someone to move out unless they have blatantly violated the agreement. If the tenant is asked to vacate, it appears the landlord may be penalized by having to pay the tenant at least one month worth of rent. Therefore landlords may decide to raise the rent another notch just to cover the increased cost of doing business, a cost imposed by the legislation. Part of the problem of asking someone to move out is that it may be difficult to find another place within 30 days. I think a better solution than a month’s rent would be that a person gets a larger notice period, like 90 or 120 days to move out. Imagine if you were told to move out in 30 days — you need to find another place and you need to pack up everything and move. Yikes, but a longer notice would solve that problem and usually does not cost the landlord anything.
David Henderson
Mar 8 2019 at 10:15am
Good points.
Dylan
Mar 8 2019 at 9:30am
I’ve been thinking about this a bit more and I think rent control is actually a pretty well tailored policy to meet my needs as a current resident. What do I mostly care about as a current renter?
I want stability and security, and an asymmetrical ability to leave (i.e. I want to be able to leave on a moments notice for any reason at all, but have it be difficult for my landlord to kick me out for most reasons, or raise my rent)
I want to decrease the supply of affordable housing from my neighborhood to discourage new people from moving in, because I want to be close to everything except for other people.
If I can’t keep everyone out, at least have the new people that move in be a lot wealthier than I am, so that way I get the decreases in crime and increases in amenities that come from gentrification.
Charles
Mar 13 2019 at 12:58pm
“So the really bad effects we generally associate with rent control may not show up.”
Except that it does signal to businesses that the legislature is open to endorsing economically illiterate policies. Signals legislative irrationality. Not a short term loss, but possibly a material long term one if it deters business relocations to the state or accelerates decisions to depart.
Comments are closed.