Assumptions and Rent Control

In an excellent piece of public testimony by economist J.W. Mason about why the assumption that rent control will lead to bad economic outcomes, one of the key things he does is challenge the assumptions of the argument (boldface mine):

…rent regulations in general affect only increases in rents. When a new property comes on the market, landlords can charge whatever the market will bear. And when they make major improvements, again, most existing rent regulations, including the current Jersey City law, allow them to recapture those costs via higher rents. So what rent control is limiting are the rent increases that are not the result of anything the landlord has done — the rent increases that result from the increased desirability of a particular area, or of a broader regional shortage of housing relative to demand. There is no reason that limiting these windfall gains should affect the supply of housing.

…in many high-cost areas, housing supply is relatively fixed. The reason that existing homes in many large cities cost multiple times more than the costs of construction, is that the ability to add new housing in these areas is very limited, by some mix of regulatory barriers like zoning, and physical or economic barriers. In economists’ terms, the supply of housing in these areas is inelastic – it doesn’t respond very much to changes in price. This fact is widely recognized, but its implications for rent regulation are not. In a setting where the supply of new housing is already limited by other factors – whether land-use policy or the capacity of existing infrastructure or sheer physical limits on construction – rent regulation will have little or no additional effect on housing supply. Instead, it will simply reduce the monopoly profits enjoyed by owners of existing housing.

…housing is very long-lived. According to the Bureau of Economic Analysis, the average age of a tenant-occupied residential structure in the US is 42 years. In much of the northeast and in older cities, the average age will be greater. The fact that housing lasts this long has important implications. No one constructing new housing is thinking about returns that far out. Most business investment is expected to repay its costs in less than 10 years. Housing construction may have a longer payback period — as we know, much construction is financed with 30-year mortgages. But the rents 40 or more years in the future are simply not a factor in the construction of new housing. This means that there is a great deal of space to regulate the rents on existing housing without affecting the decision to build or not build.

The bottom line is that rents in the everyday sense are often also economic rentsThey come from a kind of monopoly, not from contributing real resources to production of housing. And one thing that almost all economists agree on is that removing economic rents does not have costs in terms of reduced output or efficiency.

It’s mindboggling how many economists (and others) seem to ignore this bit of urban natural history. Mason also challenges an important normative assumption–the supposed primacy of owners over renters:

…these arguments misunderstand the goal of rent regulation. In part, it is to preserve the supply of affordable housing. But it also recognizes the legitimate interest of long-term tenants in remaining in their homes. A rented house or apartment is still a family’s home, which they have a reasonable expectation of remaining in on terms similar to those they have enjoyed in the past. Just as we have a legal principle that people cannot be arbitrarily deprived of their property, and just as many local governments put limits on how rapidly property taxes can increase, a goal of rent control is to give people similar protection from being forced out of their homes by rent increases.

That will burn a lot of owners up–if you’ve ever been to a city’s local board meeting (or ANC’s in D.C., etc.), there is an implicit assumption, if not an explicit statement, that owners are better stewards of a neighborhood than renters, even though, in most large urban areas, the majority are renters.

As the kids used to say, read the whole thing.

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3 Responses to Assumptions and Rent Control

  1. adameran says:

    Always worth a look: “In January 1923, Mussolini eliminated rent-control laws. His reasoning ought to be familiar since that is the same reasoning used in many contemporary editorials against rent control laws. He claimed rent control laws prevent landlords from building new housing. When tenants protested, he eliminated tenants’ unions. As a result, rent prices increased wildly in Rome, and many families became homeless. Some went to live in caves.” (from here)

  2. Bern says:

    Thanks, Mike, for the post.
    And re: Mussolini – at least he made the trains run on time…oh, wait, no he didn’t. Not really. He forced them to run on time during the Potemkin transit visits for the benefit of the fawning press…
    It’s amazing the Italians took so long to string him up.

  3. adameran says:

    One additional comment: neoclassical economics, the variety currently in the ascendant, no longer includes land as an input of production, folding it into Capital as one of the two inputs. The neoclassicals also assert that an economy is essentially one of barter, and money makes no difference. It’s not much of an accident that an enormous economic event–the subprime/derivatives Global Financial Crisis–at the confluence of credit and land was not part of their calculations…and was missed entirely by them.

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