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Repost: The Great Housing Supply Contradiction
No one seems to care about a logical contradiction at the heart of housing affordability debates
The link below is to the original post, where I also look in detail at a popular case where rent control has been blamed for what looks like noise in the data.
Most people aren’t really serious about analysing with rigour subjects they care about.
I feel silly that it took so long for me to realise why I get confused by debates about housing supply and rent control. This is why.
It cannot be true that
rent controls, such as those that limit rent increase to a certain amount per year, say 3%, stifle new housing supply, and
private property markets will continuously supply enough new housing to cause rents to fall.
This is the Great Housing Supply Contradiction.
The below chart shows the contradiction between these claims.
First, it shows with the orange curve the rental price path that occurs if the housing development market brings down rents through voluntarily increasing supply.
Second, it shows in the blue curve the rental price path under a rent-control rule that limits rental price increases to 3% per year.
The only things that can be true are as follows.
Rent control is binding on rents and the private market will not supply new homes at a rate that keeps rental price increases below this rate, or
Rent control is not binding and the private market will supply new homes at a rate that keeps rental price increases below this rate.
Yet many people who participate in housing policy debates assume the one thing that cannot be true—that rent control is binding and the private market will supply new homes at a rate that keeps rental price increases below this rate.
Other contradictions are also common in the rent control debate.
I’ve written before about how rent control studies label good things as bad things when they don’t suit the “evil rent control” narrative.
A 2014 paper looked at the effect of de-control of rents in Cambridge and found that it massively increased rents and housing prices.
Yet I just listened to a podcast where other economists were saying that this paper showed how bad rent control was for constraining housing values. This is another case where bad things, like high housing prices, are called good things to save the narrative.
Never mind the contradictions.
If you enjoyed this post, please check out some of my other posts related to rent control and housing supply, such as:
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Here’s a recent podcast where I talk about what is happening in property markets at the end of 2022 and what might be in store for 2023.
Lastly, check out J.W. Mason’s excellent commentary on the topic. Below is an excerpt.
A number of recent studies have looked at the effects of rent regulations on housing supply, focusing on changes in rent regulations in New Jersey and California and the elimination of rent control in Massachusetts. Contrary to the predictions of the simple supply-and-demand model, none of these studies have found evidence that introducing or strengthening rent regulations reduces new housing construction, or that eliminating rent regulation increases construction. Most of these studies do, however, find that rent control is effective at holding down rents.
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