There is no longer any doubt that rent control is often counterproductive and ineffective. Study after study has shown the profound social and economic consequences of government intervention in the nation’s housing markets over the past quarter century. Based on hard-earned experience, local and state courts from coast to coast to coast have significantly restricted or banned the practice.
Some communities continue to impose rent controls. The reason is to preserve affordable housing for low and middle income families. However, this goal has not been achieved. Many communities find that regulations reduce the quantity and quality of available housing.
The role of rent in the economy of a market
Advocating rent control ignores the basic economic laws that govern housing markets. Rental properties that are privately developed, owned and operated are treated as public services. This philosophy hurts not only housing providers, but also the consumers it was meant to serve.
Rent has two functions in the efficient functioning of the housing market. It compensates existing housing providers and developers of new housing for costs incurred in providing shelter to consumers. Rent also provides economic incentives that attract new investment in rental housing. Housing is like other basic commodities. The offer is linked to the prevailing market price.
Providing economic incentives is particularly important in assessing the economic implications of rent control. When the market is unregulated, rents increase as consumers compete for available units. The higher rent encourages further investment in rental housing. Buildings are constructed, rehabilitated and converted from non-residential to residential until there is an elimination of the housing shortage.
Without an increase in rents, new investments are not attractive. Housing construction is severely limited. There is no solution to the long-term housing shortage. When rents go down, the market gets the message that new investments have no room to succeed. Rents artificially restricted by a community send a false message to the market. Manufacturers do not see the need for new investments and the investments of current suppliers are reduced. The supply for a housing shortage is reduced rather than increased.
Economists are virtually unanimous in condemning rent control. They raise six main objections. They are:
1. Prohibits new construction
2. Deteriorates existing housing
3. Reduces property tax revenues
4. Administrative costs are important
5. Reduces consumer mobility
6. Hard blow to consumer entry costs.
The poor are most affected by the high costs of rent control. Costs frequently lower the quality of existing housing and reduce access to new housing. Rent control is often justified as an anti-poverty strategy. Evidence indicates that high income households are the main beneficiaries.
Rent control forces housing providers to look at credit history and income when choosing from the competing consumer group. The selection process is biased against young and poor consumers. Rent controls should supplement consumer income at the lessor’s expense. The allowable rate of return is kept below market levels for rental property investment.
The solution to the problem of housing scarcity is not an induced divestment of rents, but an increase in the supply of housing. The supply of affordable housing can be boosted by direct financial assistance to those in need. The increase in purchasing power leads to an increase in the quality and quantity of housing in the local market. Economists believe that rent control is a failure of housing policy.
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