Evidence from San Francisco shows that rent control makes income inequality worse
The shortage of affordable housing in the Twin Cities is one of the big public policy issues there. As I’ve written, prices are not problems in themselves, they are signals, telling you of underlying problems of supply and demand. To lower prices we need to tackle the imbalance of supply and demand and that means building more low cost housing.
Some people, though, get confused, and propose to treat the symptom rather than the illness. That is what rent controls do. They do not conjure more housing into being, they just make it illegal for the price of what housing there is to rise above a certain level. Indeed, by holding prices down by law, they increase the demand for the housing stock. And, as lower prices encourage demand, they also discourage supply, exacerbating the very problem they are intended to solve. This is why, as the economist Assar Lindbeck put it, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
A recent paper by economists Rebecca Diamond, Timothy McQuade, and Franklin Qian titled ‘The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco‘ illustrates this process in action. They find that
landlords of properties impacted by the law change respond over the long term by substituting to other types of real estate, in particular by converting to condos and redeveloping buildings so as to exempt them from rent control. This substitution toward owner occupied and high-end new construction rental housing likely fueled the gentrification of San Francisco, as these types of properties cater to higher income individuals. Indeed, the combination of more gentrification and helping rent controlled tenants remain in San Francisco has led to a higher level of income inequality in the city overall.
Surely, when San Francisco’s politicians passed these rent control laws they didn’t intend to increase income inequality in the city. But that is what happened. Once again, we see that the majority of the consequences of any action are unintended ones. And we have another reminder of the truth of Milton Friedman‘s old saying: “One of the great mistakes is to judge policies and programs by their intentions rather than their results”
John Phelan is an economist at the Center of the American Experiment.