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In order to relieve housing insecurity for people with less money, we need to expand the supply of housing: more housing of all kinds in all neighborhoods for people of all levels of income. The evidence is clear: enabling the private sector to produce as much housing in as many places as possible creates both more competition and innovation. That competition and innovation, in turn, improves quality, expands choice, and lowers costs.
INTRODUCTION
As local governments in growing metropolitan areas increase rules and regulations that limit housing production, housing prices increase.1 Among the responses these local governments consider is controlling housing prices by legislative fiat. Rent control policies promise consumers frustrated with rising prices an end to inflation. Central to this promise of rent control is the assertion that supply of housing has no effect on or relationship with its price; rent control advocates reject the basic economic principle that price is a quantitative measure of supply and demand.2 Instead these advocates view price arbitrarily set by people who develop and manage rental property.3 Rent control is a form of price control that attempts to solve inflation through legislation rather than increases in production.
WHAT IS HOUSING INFLATION?
“Inflation is caused by too much money chasing after too few goods.” This definition is a good and efficient one. But for most people, inflation is simpler still: “Prices that are too high.” When it comes to housing, we could revise the definition to: “Housing inflation is caused by too many people chasing too few units of housing.” When five people want an apartment, and each makes an offer of tenancy, the person who can bid up the monthly rent will eventually “win” that apartment. People with less money will walk away and be forced to try again.
Stiff competition for rental housing between people who need it happens when demand outpaces production. When such a state exists, average prices rise as potential and existing tenants have to compete with each other for a scarce resource, housing. As demand for housing rises, more and more people who earn less money are “priced out.” This is how housing inflation works in growing cities, favoring people who earn more over those who earn less.
A HISTORY OF PRICE CONTROLS
A rational and reasonable person considering inflation
and its obvious impacts on people with less money might conclude that the government should simply set or control prices, limiting the amount that sellers could ask. This idea has been around as long as people have. Hammurabi’s Code (c. 1792 — c. 1750 BCE), one of the earliest known legal documents, literally written in stone, had very specific price controls (law 272,“If any one hire a cart alone, he shall pay forty ka of corn per day). About 2,000 years later, the Roman Emperor issued an “Edict on Maximum Prices” which set very specific prices (best quality olive oil 30 cents) for goods and services to stop the “avarice that swells and grows with fierce flame” among merchants. What was the penalty for violating the edict? Death! But it was universally violated.
As recently as the 1970s the United States attempted a series of price and wage controls to tame rising prices. Like all the efforts before, the controls failed, creating widespread shortages of basic items and food. So why do politicians keep proposing orders and laws to halt prices by fiat? It’s good politics and it seems to provide the fastest and most compassionate solution. However, the evidence from the last 4,000 years shows us that efforts to control prices have the opposite effect: they discourage production, cause hoarding, and result in rationing of goods. Most importantly, price controls don’t stop rising prices since scarce items still command high prices in uncontrolled black markets, and when those items do become available at the set price, their limited supply means that few people will ever get the item at lower cost.
THE HISTORY OF RENT CONTROL
An older but still very useful history of rent control by John W. Willis, Short History of Rent Control Laws, shows that rent control is as old as other price controls or at least as old as the Roman Empire. Willis makes the case that throughout history war and disaster played a role in housing inflation that led to governments attempting to control housing prices. Often this was due to loss of income by tenants resulting in an inability to pay, but in every case looked at by Willis across Europe and Asia, it was scarcity of housing and the inelasticity of housing that drives the disequilibrium between supply and demand.
Rent is an inflexible charge. If it goes up, the tenant has little choice but to pay more or to move to a less expensive lodging, and in times of housing shortages the latter alternative is an illusory one.
And for landlords facing rent control the complaint then was familiar as the one we hear today.
APARTMENT MANAGEMENT MAGAZINE - APRIL 2022 CS-13