Economists agree rent control doesn't work; California passes sweeping rent control ordinance anyways
Despite a broad consensus among economists and overwhelming evidence that rent control actually makes housing more expensive, California state government passed a sweeping new rent control ordinance this month. John Phelan of the Foundation for Economic Education surveys the damage he thinks is likely to occur.
Rent controls propose using government regulation to solve the symptom—high prices—of a problem—a shortage of housing—which government regulation created in the first place. As public policy, it as ineffective as trying to take down a tornado with a Colt Python. …
In 2012, economists were polled with the following question:
Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.
Eighty-one percent of them disagreed. …
Why are economists so overwhelmingly against rent controls? One reason is that they mistake the symptom for the problem. …
[R]ent control will do nothing whatsoever for [the homeless]. The problem, remember, is too many people wanting to live in a given stock of housing. Capping the price of that housing by government decree will do nothing to solve that problem. What would help is getting rid of the government regulations that restrict the supply of housing.
Prices are not problems; they are signals of problems. Trying to solve the problem by treating the signal is like trying to slow down your car by fiddling with the speedometer. …
[Editor’s note: Additionally,economists overwhelmingly oppose rent controls because they always have unintended consequences. Rent controls are the opposite of minimum wage laws. Where minimum wage laws are price floors, rent controls are price ceilings.]
Economic theory is pretty clear about what the effects of a price ceiling will be. As Figure 1 shows, at equilibrium rents are $600, and 300 units of housing are both supplied and demanded. If you cap the rent at $400, however, you decrease the number of homes supplied to 200 and increase the number of homes demanded to 400. You now have an excess of demand over supply of 200 (demand of 400 minus supply of 200). If you were motivated by a concern for a shortage of housing, congratulations, you just made it worse. It wasn’t intended, but it was a consequence.
This graph depicts the effects of an effective price ceiling in a competitive market.
This might sound a little wacky. How can the supply of housing fall? Landlords don’t demolish their houses in response to a fall in rents, so shouldn’t the demand curve be vertical? In this case, a reduction in rents would see no consequent fall in the number of homes available.
But, wacky as it might sound, the supply of housing is responsive to price changes—it is “price elastic,” in the jargon. An old but excellent and still sadly relevant book titled Verdict on Rent Control examines episodes from a number of countries and finds:
[I]n every country examined, the introduction and continuance of rent control/restriction/regulation has done much more harm than good in rental housing markets—let alone the economy at large—by perpetuating shortages, encouraging immobility, swamping consumer preferences, fostering dilapidation of housing stocks and eroding production incentives, distorting land-use patterns and the allocation of scarce resources—and all in the name of the distributive justice it has manifestly failed to achieve.
This article originally appeared in FEE Stories. Read the whole article here.