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Rent Control Part 1: Microeconomics Lesson & Hoarding

May 21, 2008 By Adam Hengels

This post has been released as the first in a four part series:
Rent Control Part One: Microeconomics Lesson and Hoarding
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict
Rent Control Part Four: Conclusion and Solutions

Opposition to rent control among economists spans the political spectrum, including over 90% of American and Canadian economists.  In fact, Swedish socialist Economist Assar Lindbeck famously said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing it.” (Assar Lindbeck, The Political Economy of the New Left, New York, Harper and Row, 1972, p. 39)

Without getting into the morality of restrictions on property rights, I will discuss the more subtle consequences of rent control over a series of posts.

Quick Microeconomics Lesson:

As stated by the National Multi Housing Council:

Rents serve two functions essential to the efficient operation of housing markets:

  • they compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers; and
  • they provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock. In this respect, housing is no different from other commodities, such as food and clothing — the amount producers supply is directly related to the prevailing market price.

Those of us who have studied microeconomics understand the near-universally accepted supply/demand consequence of rent-control: a decrease in the quality and supply of rental housing over time. But, for those who need a refresher or quick intro lesson, Professor Alex Tabarrok of George Mason University and the popular Marginal Revolution blog explains the microeconomics of rent control in this video:

When you have some spare time, watch this more in-depth lecture on price controls. (windows media) The first 45 min of the [1:25:30] is dedicated to rent control. Includes segments on how a landlord became a “serf” to his tenants, “Bomb Damage or Rent Control?”, and celebrity beneficiaries of rent control.

93% of economists agree that rent control reduces the supply and quality of affordable market housing as the videos explain. But that’s not all! The burdens of rent control only increase exponentially the longer they are in place. Let’s look at some of the more subtle aspects of rent control:

Hoarding:

Just as price controls on gas in the ’70s caused long lines and hoarding of gas, the same thing happens with housing. The tenants of rent-controlled units are not stupid. They know that the supply is limited and will become more limited in the future. They know that if they stay put, they’ll be able to pay about the same rent forever, in real terms. They know that if they were to look for another apartment, and they were fortunate enough to find one, the rent would be significantly greater than what they pay where they are.

So, they don’t move. Ever. Well, almost never. Even if their family grows or shrinks. The incentive to stay is just too great, and the wealthy and well-connected are better equipped to take advantage of the situation.  As Peter Salinas and Gerard Mildner wrote in Scarcity by Design: The Legacy of New York City’s Housing Policies:

To begin with, to earn the maximum benefits from New York’s rent regulations, it helps to occupy an apartment for a long time (because landlords are permitted to raise rents more than usual when an apartment is vacant). Affluent professionals have greater job stability and can, in any case, manage to fake their continued occupancy (in order to sublet) when they must move. Also, influence or good connections are helpful in the search for a desirable rent-regulated apartment.

When rent-controlled apartments become available, family and friends often know about it first and rent up the apartment immediately, knowing that rent-controlled apartments are so hard to come by and the opportunity to rent other vacant apartments may not come for some time.

Of course, this hoarding by existing and new tenants worsens the problems, because those who are shopping for apartments have very few, if any to choose from. The longer this goes on, availability declines further and the incentives to hoard grow exponentially, as do the negative effects.

rent control long-term

In fact, one study found that rent control tripled the expected duration of residence in New York City.

The ones who suffer the worst are those who are trying to relocate to the area for job opportunities as vacancies become more rare.

Continue on to Rent Control Part 2: Black Market, Deterioration and Discrimination To make sure you don’t miss future parts, subscribe to the feed or sign up to receive posts in your email.

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Filed Under: Economics, rent control, video Tagged With: Alex Tabarrok, Assar Lindbeck, bombing, California, Economics, Free-market, housing, landlord, microeconomics, nyc, Professor Richard McKenzie, proposition 98, rent, rent control, rent stabilization, rent-regulated, San Francisco, tenant, video

About Adam Hengels

Adam is passionate about urbanism, and founded this site in 2007, after realizing that classical liberals and urbanists actually share many objectives, despite being at odds in many spheres of the intellectual discussion. His mission is to improve the urban experience, and overcome obstacles that prevent aspiring city dwellers from living where they want. http://www.marketurbanism.com/adam-hengels/

Comments

  1. Michael Ejercito says

    May 24, 2008 at 1:25 am

    Rent control is politically popular.

    The best way to end it is to phase it out gradually, by only ending rent control for future rental units. this will increase incentives to build new housing units while not increasing incentives from current renters to oppose the legislation.

  2. Michael Ejercito says

    May 24, 2008 at 1:25 am

    Rent control is politically popular.

    The best way to end it is to phase it out gradually, by only ending rent control for future rental units. this will increase incentives to build new housing units while not increasing incentives from current renters to oppose the legislation.

  3. MarketUrbanism says

    May 24, 2008 at 1:39 am

    It is popular, but a better educated public can help change that.

    I think phasing it out over a long period would be feasible.

    Thanks for the comment! I addressed some solutions in the final post of the series.

  4. Market Urbanism says

    May 24, 2008 at 1:39 am

    It is popular, but a better educated public can help change that.

    I think phasing it out of a long period would be feasible.

    Thanks for the comment! I addressed some solutions in the final post of the series.

  5. Randall Scott says

    June 15, 2009 at 2:05 am

    Just end it within one year, and let the tenant sign another lease or not, based upon the market price.

    Unintended consequences:
    Housing shortage
    Higher housing prices
    Lower quality housing
    Longer commutes

  6. MarketUrbanism says

    June 15, 2009 at 3:29 am

    test6/13

  7. mola4everyourz says

    September 24, 2009 at 9:24 am

    Renting is a good choice if you're on a trip to a foreign country or to a greater distance and you hate driving all the way there. I believe (although prices are fluctuating) that you shouldn't need that much money to rent a car or masini de inchiriat but it really depends on what you want to drive. You can't rent a mercedes for 20 $ a day that's for sure but i don't get people who are renting a car for 6 months when they can buy it :))

  8. Car Hire says

    November 25, 2010 at 9:16 am

    You got a really useful blog I have been here reading for about an hour. I am a new and your success is very much an inspiration for me.

  9. Inchirieri Auto says

    November 25, 2010 at 9:19 am

    The best way to end it is to phase it out gradually, by only ending rent control for future rental units. this will increase incentives to build new housing units while not increasing incentives from current renters to oppose the legislation.

  10. Medicaid Doctors says

    January 12, 2011 at 4:46 pm

    Thanks for information, I’ll always keep updated here!

  11. Anonymous says

    January 29, 2011 at 11:29 pm

    rent control tripled the expected duration of residence in New York City: That’s pretty much the main article FOR rent control– that it results in long-term residents, more community, etc. Rapid turnover may be good for maximum efficiency, but not so much for neighborhoods.

    (not that I deny the downsides)

  12. jaseins says

    July 6, 2015 at 6:31 am

    I’m a native of the San Francisco Bay Area. Generation X. A majority of my peers are gone, unable to afford the modest million-dollar homes we grew up in. Especially if we have children, staying home has not been viable for the majority. Those are your complacent, hoarding ne’er-do-wells. Alas, this is about the related area of home ownership. Without rent control we’re subject to the same huge market run-up in rents as home prices. Of course, we don’t deserve to remain in the communities we’ve defined. Our homes should go to someone with an H-1B visa.

    San Francisco itself is being gentrified *in spite* of rent control.

    I support it affluent communities. Landlords will still have their capital appreciation, while the land shall glisten with market stability.

  13. jaseins says

    July 6, 2015 at 6:35 am

    It’s more like a thorough indoctrination I’ve learned to reject.

  14. jaseins says

    July 6, 2015 at 6:37 am

    It’s intelligent to see both sides. The ‘market efficiency’ argument generally regards people as an afterthought.

Trackbacks

  1. The Politics and Money Carnival - Edition 6 says:
    June 3, 2008 at 2:51 pm

    […] presents 4 Part Series on Rent Control posted at Market Urbanism. Tags: carnivalShare This Related StoriesThe Politics and Money […]

  2. Could NY Democrats Revive Rent Control? | Market Urbanism says:
    November 6, 2008 at 5:36 pm

    […] Maybe our wise legislators will take the time to learn about the microeconomics of rent control… […]

  3. Market Urbanism | elmplus says:
    December 4, 2010 at 3:57 pm

    […] [Image: Graphs illustrating hoarding as a consequence of rent control. Courtesy of Market Urbanism.] […]

  4. Gentrification in Reverse says:
    January 27, 2015 at 1:39 pm

    […] fix at best; in the longer term, its effects are negative. By reducing supply, it tends to actually drive up the cost of housing. And in the face of price controls, landlords may seek to exit the rental market entirely, further […]

  5. Rent Control in NYC – writingportfolio says:
    May 30, 2016 at 9:54 pm

    […] control, there are serious drawbacks. The biggest drawback is that it increases the incentive to hoard. When a tenant knows that a unit will be deregulated when he moves out, he will try to stay as long […]

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