- Joined
- Aug 31, 2007
- Messages
- 947
Recently someone here asked the question, "Is rent control really bad?" I wish the politicians in jurisdictions that imposed rent control seriously examined that question. I found a really good article on rent control on the web several months ago. Below is an abridged version of that article, with my emphasis added as a kind of executive summary. I also added a couple comments at the end.
"... if rents are established at less than their equilibrium levels, demand will necessarily exceed supply, and rent control will lead to a shortage of dwelling spaces. Absent controls on prices, if the amount of a commodity or service demanded is larger than the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). But controls prevent rents from attaining market-clearing levels and shortages result.
With shortages in the controlled sector, this excess demand spills over onto the noncontrolled sector (typically, new upper-bracket rental units or condominiums). But this noncontrolled segment of the market is likely to be smaller than it would be without controls because property owners fear that controls may one day be slapped on them. The high demand in the noncontrolled segment along with the small supply, both caused by rent control, boost prices in that segment. Paradoxically, then, even though rents may be lower in the controlled sector, they rise greatly for uncontrolled units and may be higher for rental housing as a whole.
Economists are virtually unanimous in the conclusion that rent controls are destructive. In a late-seventies poll of 211 economists published in the May 1979 issue of American Economic Review, slightly more than 98 percent of U.S. respondents agreed that "a ceiling on rents reduces the quantity and quality of housing available." Similarly, the June 1988 issue of Canadian Public Policy reported that over 95 percent of the Canadian economists polled agreed with the statement. The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the "right" to their fellow Nobel Laureate Gunnar Myrdal, an important architect of the Swedish Labor Party`s welfare state, on the "left." Myrdal stated, "Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision." 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."
lhelvetica-->Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward other, greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, to fewer repairs and less maintenance. For example, Paul Niebanck reports that 29 percent of rent-controlled housing in the United States is deteriorated, but only 8 percent of the uncontrolled units are in such a state of disrepair. Joel Brenner and Herbert Franklin cite similar statistics for England and France.
The economic reasons are straightforward. One effect of government oversight is to retard investment in residential rental units. Imagine that you have $5 million to invest and can place the funds in any industry you wish. In most businesses governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing?
This line of reasoning holds not just for you, but for everyone else as well. As a result the supply of apartments for rent will be far smaller than otherwise. And not so amazingly, the preceding analysis holds true not only for the case where rent controls are in place, but even where they are only threatened. The mere anticipation of controls is enough to place a chilling effect on such investment. Instead, everything else under the sun in the real estate market has been built: condominiums, office towers, hotels, warehouses, commercial space. Why? Because such investments have never been subject to rent controls, and no one fears that they ever will be. It is no accident that these facilities boast healthy vacancy rates and only slowly increasing rental rates, while residential space suffers from a virtual zero vacancy rate and skyrocketing prices in the uncontrolled sector. Evidence for this is seen in the comparative vacancy rates for residential and commercial real estate; exceedingly small in the former case, reaching double-digit levels in the latter.
...
Rent control has destroyed entire sections of sound housing in New York`s South Bronx. It has led to decay and abandonment throughout the entire five boroughs of the city. Although hard statistics on abandonments are not available, William Tucker reports estimates that about thirty thousand New York apartments were abandoned annually from 1972 to 1982, a loss of almost a third of a million units in this eleven-year period. Thanks to rent control, and to potential investors` rational fear that rent control will become even more stringent, no sensible investor will build rental housing unsubsidized by government. Effects on Tenants
Existing rental units fare poorly under rent control. Even with the best will in the world, the landlord cannot afford to pay his escalating fuel, labor, and materials bills, to say nothing of refinancing his mortgage, out of the rent increase he can legally charge. And under rent controls he lacks the best will; the incentive he had under free-market conditions to supply tenant services is severely reduced.
The sitting tenant is "protected" by rent control but, in many cases, receives no real rental bargain because of improper maintenance, poor repairs and painting, and grudging provision of services. The enjoyment he can derive out of his dwelling space ultimately tends to be reduced to a level commensurate with his controlled rent. ..."
Walter Block holds the Harold E. Wirth Eminent Scholar Chair in Economics at Loyola University`s Joseph A. Butt, S. J. College of Business Administration.
One other side affect of rent control is that home owners in controlled jurisdictions subsidize the taxes paid by controlled properties. The value of an income property is determined by its NOI. If the rents are not "market rents", but some lesser number, then the value of that property is "arbitrarily" low because of rent control policies. When the apparent market value of a property is low, the amount of taxes that can be collected from the property are also "below market". The municipality has to make up those taxes by inflating the taxes paid by every other home owner within its jurisdiction. In short it is home owners who pick up the slack where rent control exists. nt-family:Verdana">In BC, a landlord can renovate his/her unit and rent it out at a market rent. In D/T Vancouver, several landlords are doing that to older buildings, and a major newspaper controversy has resulted. It is going to be interesting to see if any governmental agency is going to step in to "protect" the evicted tenants.
My understanding is that landlords can evict tenants to renovate, but must offer the ousted tenant the unit on the same terms and conditions as he/she had before the eviction. How many landlords are going to spend thousands of $ on a reno to have it rented again at the same price as before. Governments often remove any incentives for anyone to act in a reasonable manner. To my knowledge, Nova Scotia and Alberta are the only provinces in Canada without rent controls. NS removed its controls about 15 years ago. And, do you know what? The rental market did not go to hell in a hand basket. Market forces keep rents at reasonable levels.
If average property values go up by 15% (or even higher) in a given year, doesn`t it make sense that the value of income properties should increase similarly?
In short, IMHO, rent controls are bad. They hurt the very tenants they are designed to help. And, they hurt other land owners who subsidize the taxes of controlled properties.
"... if rents are established at less than their equilibrium levels, demand will necessarily exceed supply, and rent control will lead to a shortage of dwelling spaces. Absent controls on prices, if the amount of a commodity or service demanded is larger than the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). But controls prevent rents from attaining market-clearing levels and shortages result.
With shortages in the controlled sector, this excess demand spills over onto the noncontrolled sector (typically, new upper-bracket rental units or condominiums). But this noncontrolled segment of the market is likely to be smaller than it would be without controls because property owners fear that controls may one day be slapped on them. The high demand in the noncontrolled segment along with the small supply, both caused by rent control, boost prices in that segment. Paradoxically, then, even though rents may be lower in the controlled sector, they rise greatly for uncontrolled units and may be higher for rental housing as a whole.
Economists are virtually unanimous in the conclusion that rent controls are destructive. In a late-seventies poll of 211 economists published in the May 1979 issue of American Economic Review, slightly more than 98 percent of U.S. respondents agreed that "a ceiling on rents reduces the quantity and quality of housing available." Similarly, the June 1988 issue of Canadian Public Policy reported that over 95 percent of the Canadian economists polled agreed with the statement. The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the "right" to their fellow Nobel Laureate Gunnar Myrdal, an important architect of the Swedish Labor Party`s welfare state, on the "left." Myrdal stated, "Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision." 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."
lhelvetica-->Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward other, greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, to fewer repairs and less maintenance. For example, Paul Niebanck reports that 29 percent of rent-controlled housing in the United States is deteriorated, but only 8 percent of the uncontrolled units are in such a state of disrepair. Joel Brenner and Herbert Franklin cite similar statistics for England and France.
The economic reasons are straightforward. One effect of government oversight is to retard investment in residential rental units. Imagine that you have $5 million to invest and can place the funds in any industry you wish. In most businesses governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing?
This line of reasoning holds not just for you, but for everyone else as well. As a result the supply of apartments for rent will be far smaller than otherwise. And not so amazingly, the preceding analysis holds true not only for the case where rent controls are in place, but even where they are only threatened. The mere anticipation of controls is enough to place a chilling effect on such investment. Instead, everything else under the sun in the real estate market has been built: condominiums, office towers, hotels, warehouses, commercial space. Why? Because such investments have never been subject to rent controls, and no one fears that they ever will be. It is no accident that these facilities boast healthy vacancy rates and only slowly increasing rental rates, while residential space suffers from a virtual zero vacancy rate and skyrocketing prices in the uncontrolled sector. Evidence for this is seen in the comparative vacancy rates for residential and commercial real estate; exceedingly small in the former case, reaching double-digit levels in the latter.
...
Rent control has destroyed entire sections of sound housing in New York`s South Bronx. It has led to decay and abandonment throughout the entire five boroughs of the city. Although hard statistics on abandonments are not available, William Tucker reports estimates that about thirty thousand New York apartments were abandoned annually from 1972 to 1982, a loss of almost a third of a million units in this eleven-year period. Thanks to rent control, and to potential investors` rational fear that rent control will become even more stringent, no sensible investor will build rental housing unsubsidized by government. Effects on Tenants
Existing rental units fare poorly under rent control. Even with the best will in the world, the landlord cannot afford to pay his escalating fuel, labor, and materials bills, to say nothing of refinancing his mortgage, out of the rent increase he can legally charge. And under rent controls he lacks the best will; the incentive he had under free-market conditions to supply tenant services is severely reduced.
The sitting tenant is "protected" by rent control but, in many cases, receives no real rental bargain because of improper maintenance, poor repairs and painting, and grudging provision of services. The enjoyment he can derive out of his dwelling space ultimately tends to be reduced to a level commensurate with his controlled rent. ..."
Walter Block holds the Harold E. Wirth Eminent Scholar Chair in Economics at Loyola University`s Joseph A. Butt, S. J. College of Business Administration.
One other side affect of rent control is that home owners in controlled jurisdictions subsidize the taxes paid by controlled properties. The value of an income property is determined by its NOI. If the rents are not "market rents", but some lesser number, then the value of that property is "arbitrarily" low because of rent control policies. When the apparent market value of a property is low, the amount of taxes that can be collected from the property are also "below market". The municipality has to make up those taxes by inflating the taxes paid by every other home owner within its jurisdiction. In short it is home owners who pick up the slack where rent control exists. nt-family:Verdana">In BC, a landlord can renovate his/her unit and rent it out at a market rent. In D/T Vancouver, several landlords are doing that to older buildings, and a major newspaper controversy has resulted. It is going to be interesting to see if any governmental agency is going to step in to "protect" the evicted tenants.
My understanding is that landlords can evict tenants to renovate, but must offer the ousted tenant the unit on the same terms and conditions as he/she had before the eviction. How many landlords are going to spend thousands of $ on a reno to have it rented again at the same price as before. Governments often remove any incentives for anyone to act in a reasonable manner. To my knowledge, Nova Scotia and Alberta are the only provinces in Canada without rent controls. NS removed its controls about 15 years ago. And, do you know what? The rental market did not go to hell in a hand basket. Market forces keep rents at reasonable levels.
If average property values go up by 15% (or even higher) in a given year, doesn`t it make sense that the value of income properties should increase similarly?
In short, IMHO, rent controls are bad. They hurt the very tenants they are designed to help. And, they hurt other land owners who subsidize the taxes of controlled properties.