Freeman

ARTICLE

Houstons Laissez-Faire Housing Policy

JUNE 01, 1987 by J. BRIAN PHILLIPS

Mr. Phillips is a free-lance writer based in Houston, Texas.

During the 1970s Houston’s population grew by an average of 36,000 per year. This pace accelerated during the early 1980s as oil prices skyrocketed and Houston’s economy boomed. Jobs and opportunities were plentiful, which combined with the subtropical climate to create a virtual paradise for unemployed, winter-weary Northerners.

This huge influx of people created a tremendous need for housing. New home and apartment construction proceeded at an unprecedented rate. Over 25,000 apartment units were built each year from 1977 through 1983. What had been cow pastures and rice paddies only ten years before were transformed into sprawling apartment complexes in a matter of months as developers raced to meet the growing demand for housing.

In 1982 Houston’s economy began to slow. Unemployment rose and the stream of new arrivals dwindled to a trickle as recession gripped the city. Throughout this period of economic volatility, Houston continued to have an adequate supply of rental housing at reasonable rates. Unlike cities which have turned to rent control in a futile attempt to provide affordable housing, Houston has remained committed to a laissez-faire housing policy. The results speak for themselves.

The most striking fact about cities with rent control is their perpetual shortage of rental housing. Vacancy rates usually run under 5 per cent, which gives renters few, if any, housing options. Rent control, in fact, is price control. As has been demonstrated repeatedly, in theory and in practice, price controls always result in shortages.

But Houston did not experience a housing shortage. The lowest vacancy rate reached in Houston was 4 per cent in June 1982. During the 1970s the average vacancy rate was 7 per cent. And this was in spite of the fact that the population was growing by an average of nearly 700 people a week.

The 4 per cent vacancy rate of June 1982 did not last long. By April 1983 the rate had reached a record high of 24 per cent. This abrupt shift was primarily caused by two factors: the downturn in the economy and an overbuilt market. Because housing construction is a relatively long-term project, developers were unable to respond immediately to market conditions. Despite the high vacancy rate in 1983, over 28,000 new units were built that year. However, the next year that number fell by over 50 per cent, reflecting the oversupplied market.

As occupancy rates decreased, apartment owners were hard pressed to continue operating profitably. In an effort to attract tenants, apartment owners began offering a myriad of girls and other special promotions. Televisions, video recorders, memberships in health clubs, holiday ‘turkeys, life insurance policies, and cable television were among the free gifts used to entice renters into signing leases. Many apartment owners waived security deposits, and more than one even paid the moving expenses of new tenants.

Owners Compete, Too

In rent-controlled cities, renters often pay apartment “1ocators” hundreds of dollars to find housing. In Houston, apartment locators offer similar services; however, their fees are paid-by the apartment owner rather than the renter. Just as the recession has hurt the apartment industry, it has hurt the apartment locators also. Most now offer gifts to renters who find an apartment through their services. This illustrates the fundamental difference between cities with rent control and those which allow the market to operate freely: In the former, renters engage in one-sided competition for housing space, while in the latter, there is also competition among apartment owners.

These competitive forces are readily apparent in the Houston rental market. When the economy slipped into recession, the number of renters stabilized as new arrivals dramatically decreased, while developers continued to build new apartments, though at a greatly reduced rate. Since April 1983, the vacancy rate has stayed near 17 per cent, keeping apartment owners in intense competition to attract and retain tenants.

In rent-controlled cities, tenants often stay in the same apartment for decades. There are two good reasons for this: one is the general lack of housing options, the other is the obvious benefit of paying a rent established 20, 30, or even 40 years ago.

In Houston, however, most leases run six months. The average renter is young and mobile, and with an oversupplied market from which to choose, renters are quite willing and able to move with ease. The fact that renters can move so easily places more competitive pressure on an already intensely competitive industry.

One of the stated purposes of rent control is to insure a sufficient quantity of affordable rental housing. But in city after city, rent control has resulted in housing shortages. In Houston, in contrast, where apartment owners are governed by the market, there has always been a sufficient supply of rental housing.

The real victims of rent control are property owners who must accept less than market rates for their properties. Rents are established by a central board, and annual rent increases are generally meager, if allowed at all. In New York City, some renters still are paying 1940s rates for their apartments. It is little wonder that developers are reluctant to build new rental housing in such cities.

Even the most radical rent control advocates eventually recognize the discouragement to new construction that rent control creates. Consequently, like most statist policies, exceptions are made as those in power seek to gain the benefits of the free market without losing their control over the lives of others. Most often, new construction is exempted from rent controls.

But even this enticement is seldom sufficient to stimulate new construction. After all, the exceptions that can be arbitrarily granted can just as easily be arbitrarily withdrawn. Developers see little reason to take chances on such a possibility, when cities such as Houston offer developers the economic freedom all industries need to thrive.

Rental property in rent-controlled cities is difficult, if not impossible, to sell. Clearly, not many people care to spend good money for the privilege of losing more money. In Houston, despite a soft real estate market in general, apartment complexes are selling rather briskly, as investors hope to make purchases at bargain prices. This demonstrates that capital flows not only to its most profitable uses, but also to its most efficient.

Many rent-controlled cities allow the rents on voluntarily vacated apartments to rise to market levels. But when this occurs, the under-supplied market pushes rents higher than they would be in a completely free’ market. Consequently, new tenants are forced to pay rates much higher than could be sustained if rent control did not exist at all. By artificially establishing and controlling rents, rent control creates huge inequities in rental rates.

In Houston, the average apartment rent reached a high of $402 in late 1982, shortly after the vacancy rate reached its record low. However, as the vacancy rate increased, rents fell to reflect the market’s oversupply. And despite the fact that vacancies have remained relatively stable for the past three years, rents have continued to drop. Today the average apartment rent in Houston is $303.

Maintenance Suffers

One of the most visible consequences of rent control is the slow deterioration of rental property due to a lack of maintenance. Property owners, often forced to incur losses on their property, see little economic sense in making repairs. And all too often, owners simply abandon their property, rather than continuing to absorb losses.

In Houston, however, competition encourages apartment owners to maintain their properties. While there are certainly examples of rental housing that is not well cared for, Houston does not have the widespread deterioration of rental housing that plagues most cities with rent controls. Furthermore, most of the vacancies in Houston are in the older apartment developments.

Today, apartment rates in Houston are 25 per cent lower than they were five years ago. During the same period, consumer prices have risen nearly 13 per cent, and Houston’s unemployment rate has climbed from 4 per cent to nearly 10 per cent. Consequently, at a time when prices are higher and more people are out of work, i.e., when people have less money available for housing, the market has driven rental prices down in Houston.

Rent control advocates insist that their policies will result in decent housing at reasonable rates. The facts show otherwise—only the free market can provide the best product at the lowest cost to the consumer. Rent control attempts to force property owners to provide affordable housing, ignoring the fact that if a legitimate market exists, free enterprise will provide for that market. While rent control advocates profess to help the consumer, the free market is the best protection the consumer has ever had

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June 1987

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