The Folly of Rent Control
JANUARY 01, 1990 by JAMES A. MACCARO
Mr. Maccaro, who lives in Whitestone, New York, is a free-lance writer and a law student.
Rent control was established in New York City during World War II as an emergency measure to combat feared wartime profiteering. More than two generations later, rent control is still in place, and has inflicted more damage on the city than the war itself. As Swedish socialist economist Assar Lindbeck has written, “. . . rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” Anyone who seeks confirmation of this statement needs merely to tour the urban blight which sadly covers much of New York City.
The destructive effects of rent control are predicted by the laws of supply and demand. The law of supply states that the supply of a product, such as housing, will increase as the price rises; while the law of demand states that demand for a product will decrease as its price rises. These propositions would appear to be intuitive, and are illustrated countless times in the marketplace.
in the free market, supply and demand are kept in balance by the self-interest of market participants. If demand for housing increases, investors will pour capital into the market in order to reap the profits. Any attempt to take advantage of shortages by price gouging is futile, except in the very short term, because excess profits will attract other investors who will increase supply.
Legislatures cannot repeal the laws of supply and demand. Whenever prices are set by government coercion below the market-clearing level, shortages will result. Investment will evaporate as those with capital to invest will look elsewhere, rather than enter a market where the rules of the game are skewed against them. Meanwhile, demand will increase, and consumers will have to scramble to get a share of the supply that re mains.
The chaotic results of rent control are clearly evident in New York, where the outcome has been a perpetual housing emergency.
The rents charged for apartments subject to government regulation are kept artificially low and frequently bear little relation to the owner’s costs. Any increase in rent is subject to government approval, and in a city where renters are the largest and most vocal special interest group, are only reluctantly granted. As a result, few people invest in rental housing that is subject to government regulation.
The housing shortage is further exacerbated because rent-controlled tenants, whose rents are often a fraction of their units’ fair market values, are loath to relinquish their apartments. For example, New York Mayor Ed Koch has lived in a mansion provided by the taxpayers, yet has maintained a rent-controlled apartment as a second home.
Slaves of New York
Stories abound about how difficult it is to find a decent apartment in New York. A recent best-selling book and movie, Slaves of New York by Tama Janowitz, is based on this theme. Its main character is described as a “slave” Of the city, since she lives with an abusive boyfriend because he has a lease for an apartment. If she were to end their relationship, she would have no place to live. According to the author, the ambition of “slaves” is to find an apartment of their own, which can take years, and in turn, to continue the process by acquiring their own “slaves.”
A bizarre by-product of rent control in New York is “commuter leases.” Finding an apartment is so difficult that people are willing to rent apartments for just nights and weekends; the rest of the time the apartment is occupied by someone else. For instance, Justin Martin, a 24-year-old who works in public relations, pays $600 a month to sublet a one-room apartment on East 49th Street. Under his lease, he has the right to use the apartment only on weekends and during the week from 5:00 P.M. to 9:00 A.M. The rest of the time, the apartment is used as a studio by an artist.
Fairness and Equity
The cry of those who imposed rent control was “fairness” and “equity.” Yet rent control accomplishes the opposite: poor and middle*class renters and would-be renters are harmed to a disproportionate degree, while affluent tenants are in the best position to reap the benefits.
The lack of investment in housing and the low vacancy rates caused by rent control combine to create a static rental market. Those who live in poor neighborhoods cannot “move up” to better apartments because few are on the market, and those that are available are generally not within their financial reach.
Other factors work against the poor. Desirable apartment buildings usually have long waiting lists. Consequently, landlords need not publicize the availability of units, and can pick and choose their tenants. As a result, getting an apartment depends to a great extent on personal contacts and the ability to impress a landlord as a reliable tenant. Furthermore, the rent control-induced housing shortage leads to under-the-table “key money” payments to bribe landlords to lease apartments.
Apartment buildings housing low- and middle-income occupants are the hardest hit by rent control. Landlords of buildings in desirable neighborhoods catering to more affluent tenants can more easily raise the rents on vacant units to counterbalance the low rents charged on the other apartments in these buildings. In addition, they are encouraged to maintain their properties by the prospect of converting them to condominium or co-operative ownership. Landlords in lower-income sections of the city don’t have these incentives. Rather, they are faced with the prospect of continuing losses and eventual bankruptcy. For this reason, more than 500,000 apartment units have been abandoned in the city, destroying entire neighborhoods and severely decreasing the housing stock available to the poor and middle class.
Winners and Losers
While there are losers as a result of rent control, there are also winners. Rent control creates a privileged special-interest group, namely, those who have leases on desirable apartments. Since rent increases don’t match increases in costs, and bear no relationship to the market value of the apartment, tenants who remain in their units rather than relocate will find that, after a short number of years, they are paying a fraction of the true value of their units.
Under rent control, a lease becomes, in effect, an investment. As such, it has an economic value. For instance, “vacate” or “move-out” fees paid by landlords to tenants are common. A few years ago, a New York landlord offered his tenants $15,000 for each room of their apartments if they would move out so that he could convert the building to a condominium. Incredibly, the tenants’ association sued the landlord in order to get an injunction against the offer, claiming that it was an illegal attempt to subvert tenant solidarity.
The effects of rent control have been disastrous. Politicians who refuse to recognize this, and support rent control to garner votes, add to the problems of the urban homeless and the deterioration of the quality of life in our nation’s cities. To achieve the goals of an efficient and equitable supply of housing, the free market must be allowed to function. The free market will permit all consumers of housing to make rational decisions on a level playing field. The alternative of government intervention protects a select few and distorts the housing supply, resulting in chaos.
2. In Santa Monica, California, for instance, rent increases have been set at about two-thirds the rate of inflation. Marc Beauchamp, “Bankrupt Landlords in Wonderland,” Forbes, March 20, 1989, pp. 105-10′/.
3. Mr. Martin’s strange plight is described in an article in The Wall Street Journal by Jeffrey A. Trachtenberg entitled “And for the Summer, He’s Rented Sunday Mornings at a Beach House,” April 11,1989, p. B1.