Can Rent Control Be Abolished?
Rent control makes housing less affordable to anyone seeking housing in a rent-controlled market. Even people who already have a “great deal” under rent control become prisoners of their own apartment. They can never move because it means being thrown into the shadow market, where prices may be three or four times as high for an almost identical apartment.
In Europe, where rent control governs even larger sectors of the market, the result has been the continent’s famed “labor immobility,” where moving a factory across town may bean losing half of the work force.
This huge differential between the regulated market and the shadow market strikes terror into the hearts of a rent-controlled population and fuels the fires against deregulation. Bu this fear is based on the illusion that shadow market prices are actual market prices. Even landlords make the same mistake. They often assume that an end to regulation will enable them to double and triple rents, whereas the overall effect would be far more modest.
The goal in getting rid of rent control should be to allow the curve of housing prices to return to the elegant symmetry of the free market. It is important to deregulate as much of the market as possible at once. That will move the entire curve toward the lower end of the market. If deregulation occurs in small increments, on the other hand, each individual tenant will be forced to make the jump from the low end to the high end, until their accumulated weight moves the curve back. It would be like moving a mountain one gran of sand at a time.
One poor way to deregulate is “vacancy decontrol.” This solution, now in effect in California and being proposed as a compromise inNew York, simply extends the adjustment period while delaying the benefits of deregulation. Under vacancy decontrol, apartments are deregulated only when the current tenant leaves or dies. But, of course, tenants in regulated apartments never move, since leaving an apartment means being thrown into the shadow market. It may take 20 to 50 years before the market resumes its normal shape.
Worse yet, under vacancy decontrol, individual landlords have every incentive to evict their regulated tenants, since vacancy means deregulation of the apartment. The result will be a daily series of horror stories, with landlords doing everything from hiring thugs to setting fire to their buildings to get rid of low-payment tenants. Meanwhile, because of general uncertainty, builders and renovators will not invest much in new housing. As a result, there is always pressure to repeal vacancy decontrol. New York tried such decontrol in 1972 but repealed it after only two years.
Instead, rent control is best abolished quickly and cleanly, with ample effort to protect the most vulnerable tenants. Massachusetts did it about right. After winning the 1994 referendum, property owners were faced with a series of court challenges that could have delayed implementation indefinitely. At the same time, Governor William Weld had vowed to veto any state legislation to revive rent control in Boston,Cambridge and Brookline. The result was a compromise. Rent control was lifted immediately in the three cities, but a two-year extension was allowed for tenants qualifying for the federal definition of “low income” – less than 60 percent of the median for the region or 80 percent for the elderly and handicapped. In the end, four percent of the tenants in Boston and 10 percent in Cambridge and Brookline qualified for this extension. These groups were finally deregulated in January of 1997.
Such a program could work inNew YorkandSan Francisco, perhaps with a slightly longer time scale. A three-to-five year phase-out would seem reasonable. The effort could be helped enormously if builders and developers would pledge publicly to step up housing construction during the interim. Unfortunately, landlords and developers in both cities have become such pariahs that they rarely speak openly or work in concert. Boston landlords helped their cause enormously by setting up the reserve bank of 200 apartments for emergency relocations. Yet owners’ groups inNew YorkandSan Francisco have done nothing comparable. Such an effort would go a long way toward allaying fears about deregulation.
The Morality of the Market
Human morality is based on the premise that virtuous behavior should be rewarded while harmful behavior ought to be punished. Where the rewards of the marketplace are concerned, it can truly be said that cities and nations get what they deserve.
Price controls are built around the concept that one particular group, the providers of some essential good service, is a nefarious clique that must be wrestled into submission by the government. Oil company executives were the villains of the “energy crisis” and Congress portrayed itself as a gallant knight riding to the rescue of a distressed public. In fact, all that was at stake was the public’s ability to tolerate the price increase associated with shifts in energy resources.
Rent control works the same way. Providing housing is perceived by some as an illegitimate enterprise. “Greedy landlords” become public enemies in rent-controlled cities and the entire political apparatus is geared up to subdue them. (The political party that has governedSanta Monica for the last 20 years is called “Santa Monica Renters’ Rights.”)
The hate campaign against landlords feeds on itself, becoming a self-fulfilling prophecy, since owners in the shadow market can charge exorbitant prices, while owners in the regulated sector do best by making life uncomfortable for their low-rent tenants. Yet all that is really at stake is public willingness to accept the idea that some people make their living by providing housing.
RENT CONTROL IS A DISEASE OF THE MIND that soon becomes a disease of the market. Those cities that resist infection – merely by having a healthy tolerance for the rights of others – are rewarded with a normal competitive housing market in which housing is available at every price level. Those cities that succumb to the disease of rent control are doomed to never-ending, house-to-house warfare over an ever-diminishing supply of unaffordable housing. Public policy creates its own rewards.
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. This is the final article of a seven part series.