Lies my progressive economics professor told me Part 2 - The Renter’s Utopia

The progressive myth of rent control

It has been a busy few weeks, I get it.  There have been so many important political stories that it’s hard to keep track of what’s going on.  What with the assassination attempt, Biden dropping out, and Secret Service DEI/incompetence  stories you may have missed an important progressive idea floated by the Biden administration.  I’m referring of course to the suggesting that a national cap be placed on rents charged by corporate landlords.  This “solution” to rising rents falls neatly under the heading of my ongoing series: Lies my progressive economics professor told me.” 

What are “Rent Controls?”

Rent controls are a type of price control which take various forms including strict rent ceilings, strong rent controls, which limits the price that a landlord can raise rent between tenancies, and weak rent controls, which limits how much a landlord may raise prices for existing tenants but allow greater adjustments between tenancies.  The Biden proposal would give large landlords, those with 50 or more units, the choice between forfeiting federal tax breaks and agreeing to cap rent hikes to no more than 5% per year (the exact details are vague but this appears to be the weak form of rent control).  The argument here being that limiting a landlord’s ability to raise rent will stop rising rent prices.  The narrative in Canada is similar.  Canada’s left wing New Democrat Party (NDP) has blamed rising rental prices in Canada on “corporate greed” and provincial parties on the left side of the political spectrum across Canada have been making proposals similar to the Biden one for some time now.

Why does the left think this will work?

Progressives and others on the left believe rent controls are the best way to deal with rising rent prices because they think that limiting what “greedy” landlords can charge will keep rents low and in one way they’re correct, if landlords can’t raise prices rent can’t increase.  However, believing that rent controls are the solution to high rent prices requires two things: an ignorance of economics and an ignorance of history.  The Soviet Union was one big experiment in government mandated price and rent controls and we know how that turned out, shortages, bread lines, black markets, and ultimately economic collapse and the loss of the Cold War.  However, that’s an answer without an explanation.  Explaining why the left believes price controls work may just come down to a hatred of capitalism and industry and a love of big government and the “little people.”  However, even if that is the case it requires a couple of faulty assumptions:

1. Renters are good and landlords are bad

2. Renters are helpless and landlords hold all the power

3. Renters and landlords are the only parties involved in the rental market

The first two bullets should come as no surprise as together they nicely align with the leftist world view that power dynamics and oppression explain everything (ok, there’s also racism and sexism).  This is obviously overly simplistic.  While there are no doubt bad landlords (there’s a reason the term “slum lord” exists), there is also no shortage of bad tenants (there’s a reason landlords ask for references).  The uncertainty involved in renting/leasing a property is one of the reasons for rental agreements and the strongest argument against the oppression narrative.  The existence of contract law means that both tenants and landlords can leverage the courts if wronged and if the government didn’t interfere, the courts would be free to handle any disagreements between the two.

However, the flaws in the leftist oppression narrative pale in comparison to the damage that results from the third assumption.  The problem with assuming that only renters and landlords are affected by rent control is that it ignores the effect government intervention has on the greater economy.  When the heavy hand of government comes down on the side of the renters a lot of damage is done to the economy and the housing market.  In many ways the government is like the character Lenny in “Of Mice and Men,” he may have good intentions and he may love that puppy, but he’s more brawn than brain and it’s not going to end well for the dog.

The attraction of rent control is that it looks good on paper, but it is another example of “an answer that is clear, simple, and wrong.”  Sure, there are winners and losers but there are a lot more of the latter than the former and even the former doesn’t come out as well as one might think.  Let’s look at the primary groups affected by rent control and whether they’re winners and losers.

Landlords

There is no debate here, landlords are clear losers.  So, what, right?  Corporations are big and can handle a little extra cost.  Probably, and we’ll get to that later, but for-profit corporations only own about 45% of rental units meaning that the majority of rentals are owned by mom-and-pop landlords which do not have the deep pockets to stay in business when rent increases are not allowed to match rising costs.  Both corporations and mom and pop renters are faced with the same dilemma, lose money and potentially go out of business, cut costs (probably by reducing the amount of maintenance), or find a way to evict tenants so prices can be raised to the market rate.  Reduce maintenance enough and you’ve got a slum lord and a property that is no longer worth what you paid for it.  Evictions are tricky too as you generally need a reason however landlords can usually evict any tenant if renovations are planned and in the last few years as inflation skyrocketed, locations where rents increases were limited saw an increase in “renovictions.”

Renters

Rent control is designed to help renters so they’re the obvious winners, right?  Not so fast!  There are two groups that we need to look at here, existing renters and people looking to rent.  Existing renters are as close to being a clear winner as any individual in this scenario as rent control will mean that their rent increases are limited and predictable.  However, as described in the landlord section above, if costs rise faster than rents landlords will look for ways to cut maintenance or evict renters to forestall bankruptcy.  The former, over a long enough timeline, will result in a decline in the quality of existing rental units. The latter means renters will still end up paying more for rent but with the added inconvenience of having to move.

While existing renters may see some upside to rent controls, the same cannot be said for those seeking to rent.  If existing renters cannot be charged going rates, then landlords will look to recoup losses by charging higher rents to new renters.

There is also one more way that new renters are harmed and that is in the availability of rental units which takes us to…

The Rental Market

Rent control damages the housing market as this lovely diagram clearly shows:

I get a headache just looking at it so let me make it simple, investors build rental properties because they think they can make money from them.  If the government limits rent, expected profits are lower and investors will put their money elsewhere.  This will mean fewer rental properties will be built leading to a shortage of available units (see: new renters are losers above).  This predictable economic outcome will also hurt the prospects of our next group…

The Trades

Construction workers, electricians, plumbers, etc. will all be losers in a market limited by rent control.  These trades make their living by building new properties and maintaining existing ones.  When investors take their money elsewhere fewer new units are built, reducing construction jobs and when landlords reduce maintenance to save money, the number of maintenance jobs drop as well.  Put simply, rent controls increase unemployment. 

That’s a lot of losers.  Are there any clear winners from rent control?  Yes, but they’re mostly on the periphery and you’re not going to like who they are.

The winners

• Bureaucrats and the administrative state – if the government is going to roll out and enforce rent control, then obviously some department of the government is going to have to oversee it.  This means more jobs for government employees and higher taxes for everyone else.  Including renters.

• Government housing agencies – Isn’t this the same thing as the previous bullet?  Nope, this is the group that will have to build houses because the investors are no longer doing it.  Oh, and they’ll also be buying houses from the mom-and-pop landlords who go broke because they can’t charge the market rate for their properties.  Government construction is slow and expensive due to inefficiencies in the bidding process and too much regulation.  All of this will mean higher construction costs and longer construction times.

• Corporate Landlords – This group has deeper pockets than the mom-and-pop landlords, so they’ll compete with the government to buy the properties that the banks have foreclosed on due to insolvency.  Their deeper pockets also mean they’ll be harder to sue for wrongful eviction.

• Banks – Banks always make money.  If the landlord pays the mortgage the banks make money.  If the landlord fails to pay the mortgage the banks foreclose and sell the property (and write off any loss), making money.

• Lawyers – Like the banks, lawyers always make money because they provide required services.  Here is a short list of legal services that landlords must pay for:

  • Conducting the closing

  • Title searches

  • Drafting contracts

  • Evictions

  • Resolve settlement agreements

  • Arrange for title insurance

  • Purchase agreements

  • Arranging for financing

  • Deed transfers

  • Draft legal documents

  • Handling estate sales

  • Reviewing the purchase contract

As one might expect, from a “solution” promoted by the left, all the wrong groups end up winning.  And the individuals who were supposed to benefit from rent control?  Well they can take satisfaction in the knowledge that least the government meant well.

So, what is the solution?

One word: build.  The market works by supply and demand.  If there aren’t enough houses demand exceeds supply and those looking to buy properties will bid up the prices and those looking to rent them will charge more money safe in the knowledge that if one renter won’t pay, someone will.  Build enough houses and it becomes a buyer/renter market instead of a seller/landlord one.

There is one wildcard to this solution though and that is inflation.  Since the last US election, inflation has caused rents to increase by over 30%. 

It’s the Economy, Stupid! Or is it?

Increasing the number of available units will not bring that price down and despite the leftist narrative that rising rents are caused by “corporate greed,” rent control won’t fix it either.  If high rent prices were caused by anything it was the federal government’s decision to print money as well as state and municipal government decisions to implement local rent controls and overregulate the market.  The correlation between prices and regulation is obvious from the graph below.  Despite what the Biden (Harris?) administration might think, the solution to problems caused by the government isn’t more government.  Deregulation and lower taxes will do more for the housing market than any rent control ever will.