Mayors rehash false explanations for expensive housing
In March, I had an op-ed in the Star Tribune about the shortage of ‘affordable housing’ in the Twin Cities, in which I argued that: A price is not a…
Almost exactly a year ago, I wrote that Berlin’s rent controls had slowed house building in the city. To recap, the German capital’s population is growing rapidly which means that the demand for housing is also growing rapidly. Indeed, it is growing more rapidly than the supply of housing. The result, as any first year econ undergrad could tell you, is that housing prices are rising.
It is crucial to identify the actual problem here. It isn’t the high and rising prices. Rather, they are a symptom of the problem, a big flashing sign saying that ‘Demand is rising relative to supply’. That is the problem.
With the actual problem identified, the solution becomes obvious: expand supply. This could be done by cutting the taxes, fees, and regulations which effectively make it illegal to build affordable housing in many places, such as Minneapolis.
Sadly, policymakers frequently attempt to treat the symptom rather than the disease, either out of economic ignorance or political cowardice, by adopting ‘rent control’ measures. These try to dictate prices rather than tackling the supply and demand mismatches which drive them. In Berlin, as Andreas Kluth reports for Bloomberg:
A year ago, a rent cap took effect in the city that was unprecedented in Germany. For all apartments built before 2014, rents were frozen at whatever they were on Jun. 18, 2019. Tenants in those units can also force landlords to lower rents defined as “excessive.”
But, of course, prices are incentives and if you change the incentives you change the behavior – that is why policymakers hike ‘sin taxes’, after all. Berlin’s rent controls had already had the effect of slowing housing construction a year ago, exacerbating the problem they were intended to solve. A year in, further unintended consequences are becoming apparent:
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.
The following two charts show the relative trend of rents in these two segments when compared to the average growth in the 13 next-largest German cities. As expected, rents in Berlin’s regulated market plummeted in relative terms. But since the excess demand of apartment hunters had to go somewhere, rents in the unregulated market simultaneously started rising faster than in the 13 other cities. Newly built apartments have therefore become even more unaffordable for most people.
The next chart shows what happened to home prices in the two segments. Price changes in the regulated market dropped relative to those in the 13 other cities. That’s because real estate loses value if its future cash flows to landlords are capped. There was also an acceleration of apartments going up for sale, as landlords tried to cash out of their now less profitable investments.
Price increases in the unregulated market, meanwhile, outpaced those in the other cities, as expected. But the trend isn’t as clear in this segment, because investors worry that rent controls could be extended to younger buildings in future.
The most devastating charts are the next two. The first shows trends in listings of units for rent on immowelt.de, a German website. In the regulated market, the supply of apartments basically froze. Unsurprisingly, those tenants fortunate enough to already live in a rent-controlled flat are staying put. And whenever somebody does move out — when moving to another city, for example — the landlord tends to sell the unit rather than re-let it.
At the same time, listings in the unregulated market increased only marginally faster than in other cities. Tenants in those apartments are also discouraged from moving — after all, where to? — and anyway the supply of fresh housing is still constrained by construction schedules.
These data confirm what economists had warned about — and what’s been observed in other cities that dabbled in rent controls, such as San Francisco or Cambridge, Massachusetts. The caps represent a windfall to one group of tenants: those, whether rich or poor, who are already ensconced in regulated apartments. Simultaneously, they hurt all other groups — especially young people and those coming from other cities — by all but shutting them out of the market.
This totally predictable, avoidable fiasco “came courtesy of the city state’s “red-green-red” governing coalition between the three left-leaning blocs in the German political spectrum: the Social Democrats, the Greens and the Left (which descends largely from the communist party of the former East Germany),” Kluth writes:
That heritage seemed to set the tone of the campaign that preceded the legislation. At times it descended into a competition between the coalition partners about who could play the most demagogic class warrior, rhetorically pitting pitchfork-wielding tenants against let-them-eat-cake landlords. It’s probably no coincidence that there’s even a separate grassroots effort for a ballot initiative to expropriate large property-owning companies.
As Minneapolis’ city council begins to push for rent controls there, it all has a grimly familiar ring to it.
John Phelan is an economist at the Center of the American Experiment.