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Rent prices had soared in recent years, the product of surging housing demand and constrained supply . This was a problem for Berliners, a city proud of being “grungy and affordable .” (It should be noted, however, that rental prices in Berlin remain modest compared to the most expensive cities in the world and are about 50 percent lower than New York .)
What Was the Solution? “The right answer to that [Berlin] shortage would be to increase supply — for instance, by cutting red tape in zoning and construction,” wrote Andreas Kluth, who has covered Berlin’s housing issues for Bloomberg . Instead, Berlin opted for rent control, a policy Swedish economist Assar Lindbeck once observed is the single most effective way to destroy a city “except for bombing .” (Though some have noted that rent control destroyed Hanoi more effectively than U .S . bombs .)
Well, a year later, and the results of Berlin’s experiment are in . “After a year, Berlin’s experiment with rent control is a failure,” The Economist declared Tuesday . “Rents may be down, but so is the supply of homes .” In fact, as Bloomberg puts it, if you’re looking for a place to live, “good luck finding a flat .” Housing supply has shrunk and many landlords have reportedly exited the market, making the shortage much worse .
“The number of classified ads for rentals has fallen by more than half,” The Economist explains . “Tenants, naturally enough, stick to their rent-capped apartments like glue . Landlords use flats for themselves, sell them or simply keep them empty in the hope that the court will nix the new regulation .”
But there’s more to the story . Kluth points out that by exempting some units from its rent cap, Berlin (rather predictably) essentially created two housing markets . “Unsurprisingly, the rent controls have split housing in Berlin into two distinct markets: the much larger one, consisting of all apartments built before 2014, which is now regulated; and the smaller unregulated one of relatively new buildings .”
Citing new research from four economists at Munich’s Ifo Institute, Kluth shows rent prices have surged in the unregulated market, rising faster than the average growth in the 13 next-largest German cities . “Newly built apartments have therefore become even more unaffordable for most people,” Kluth observes .
A HISTORY OF FAILURE
Hearing Theresa Dolata express fear about being homeless again because she is struggling to pay rent is impactful . It is natural and human to want to do something to help people who are struggling . But it is important to offer solutions that are constructive, not
destructive .
A constructive solution to a housing shortage is simple: more supply . Building more housing will increase the supply of units, lowering costs . It is the most obvious solution in the world and constructive in a literal sense . You are building something .
Rent control is a destructive policy . In his book Basic Economics, economist Thomas Sowell spends entire chapters documenting the failures of rent control policies around the world, from Australia and Sweden to New York and San Francisco . We have decades of research showing rent control makes housing shortages worse, which explains why there’s near-universal opposition to rent control policies among economists .
Why wasn’t a single housing unit built in Melbourne in the nine years after World War II? Because rent control laws had made the buildings unprofitable . Why did Washington, DC, see its available rental housing stock decline from 199,000 to less than 176,000 in the 1970s? Because fewer people were willing to rent to their homes because of price controls . Why did building permits decline by 90 percent in Santa Monica, California, in 1979 from just a few years earlier? Again, because rent control laws had made the building of new units unprofitable .
The lesson? Rent control has effects on housing supply, and those effects are not good . And that is only half the equation . Rent control also has adverse effects on the demand for housing . Because properties are priced below market rates, people tend to consume more than they otherwise would . In some cases, Sowell points out, this has resulted in housing shortages in the absence of actual scarcity, such as Sweden in the 1950s, which saw the average wait time for a place to live reach 40 months even though Sweden was building more housing per person than any nation in the world .
“As of 1948, there were about 2,400 people on waiting lists for housing in Sweden, but a dozen years later, the waiting list had grown to ten times as many people despite a frantic building of more housing,” Sowell writes . “When eventually rent control laws were repealed in Sweden, a housing surplus suddenly developed, as rents rose and people curtailed their use of housing as a result .”
The evidence is overwhelming . Rent control laws are destructive . We have decades and decades of research that shows that it makes housing shortages worse, which explains why there’s near-universal opposition to rent control policies among economists . Nevertheless, the perils of rent control seem to be a lesson we may have to relearn . Bad ideas, like old habits, die hard .
AMM7 APARTMENT MANAGEMENT MAGAZINE - AUGUST 2021 39