Monday, March 8, 2021

Evil rent control revisited

A new report is out looking at the Berlin experience with rent control (original German report here). The basic idea is that dwellings built prior to 2014 now have regulated rents and caps on rental increases. All very standard price-cap regulation. New dwellings are not regulated. 

What I find funny are the contortions that economists make to explain good things as evil things because of their cultural taboo about rent control. With the help of another recent paper on rent control, I want to straighten out some of these contorted arguments.

Rents in the unregulated market don’t fall. This is evil. 

High rents are bad. This is the foundation of the claim that rent control is bad. Yet the enormous benefit of rent growth at a rate 60% less for roughly half of all households in Berlin is ignored and downplayed.

There aren’t many other policy interventions that get this size outcome. Even doubling home building for a decade is at most going to see a 10% relative rent reduction in a decade's time, which in terms of growth rates would be a tiny effect. This rent control case study appears to be one of the most successful affordable housing policies I've ever seen.
Even if you assume that market rental increases of the past year are related to rent-control policy (rather than being a continuation of previous market trends, which my eyeballs tell me is the case, especially in the original report chart with error bars marked) the welfare calculation is hugely in favour of rent control.
The basic welfare calculation is:
With a 0.5 share of households renting pre-2014 buildings with rent rising 2% per year instead of, say 5%, saves each household about half of the current year’s rent over 5 yrs. That’s 0.25 “city rent years” of benefit to residents.

With a 0.05 share of households relocating each year paying at worse 0.08 more for their rent, we get 0.027 of “city rent years” of cost to residents over 5 yrs.

On pure "high rent is bad" benefit-cost terms the Berlin experience got a 10x economic return! This even assumes that all private market rental growth is due to rent control, which is implausible (more on new supply later).

You can’t just pretend that these orders of magnitude are similar.

Additionally, the macro-economic effects of additional non-housing renter spending in the local economy must be quite large. This is a diversion of half the rents in the city from landlords to tenants, with the downwards income distribution likely having large spending effects.  

Landlords sell to homeowners. This is evil.

“Landlords treated by rent control reduce rental housing supplies by 15 percent by selling to owner-occupants and redeveloping buildings.”

I find this statement hilarious. 

Landlords sold to owner-occupants. This is a good thing, not an evil thing. 

Many policies are aimed at getting more homeownership and the best way to do that is for landlords to sell to owners (even the tenant perhaps). 

If they do this, there is no effect on the supply of dwellings. This is because the former renter who buys the home is now also no longer a renter. It’s a minus one from the supply AND a minus one from the demand. 

Redeveloping buildings increases new housing supply. This is evil.

The whole economic schtick about rent-control is that it decreases new housing supply. But both the Berlin report and the Diamond et. al. paper show this is not the case. 

Diamond shows that rent-controlled housing is roughly 5% more likely to get additions and alterations, and 7% more likely to be redeveloped. But I thought rent control meant that landlords won’t invest in their buildings anymore? The charts below show these effects over time.

In fact, there is a whole movement of economists and urbanists who are itching for ways to get more housing supply because they believe it helps reduce the cost of renting in prime areas. Maybe try rent control?

Turning now to the supply of unregulated rental housing advertised in the market, it looks from the Berlin study that new apartment listings are outpacing peer cities. But this is labelled evil. They are "only slightly outpacing" other cities. Terrible!

Rent control stops poor people from being displaced. This is evil.

The final strange contortion happens in the Diamond paper when concerns over low supply (now invalidated) turn into concerns over gentrification and the rapid new supply of luxury market-priced housing. That rent-control works to stop the displacement of poor people during this process is then labelled as evil by saying that it widens income inequality. 
…it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. Indeed, by simultaneously bringing in higher income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city. 

The problem with rent control is that it works. This is evil.

The real issue is not that rent-control is an economic failure. The zeal with which the theoretical economic case against it is made, regardless of the evidence, is necessary because rent-control works. Without an economic story for why rents should not be regulated, all those landlords would constantly face the political risk of losing billions in rents. 

One argument that I’ve heard is that economists have tricked themselves with their own supply and demand theories. But I think that’s wrong. I argue that the theory is used to back-fill a convenient political story. I say that because supply and demand logic can just as easily be used to show why rent-control should be a huge success with no changes to investment incentives around new housing. 

Let me show you. In the first supply and demand diagram below I include total housing supply and demand, with a kinked supply curve to represent the existing stock of dwellings that don’t get demolished because prices might fall. This the way Ed Glaeser describes housing supply curves.  

All we then do is split the demand curve into existing and new demand. We subtract out the tenants of existing houses from new demand, and their existing homes from new supply, and are left with the following, where the dashed blue line is the demand curve for existing housing and the solid blue line is the demand curve for new housing. It’s the same equilibrium. We merely cut off all demand and supply to the left of the market equilibrium and put it in the regulated system.

The economics of rent control is evil.

The taboo topic of rent control is so screwed up that the evidence it works must be contorted into something evil.

And that's all folks. 


  1. I get that you're a big fan of redistribution, but why not advocate for redistribution from rich to poor directly.

    I mean owners are probably likely to be richer than renters, but this is only a proxy for what you're really interested in (income/wealth).

    Not to mention that prices will adjust to minimize this effect (if you're stuck with an asset that yields less than the market value due to rent control is one thing, but you're not going to voluntarily buy a new house to transfer part of your income to the renter.)

  2. "why not advocate for redistribution from rich to poor directly."
    I do advocate that.

    I don't really get your final point.

  3. My point is rent control is a roundabout and not effective way to implement redistribution.

    Why not, instead, tax the rich directly and give money to the poor directly.

  4. the govt could buy up a lot of houses, become a major landlord and freeze rents and provide long leases. rent control in another way.

  5. Pretty effective case here. Rent control (on established dwellings) is sort of like the vacancy tax, or a premium land tax that only applies to already established dwellings - but it transfers the revenue directly to tenants.

    I recently read about how the problem of land taxes in bringing for development, is during a boom it gets developers to lock-in lower density and then on aggregate reduces supply over the long run. The problem being the demolition costs reduce the rent gap from stimulating redevelopment.

    But if rent control increases the rent gap, then that problem is effectively resolved. It opens up the rent gap again and accelerates more redevelopment.

    The question I'm left with is, what are the longer term effects of these rent controls? In a sense this policy is sort of a one off, because it only targets pre-2014 buildings. But if you were to consistently impose new rent controls not long after buildings are established, you could expect investors to price this in (it would no longer resemble that supply demand graph you put up). Although perhaps that just means slower capital growth?

    I guess the real issue with accelerating development, is that "cheaper" lower end housing stock would disappear faster, in turn meaning for new movers the median rent would rise (which you already addressed). Renters would then also become less mobile and trapped in their very cheap homes (much worse than stamp duty). On balance you're probably right regarding the net benefits, but the issues would persist none-the-less.

  6. Given that this approach targetted pre-2014 buildings rather than socioeconomic status, the redistributive impacts are not clear. A wealthy person who happened to rent in a pre-2014 building compared to a poorer person in a post-2014 building would be highly regressive. In addition, so is the point about landlords selling. Poorer tenants would not be able to borrow to purchase the property. Over time, poorer tenants will have fewer options for rent controlled properties as they become owner occupied and will inevitably end up in the more expensive unregulated sector. Again, a loss of welfare.

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  8. I guess I'll have to ask my daughter to return my EC101 text book before she reads the bit on rent control in New York - which seems to have become dogma. The problem now is that so many economists have been inculcated with the belief that rent control is bad.