Everything Wrong with Rent Control

Shortage – At its core, rent control creates a shortage for rental housing, by setting a price ceiling. The quantity demanded exceeds the quantity supplied.

Lack of upkeep – With lower, capped revenues and with tenants who are desperate to keep their rent-controlled units, landlords have less incentive to maintain their properties. Under rent control, apartments often fall into disrepair and even become dangerous.

Lack of new buildings – Rent control disincentivizes the construction of new rental housing. If the profitability of a new development is in question due to rent control, the developers won’t build it.

Misallocation – Ideally, an apartment goes to the person who will gain the most use out of it, measured by their willingness to pay, but with rent control, apartments often go to people who value them less. Once somebody locks in their rent-controlled unit, they have little incentive to ever give it up. This misallocation appears in a few different forms.

Rent-controlled vacation homes – People may own one or more rent-controlled apartments that they only stay in for part of the year, or even just to hold for visiting family and friends.

Apartments that are too large or small – Often empty nesters will hold onto a large rent-controlled apartment that has far more space than they need. At the same time, other will cram into a rent-controlled apartment like sardines, when they would do better with a larger apartment.

Keeping people in the wrong area – People may remain in neighborhoods they don’t like, or live far from their jobs, just to keep their rent-controlled unit.

Not directed to the poor – Rent control is often done in large swaths over whole buildings, neighborhoods, or cities. There is no guaranteeing the policy will benefit the poor and not the rich.

Ends up benefitting the rich – If you live in NYC and are paying $400 in rent instead of $4000, you will soon be rich. Many people who were poor when their unit was rent-controlled are now wealthy. In the long-run, you’ll find that rent control overwhelmingly benefits the rich.

Low vacancy rate – As few people want to leave their rent-controlled apartments, there is a low vacancy rate and very little turnover. This makes it harder for people to move into the city, with fewer options on the market, further driving up prices.

Buying and renting prices rise due to shortage – With fewer rental apartments built and fewer on the market, people look to alternatives, so demand increases for condos, homes, and non-controlled rental housing, driving up prices. In essence, rent-control the rest of the housing stock more expensive.

Unable to live in cities – By restricting supply and driving up prices, rent-control prevents people from moving to cities. Cities have higher productivity than rural or suburban areas, and they are also greener, with lower emissions. Keeping people out of cities is bad for the economy and the environment.

Incentive to convert to condos/commercial – Landlords have an incentive to convert their units into condos or commercial space to be free of rent-control. This further lowers supply in the rental market.

Incentive to make tenants miserable – Landlords are sometimes permitted to put a vacated rent-controlled unit back on the market with a higher rent, or convert the unit to a condo. This creates an incentive for the landlord to make their tenants so unhappy that they voluntarily leave. Often there are further regulations required to prevent these incentives, but if they do exist, quality of life as a rent-controlled tenant can become very poor.

Landlords discriminate – If 10 people want a rent-controlled unit, but they can’t bid up the price, the landlord is left to pick among the 10. They are more likely to choose those without kids or pets, and if they have a prejudice against a certain group, that is likely to come into play. They pay no cost for their discrimination.

Longer waiting and searching costs – With fewer properties on the market people spend a longer time searching and waiting for an available unit. This is especially true for those who are specifically looking for a rent-controlled unit. Since rent-controlled apartments rarely come on the market, far more searching and networking is required.

Criminalizing mutually beneficial transactions with no externalities – Under rent control, there is a strong incentive for both the landlord and the tenant to raise the rent. The landlord wants more money coming in, and the tenant may be willing to pay a higher rent if it ensures they get the apartment and the unit is well-maintained. Rent control prohibits landlords and tenants from cooperating in their mutual interest.

Black market – When a mutually beneficial transaction is outlawed, it often turns to the black market. Rent control incentivizes landlords and tenants to form under-the-table transactions, such as a large upfront fee known as key money. These black-market transactions themselves are beneficial and erode the effectiveness of rent-control. The problem is the government oversight, which is often enough to deter landlords and tenants engaging in black market activities.

Subletting – Subletting itself isn’t the problem. The problem is two layers of landlords. Under market conditions, there are occasionally instances in which subletting may make sense. Under rent control, subletting becomes very profitable. While this leaves fewer units vacant which is good, it also creates two layers of landlords which increases transaction costs.

Homelessness – With fewer units available and higher prices, homelessness increases, hurting both the homeless themselves, and the rest of the city’s residents. It is hard to overstate how much homelessness can ruin every aspect of city life.

Underwork and overwork – Those with a rent-controlled apartment may have incentive to lower their productivity. If their rent is only $400 a month, they may choose to work fewer hours, take more vacations, or work at an easier job. Simultaneously, those who hope to afford inflated market rate prices often need to overwork themselves. This seems unjust.

Government administration costs – Oversight to ensure compliance with rent control regulations is costly. Taxpayers must pay to fund a policy that makes housing affordability significantly worse. Scarce labor is wasted in the form of bureaucrats who oversee a policy that destroys wealth.

Litigation Costs – There are costs to prosecuting rent control violations. Prosecutions squander scarce legal resources and the wealth and time of litigants.

Lower property tax base – Lower market values for rent-controlled buildings and a housing shortage results in a lower tax base for the municipality. This results in some combination of higher property tax rates and worse city services.

More vacant units due to unprofitability – Landlords may choose to leave some rent-controlled units vacant because it may not be profitable to rent them out, worsening the rental housing shortage.

Eroding property rights – Our wealth is built on property rights. Rent control is an erosion of property rights. This establishes a precedent for future expropriation, creating uncertainty, and making people reluctant to undertake long term investments.

Trapping rent-controlled tenants – Tenants of rent-controlled apartments are trapped. They face the choice of either putting up with the low quality of life in their rent-controlled unit or paying ten times their current rent to live anywhere else.

I hope I have convinced you that rent control is a terrible policy. It is awful for landlords, has costly side-effects for those it purports to benefit, and harms everybody else in society.

What is the alternative?

Let’s overview the market for rental housing. Renters want a place to live, landlords want tenants so they can receive rent. The two parties can make a mutually beneficial transaction. There are large costs to a tenant leaving: lost rent during the vacancy, cleaning, advertisement, and paperwork, so most landlords want to keep most tenants. Prices are dictated by supply and demand. If there is a large demand for apartments, rents will rise, at which point it becomes profitable to build more buildings, until prices fall again. The market works!

Unfortunately, due to housing regulation, the market doesn’t function properly, because supply is artificially restricted. Rent control takes that existing problem and makes it even worse. To solve housing shortage, we must first deregulate the housing market, so supply can increase. And if the poor still need help, we can give them cash or vouchers to help them afford their rent. It solves the problem, without all the terrible effects listed above. It’s really very simple.

When should rent control be used?

Never! If somebody says the words “rent control,” and the words immediately following aren’t “should be abolished”, please politely offer them an economics textbook.