Shortages Under Rent Control – The New Evidence
What happens to price and availability of unregulated housing in a rent-controlled market? To determine this, this author collected data on all the available apartments advertised in eighteen major cities around North America. The advertised prices were taken from a single Sunday edition of the largest paper in each city during the month of April 1997. The advertised price of every listed apartment was recorded. (Three newspapers were used for New York.)
Rental houses were also included. Some older urban areas –Chicago, Cleveland, New York and Philadelphia have very few rental houses, while in the Sunbelt cities such as Dallas, Houston, Phoenix and San Diego, they make up a large portion of the rental market. To make sure this regional phenomenon was not distorting the figures, rental houses were omitted in two cities, Atlanta and Phoenix. Six of the surveyed cities have rent control –Los Angeles, New York, San Francisco, San Jose, Toronto and Washington. In addition, Boston ended rent control in January of 1997. The median rent shown is based on the 1990 U.S. Census. The most striking observations that the graphs of rents in free-market cities follow a standard bell curve. The vast majority of advertised rents cluster around the median, with between 33% and 40% below the census median. The median advertised rent is rarely more than $50 above census median. This may be because the very cheapest apartments are not likely to be advertised in the newspaper and because landlords often raise rents when apartments become vacant. The mode – the number where the graph peaks – usually occurs below both medians. Characteristically, there is a steep climb on the low-rent side of the curve, followed by a long tail toward the “luxury” end of the market.
[1997 Prices] – It is also striking how affordable housing is in most free-market cities. In Philadelphia, the nation’s fifth largest city, the most common advertised rent, (the mode) is between $450 and $500 – below both the advertised and census medians. In Chicago, the mode was $500 to $550, also below both medians. Unregulated cities such as Philadelphia, Chicago, San Diego, Phoenix and Seattle seem to have almost perfectly competitive housing markets, with housing available at every price level but clustered at the low end. The two cities with strict rent control are glaring exceptions to this pattern. In both New York and San Francisco, advertised rents peaked at $2,000 – more than triple the U.S. Census median rent for each city. The median advertised rent in New York was $1,350 and in San Francisco, $1,400 – both more than double the census median. More important, there were almost no rental units available at the low end of the market. In both San Francisco and New York, less than 10 percent of advertised rents were below the census median. (The New York figures also included listings from the Daily News and the New York Post, which are slanted toward the lower end of the market.) Rent control in both these cities appears to make housing spectacularly unaffordable.
[Prices Have Changed Since 1997] – San Jose and Boston both show strong symptoms of the rent control disease. San Jose rents peak at $1,500 with rents pushed more toward the expensive end. Boston shows the usual “median hump”, but displays overtones of the rent-control effect at the upper end. Los Angeles, Washington and Toronto – all of which practice milder forms of rent control than New York and San Francisco, show little or no signs of the rent control effect. What is going on in these markets? The explanation seems fairly straightforward. Rent control splits the housing market into two sectors – the regulated segment and the shadow market. As prices in the regulated sector are forced lower, prices in the shadow market go higher. At a certain point, the differential between the two markets becomes so stark that tenants in the regulated sector begin hoarding their apartments. They hardly ever move. In New York, 88 percent of the 2,800 listings in the New York Times, Daily News and New York Post were identified or identifiable as rent-regulated.
With the regulated portion market locked away, all new demand is funneled into the unregulated sector – the shadow market. Eventually, the competition for these limited number of apartments creates highly inflated prices. It is like squeezing a balloon at one end – the pressure will simply create a bulge at the other end.
Burdens on Newcomers
One thing that makes rent control more palatable to the majority is that the brunt of these excessive costs is usually borne by newcomers. People moving to New York or San Francisco assumed that housing is very expensive. They may get discouraged and leave. New York has lost 200 of its 250 national corporate headquarters over the last 25 years, n part because these companies found housing almost unattainable for transferring employees. If these individuals do stay, it may be several more years before they realize that others living in almost identical apartments are paying only a fraction of their rent. In 1985, for example, a woman wrote this letter to the New York Daily News: “I recently moved to New York and I pay almost $1,200 a month for a nice little apartment on the lower East Side. [1997 prices]. The landlords have been reasonable and the building is clean. Still, when I found out at a tenant’s meeting that 30 of the building’s 34 units rent for below $300 and that most of the tenants in those cheap apartments make more money than I do, I was a bit outraged. I understand protecting the old people, but protecting fellow yuppies with bargains? In Texas, $400 will rent a two-bedroom apartment with air conditioning, washer/dryer, swimming pool, fireplace and garage. The vacancy rate is over 10 percent. There are no rent controls and the tenants hold all the cards – AND – landlords are not a hated breed.”
Such voices are usually drowned out in the rent control debate. But, they are beginning to be heard. As the current debate heads for its June 15 deadline in New York, the following letter appeared in the New York Times: “Where are the voices of all those who do not share the benefits of rent control but who actually suffer from it? For the past seven years, my husband and I have been killing ourselves to pay our exorbitant market rent for a small, one-bedroom apartment in order to stay in this city. I know too many people who live in rent-controlled apartments who also own country homes. One person, (whose apartment we tried to rent at the legal rate) moved to Florida and now rents out his apartment, illegally, at the market price, subsidizing his new lifestyle. If rent decontrol would mean a fairer, less insane market, then it is a just cause. If the housing situation does not improve, it will be the new generation of middle-class New Yorkers who will be forced to leave the city we love”.
William Tucker is the author of The Excluded Americans: Homelessness and Housing Policies –(Regnery), and Zoning, Rent Control, and Affordable Housing – (Cato). Reprinted with permission of The Cato Institute, a public policy research organization — a think tank – dedicated to the principles of individual liberty, limited government, free markets and peace. Its scholars and analysts conduct independent, nonpartisan research on a wide range of policy issues. For more information, visit www.cato.org.