What effect do they have on renters? Landlords? Are there examples of rent control working, improving living conditions for renters?
I.e. What are the main arguments for/against rent control (purely economic, not emotional or moral).
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4 Answers
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Well, rent control is the classic example used in many economics textbooks when talking about price ceilings. A price ceiling is a maximum price one can pay for a good, and is set by a governing body. There are many cons to price ceilings and not many pros.
$\textbf{Pros:}$
1) Because tenants of the property know that apartments are in short supply, they will have an incentive to take good care of the place in order to stay on the renter's good side because they may not be able to get another apartment if they get kicked out of this one.
2) Tenants who get apartments will have lower rent costs and will therefore be able to spend/save more of their money. If they choose to spend it, that can boost the local economy because more money will be spent in local businesses.
$\textbf{Cons:}$
The graph above depicts a binding rent control. By this, I mean that the rent controlled price is below the equilibrium price. In this example, the rent controlled price is $1,000$ and the equilibrium price is $1,500$. What this causes is a shortage of apartments. Looking at this graph, we can see that at the price of $1,000$, $Q_D=2,100,000$ and $Q_S=1,900,000$. Using this, we can see that the shortage will be: $$Q_D-Q_S=2,100,000-1,900,000=200,000\;apartments$$
What this means in words is that there are more people who want apartments than there are people who are willing to supply apartments. What might be the side effects of this?
1) Rationing: There are a couple of ways rationing may occur, but in the market for apartments the only way which makes sense is rationing through discrimination by sellers biases. What this means is that the renter may give the apartment to someone who doesn't value it as much as another person based on their biases.
2) Illegal activities: One thing which may occur due to rent control is under-the-table deals. Basically, people may pay the seller some money under the table to ensure that they get an apartment.
3) Homelessness or relocation: We need to look at what we mean by the quantity of apartments demanded is greater than the quantity of apartments supplied. What this means is that people who want/need to buy apartments will not be able to (in our example 200,000 people at least). What are the two outcomes of this? The first outcome would be homelessness because people cannot get apartments, and they may have nowhere else to go. The reason why this is not desirable is pretty obvious (we don't want people to have to live on the streets). The second outcome would be relocation of current residents. What this means is that people will need to move out of the area. This will hurt the local economy because less people will be spending their money in local businesses.
One last thing to keep in mind is that over time this shortage will get worse. In the short run, the sellers may not be able to take the apartment off the market. However, in the long run, sellers may decide to sell the apartment complex, which will cause the supply of apartments to decrease even more. This will exacerbate the problems I listed above.
$\textbf{Edit:}$ Another problem caused by rent controls was mentioned (quite astutely) by $\textbf{AdamBailey}$. He pointed out that landlords may not make enough money to maintain his or her rental properties, and over time the quality of such rental properties may depreciate drastically. This shows that, not only will the quantity of apartments decrease, but the quality may decrease as well. This is another perfect example of how rent controls can hurt those that it is trying to help.
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1$\begingroup$ Selling an apartment complex merely transfers ownership, it doesn't necessarily take it off the market. Did you perhaps mean they'll sell to owner-occupiers? $\endgroup$– 410 goneCommented Mar 31, 2016 at 9:14
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$\begingroup$ If they sell it because it is not profitable, the buyers would know that and would use it for something else such as an office building $\endgroup$– DornerACommented Mar 31, 2016 at 11:03
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1$\begingroup$ +1 Where landlords are responsible for repairs and maintenance, a further disadvantage of rent control is that landlords may be unable to afford to maintain properties while obtaining a reasonable return on investment, leading in the long run to a deterioration in the quality of rented properties. $\endgroup$ Commented Apr 1, 2016 at 12:28
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$\begingroup$ @AdamBailey that is an excellent point. I'll add that to my answer (crediting you of course) when I have a little more time! $\endgroup$– DornerACommented Apr 1, 2016 at 13:42
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1$\begingroup$ The last point might not necessarily be a con - if you assume that the purpose of the rent control is to make more apartments available, it doesn't matter if they are cheaper. A property developer could ask "So you're saying you want us to make lots of cheap shitty apartments instead of big luxurious ones?" and the city might say "yes, that's the point actually." $\endgroup$ Commented Jan 8, 2020 at 12:50
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There is a new paper forthcoming in the American Economic Review by Rebecca Diamond, Tim McQuade, & Franklin Qian on The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco
They exploit quasi-experimental variation in assignment of rent control to study its impacts on tenants, landlords, and the overall rental market. Leveraging new data tracking individuals' migration, they find
- rent control increased renters' probabilities of staying at their addresses by nearly 20%.
- Landlords treated by rent control reduced rental housing supply by 15%, causing a 5.1% city-wide rent increase.
Using a dynamic, neighborhood choice model, they find rent control offered large benefits to covered tenants. Welfare losses from decreased housing supply could be mitigated if insurance against rent increases were provided as government social insurance, instead of a regulated landlord mandate.
Chek out also a nice freakonomics podcast on Why Rent Control Doesn't Work.
answered Apr 7, 2019 at 21:47
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1$\begingroup$ the freakonomics podcast is awesome! $\endgroup$ Commented Apr 9, 2019 at 9:04
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From a market perspective, rather than socio-economic, rent control puts at risk debt vs. Interest rates. When rates don't move, rent control is fine. When rates move up, debt becomes expensive and it puts at risk funding capabilities of landlords and with that creates a negative impact on lenders' balance sheet.
If rates go down, landlords will be raking it...
Rent control makes sense in a (relatively) static environment not fuelled by borrowing. It would also make sense in an environment where properties are not an asset class.
If you find such an environment, let me know (Germany is close).
BTW, the above is also a good example why governments should not lend money to home owners as this artificially hikes prices and the money goes to the shareholders not the Joe public...public ends up with an unaffordable debt...sounds familiar?
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This question already has an accepted answer, which addresses the economic drawbacks of rent control quite well. I did want to contribute one additional aspect that hasn't really been addressed: Rent control can be viewed as a form of (limited) compensation to residents/tenants, for their contribution to making their neighborhoods desirable places to live (and thus driving up property values.) This is especially clear in the case of commercial tenants (a popular restaurant nearby is certainly a boost to local property values) but also holds true for residential tenants. Part of the process of gentrification is that (typically) younger, hipper bohemian types move into a formerly low-rent neighborhood, and in virtue of their mere presence (and those of the businesses they frequent/establish/work at) they make the neighborhood more desirable. While difficult to quantify, there is nonetheless real value being created, and in a fair market those tenants would receive some form of compensation.
