Minnesota’s Economic News — W/E 10/15/21
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‘Are rent controls the solution to the affordable housing shortage?‘ asked MPR’s Martin Moylan last week. No, they’re not.
High prices aren’t problems, they’re symptoms of problems
That is the short answer. The long answer, as I wrote a while ago, is that the policy of rent control mistakes the symptom for the illness.
When prices are high they are sending you information. They are telling you that demand is high relative to supply. If you want to do something about this, act to either reduce demand or increase supply. Either way, trying to fiddle with the signal makes no more sense then trying to slow down your car by breaking the speedometer.
Economists recognize this. They also recognize, in this area at least, that if you cap the price below the market rate all you do is increase demand relative to supply, exactly the situation you wanted to avoid.
Figure 1 illustrates this. The market clearing price – where supply meets demand – is $600. At that price, 300 homes are both supplied and demanded. But when the price is capped at $400, more buyers come into the market and demand rises to 400 homes. At the same time, suppliers find it less worthwhile to supply housing and so supply falls to 200 homes. Sure, prices are lower (excepting all the additional fees), but there are fewer units to buy. There is no solution to ‘unaffordable housing’ that doesn’t involve either shifting the supply curve to the right or the demand curve to the left.
This isn’t just theory. In the post-war period rent controls were in operation in many American cities. By reducing the return to landlords it made sense for them to let their proporties go to rack and ruin. This was a major source of ‘urban blight’. 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.”
So strong is the evidence for this that we have that rarest of things – a consensus among economists. In 2012, economists were polled with the following question;
Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.
81% of them disagreed.
If consensus is how you do your science, ‘rent control’ is a dead duck.
John Phelan is an economist at the Center of the American Experiment.