True free-market capitalists have long warned of the harmful effects of rent control, laws that limit the rent prices landlords can legally charge. Economist Assar Lindbeck once remarked, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
We have countless examples to back this up, most recently in St. Paul, Minnesota.
The city passed a rent control policy in 2021 and it hadn’t even taken effect before it managed to reduce new building permits by 80%. But aside from merely making housing harder to come by—and therefore much more expensive—a new study shows that the policy actually redistributes wealth as well, hurting the poor in the process.
Rent control is very bad pic.twitter.com/uhg5Mqf9Bm
— Alec Stapp (@AlecStapp) April 12, 2022
What the New Study Found About the St. Paul Rent Control Scheme
First, the study (which also looked at St. Paul) found that rent control caused property values to fall by 6% to 7%, for a total loss of $1.6 billion.
Secondly, it found that “the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities.”
And lastly, the researchers reported that, “For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”
Why Does Rent Control Fail?
For one, landlords tend to respond to rent control by ridding themselves of properties they no longer find valuable enough, or by evading the law (something higher-income earners will have greater ease in doing).
Secondly, the decrease in property values caused by rent control also leads to a decrease in the property taxes the city may collect—and property taxes are what fund schools and most city services (often used at far higher rates by poorer people).
Not only that, but the study also found that rent control’s benefits tend to help higher-income renters far more than lower-income renters and that rent control imposes a larger burden on lower-income renters.
It’s actually pretty easy to understand why.
When rents are capped at a certain percentage, landlords will likely be incentivized to focus on properties with a higher value and lower risk—meaning higher-income renters will have a larger supply of properties to choose from.
In contrast, lower-income renters will be left with scraps in the market and, additionally, find their landlords unwilling to help with repairs or upkeep because they lack any incentive to do so.
When there are lots of lower-income renters chasing a small number of properties, and when the landlord has no ability to recoup additional investments into a property, they have virtually no reason to provide good customer service.
Real Solutions to the Housing Shortage
Of course, we do have an affordability problem in many cities. But housing prices—and therefore rent prices—are increasing drastically for one reason and one reason alone: bad government policies.
Things like zoning, historical overlays, strenuous building regulations, unions (backed by the government) lobbying for artificially high labor prices, environmental policies, and yes, things like rent control and Airbnb bans, have all led to a massive housing shortage.
It’s simple: they make it very expensive and less profitable to build housing.
In fact, we’re about 5 million properties shy of where we needed to be as a country to keep up with replacement and population growth rates. And when people do build, they increasingly focus on higher-income homes where they can at least make a decent profit in exchange for all the hoops they have to jump through to build. This means the poor and lower middle class are the most burdened by this shortage.
If we want the price of housing to come down, we simply must make it more profitable to build. And we also need to expedite the process so prices can fall quickly.
The government cannot fix the mess it created, it can only get out of the way. And until it does, it is the poorest among us who will continue to suffer from the progressive policies that claim to be their savior.
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