Reason.com

Free Minds & Free Markets

We Can’t Reduce Housing Costs by Wishing for Rent Control

A new California ballot initiative proposal combines wishful thinking with the heavy hand of government.

The term "magical thinking" describes people who believe, as one psychology related website puts it, "that one's own thoughts, wishes or desires can influence the external world." It's the idea that if we wish for something hard enough it might actually come true. It's become a fixture in California's political world, especially as it relates to the problem of high housing prices.

For example, a group of community activists has proposed an initiative for the November 2018 statewide ballot called the "Affordable Housing Act." It would vastly expand the ability of municipal governments to impose rent-control ordinances by repealing a 1995 law, known as the Costa-Hawkins Act, that essentially bans local rent caps (and vacancy controls) on newer buildings and single-family homes. Its repeal would lead to a flurry of local controls on rent prices.

Sure, the initiative's drafters make some good points. Housing prices have indeed skyrocketed, median rents are higher in California than other states, and many Californians spend too much of their family budgets on housing. As a result, they add, "three times as many Californians are living in overcrowded apartments" as in the nation at large. This leads to the state's sky-high poverty and homelessness rates.

But their proposal combines wishful thinking with the heavy hand of government. Policy makers cannot fix the above-mentioned problems by waving a magic wand and limiting rent prices—not without distorting the marketplace, stealing people's private property and exacerbating the very problem the drafters are trying to solve. Price controls of any type are doomed to fail, which is clear from any number of historical examples.

The most telling example is San Francisco, which has some of the toughest rent-control and tenants'-rights laws in the country. The city has a full-on housing crisis, with rent prices that are unfathomable. Yet around 5 percent of the city's rental stock sits vacant, with landlords preferring to keep units empty rather than receiving significant income renting them out.

That might seem counterintuitive, but it makes perfect sense. Once a San Francisco property owner leases out a house or apartment, that owner loses much control of the property thanks to the city's rent ordinances. The government limits rent prices and the owners' ability to evict tenants. Once you allow someone to move in, you might never be able to get them out.

Rather than loosen up these rules, city officials want to tax owners who have vacant units, thus leading to the latest counterproductive cat-and-mouse game. Owners will shift their units to short-term vacation rentals, or convert them to condos or sell them to overseas buyers. These are just a handful of the unforeseen consequences of rent-control laws.

By not allowing rents to reflect the market rate, these rent-control rules deplete the overall supply. Punishing owners makes investors less willing to buy, build and renovate rental properties. Further taxes and penalties make it even less appealing to get into the apartment business. Who wants to build them if you might be locked into a money-losing situation? Rent control ends up driving up housing prices.

Rent control also erodes the quality of rental housing. A landlord who is not making a sufficient amount of money on the rentals isn't going to upgrade the units' kitchens or bathrooms. As a 2012 New York Times column explained, many landlords actually are middle-income people who invested in rental properties. They end up subsidizing the rents for wealthy people, who can squat indefinitely in underpriced apartments in prime locations.

As a landlord myself, but in non-rent-controlled cities, I have every reason to keep my tenants happy and vice versa. I charge the most rent the market will bear, and tenants shop around for the best deal. The marketplace helps assure a mutually beneficial situation. But if I were forced to charge half or two-thirds of the going rent, then it would create an antagonistic situation. I'd want the tenants to leave—and would get out of the business and find an alternative use for the property. I've got better things to do than subsidize the lifestyle of strangers.

To understand the nature of rent control, consider how a similar price control would work in your business. Let's say you sell cars and the government limits sales prices to below market rates. Profits would evaporate and there soon would be too few available cars to satisfy the demands of buyers. Dealers would leave the business or find new ways to hike prices (this one only comes with $5,000 aftermarket wheels) and car lots would be like war zones.

Yes, the rent is too damn high, which even is the name of a political party in rent-controlled New York. But the best way to lower rents is by encouraging people to build or offer more housing units. This isn't magic, but it's better than wishing that a voter initiative will fix things.

This column first appeared in the Orange County Register.

Photo Credit: Jonohey

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Telcontar the Wanderer||

    Like a rented mule!

  • The Iconoclast||

    Good luck talking sense into Californians. I hope it passes, teach the rest of the country something (except New York).

  • Rhywun||

    In NYC, rent regulation applies only to buildings with six or more units. So as bad as it is here, it's not as bad as CA already is (or at least SF).

  • CE||

    California was built on magical thinking. Let's head out to California and find gold and get rich! Let's buy bus tickets with our life's savings and go to Hollywood and be movie stars! Let's start making video games in our garage and dominate the tech world! And those things really happen for a few people, so they must have visualized them better.

    Now it's the new age hippies and the strangest secret and the Universe responding to your wished-for future because it must work that way.

  • Citizen X - #6||

    +1 vision board

  • mpercy||

    Economists are virtually unanimous in concluding that rent controls are destructive. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that "a ceiling on rents reduces the quantity and quality of housing available."

    Similarly, another study reported that more than 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."

    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."

    [http://www.econlib.org/library/Enc/ RentControl.html]

  • mpercy||

    That last line bears repeating:

    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."

  • Sevo||

    http://www.nytimes.com/2000/06.....ffair.html
    Krugman on rent control. Yes, that Kruman

  • CatoTheChipper||

    Wow! A sensible article by Krugman. Yes, that Krugman!

  • Get To Da Chippah||

    It's seventeen years old. He may have had a shred of sanity left back then.

  • ||

    That's Krugman 2000, not Krugman 2017

  • Jimbo||

    Can't wait for the Krugman2020 Model: Even more batshit insane!

  • JFree||

    And they are similarly unanimous in the other direction re a land value tax. Which would also solve the 'high rent' problem - not by trying to do the impossible (controlling the price of rent) but by doing the logical (govt gets the land/location rent, property owner gets the return on property capital).

    But when push comes to shove, it turns that only one thing is truly unanimous - everyone wants to be the rentier precisely because that's where economic power - untakeable by mere 'competition' - originates. So we will always choose the suboptimal because that's what gives us the only chance to be the economic leech.

  • Incomprehensible Bitching||

    Once housing is free, everyone will have it.

  • gaoxiaen||

    Gov't sucks., nuff said.

  • Citizen X - #6||

    More like "hold my chardonnay" though, right?

  • Longtobefree||

    It must be a craft beer that costs over $25.00 a class, then it's OK.

  • steve walsh||

    "Wishful thinking" is too kind a descriptor for this proposal that would greatly increase the very problems it purports to solve. "Fucking Idiotic" is better.

  • Sevo||

    I live in SF. If I look out my windows, front and rear, I can point to 16 former rental units which have been removed from the market since the implementation of R/C.
    Several (as mentioned in the article) are simply left vacant, since the owner has decided to lose the grief along with the income. Others are converted from multiple units to SFH, or condos/TICs. one next door is kept as a temporary rental unit.

  • CE||

    Let's say you sell cars and the government limits sales prices to below market rates. Profits would evaporate and there soon would be too few available cars to satisfy the demands of buyers.

    But houses aren't like cars! Houses are where people live! If you let landlords jack up rents, cities will lose their character and be overrun by boring Google employees and their private buses! Then they're won't be any colorful bums on the streets!

  • Sevo||

    'Then they're won't be any colorful bums *shitting* on the streets!'
    You left that out...

  • ||

    Times Square was better when it smelled like piss!

  • JFree||

    Houses AREN'T like cars - because land is not like capital

    That doesn't mean rent control works. It does mean that everyone who uses neoclassical/marginalist economic ideas to rationalize why it doesn't work is just spouting nonsense.

  • JFree||

    Just to state the obvious

    Even if you own a car, that doesn't give you any right at all to park it anywhere you want - or to drive it anywhere you want. So even with a car, much of its economic value arises NOT from its per se ownership but from its use of land

    As for the mixing of labor with land peeing on a tree in order to claim it as exclusive property for eternity - well that's so obviously stupid that one would have to be a Rothbardian to believe it.

  • Fuck you, Shikha (Nunya)||

    There is a huge psychological barrier that will never be crossed for a large swath of the population. The give me free stuff crowd and older folks will never acquiesce. For both it is a situation where because they live in an abode that abode must be theirs until the time they choose to exit, and that choosing cannot be cause of market pricing, taxation assessment, gentrification, or some combination thereof.

    This became very clear to me recently with my typically laissez faire parents. They have started to espouse the idea that the house they lived in for 40 years should not be subject to tax increases even though they've seen the price of the house triple in that period. They could move from their central suburban house to a more senior friendly area, but the emotional attachment has rendered the logical side of their brains paralyzed.

    Trying to discuss with them that the rising price should encourage them to leave so that younger families could gain the same leverage their family had fell flat. They did not care. The fact that their money from this house could buy them a better and cheaper house, but father from the city center, was of no consequence.

    I've had this same conversation over and over in my old neighborhood with the older folks that lived there. It's been said before, you can't have a reasoned argument with someone that has an emotional argument in return.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online