More destructive than an Air Raid! Examining the ravages or rent control

Let’s assume that we have given free rein to our imagination with the goal of designing the ideal economic environment. The result of our brainstorming would very likely be a system that allows for a steady climb in our standard of living and level of comfort. Many people, however, would distrust our model. They would argue that the possession of material goods cannot provide, much less guarantee, either contentment or serenity. Their point of view is certainly reasonable, and it would be foolish to dispute it. But even if possessions do not produce happiness, they can surely contribute to happiness. Who could possibly deny that fulfillment of material need equates with enhanced standard of living? The equation is straightforward and unassailable: once we are able to obtain the necessities of life with less and less difficulty, we find it easier and easier to devote ourselves to self-improvement and the pursuit of happiness.

If abstract ideals did indeed outweigh standard of living as a contributor to human wellbeing, how would we explain the many Cubans who flee their country for American shores every year? And how would we explain the complete absence of boats going in the opposite direction? To take another example, this one from the recent past, how would we account for the mortal risks assumed by so many East Germans as they attempted to escape across the Wall? And how account for the fact that immigration into East Germany, throughout that country’s history, was by any important measure almost non-existent?

Since standard of living and material comfort incontestably play important roles in everyday life, the ideal world to imagine is one in which people would have access to quality goods while living in spacious, comfortable homes. Furthermore, in such a world, people would enjoy an abundance of product choice. They would select the goods and services that most closely respond to their needs and oblige their budget. Of course, the goods in this ideal world would also be sold with a full guaranty, and the housing stock would be superbly maintained and periodically refurbished. Since our imagination knows no bounds, we could even conceive of the prices for goods coming down as time goes by, and of affordable rents making it possible for everyone to suitably house themselves.

You might believe that the description above, although compelling, is of a fictional world – a utopia that even the most idealistic among us would never dream of achieving. A cursory look at our own economy, however, shows that the dream is real, and that it has already been largely achieved. Let’s look at a proof of this proposition.

Just a little over half a century ago, televisions were bought by only a privileged few. Today, extremely sophisticated high quality televisions can be purchased on practically any budget. The same holds true for a vast array of other appliances. Such progress points to the mainspring of economic prosperity: wide-ranging affluence is a function of sustained growth in the number of goods aimed at meeting our needs and demand. Concomitant with that growth is a ceaseless enhancement in both the quality of the goods and the power of a larger and ever larger number of people to purchase them.

Admittedly, this trend is not replicated in all domains of the economy. For instance, in spite of the prosperity and significant growth of recent decades, not everyone enjoys suitable housing. In fact, many families become homeless every year. The housing situation stands in stark contrast to our experience with most other goods. It’s not only that the quality of rental accommodations fails to improve over time, the number of apartments available to tenants has actually shrunk over the last few years. While the market provides a super-abundance of goods and services, and while business people engage in fierce competition to win customers in other sectors, the reverse happens to be the case when it comes to apartments for rent.

That said, it’s legitimate to ask why. Why is there a shortage of apartments while abundance is the norm in regard to almost all other goods and services? What is it about this particular market that causes the anomaly? Why do business people behave so competitively in other markets, and so indifferently in the rental housing market?

The shortage is stranger still if we compare our current situation in Quebec to the city of San Francisco in April of 1906. Although a killer earthquake had just destroyed half of the city’s housing stock, all of the residents of San Francisco soon found a place to live and no issue of a housing shortage ever arose. Barely a month following the event, the classified ads in the local newspapers advertised more apartments for rent and houses for sale than demand required.

So consider this puzzle: On one hand, the residents of a half-destroyed city were able to find shelter almost immediately. On the other hand, today, in many urban areas of Quebec (none of which have fallen victim to an earthquake or any similar disaster), a shortage of housing has persisted for years. What is going on?

Many good souls, as intelligent as they are well-meaning, have sought to solve the housing crisis with recommendations aimed at “protecting” our least affluent households. It’s to the credit of the unions, the public housing activists, and countless politicians that they are motivated by altruism and philanthropy. Regrettably, however, few among the legions of the well-intentioned ever make the effort to identify the root cause of the problem. Avoiding that essential exercise, they instead hurry to put forward policy recommendations that ultimately prove as ineffectual as they are illusory.

A number of different reasons are trotted out to explain the shortage of housing. We often hear it said that population growth, the increase in the number of young adults, and job creation account for the crisis, since these factors systematically contribute to the growing demand for housing. If the shortage of apartments is indeed caused by the variables just mentioned, then it is fair to ask why those same variables do not bring about scarcity in other sectors. A new immigrant or a young person leaving the family home both create a demand for housing, clearly, but they are also going to create increased demand for furniture, dishes, household appliances, and a range of other goods. It’s only the rental housing sector, however, that fails to respond adequately to demographic changes in Quebec; somehow all the other markets satisfy the new demands entirely.

While the above-mentioned factors explain the increased demand for housing, they fail to tell us anything about the causes of the apartment shortage. Why do entrepreneurs and investors hold back from responding to the growing need for rental accommodation, even as they shake heaven and earth in other domains to leave no demand unsupplied? If our leaders sincerely wish to solve the housing crisis, they should ask themselves why only the apartment market fails to meet rising demand – instead of persistently invoking factors that are, in reality, unrelated to the current crisis.

The Front d’action populaire en réaménagement urbain (FRAPRU, a social action group which lobbies for social housing) blames the passivity of our governments for the crisis. FRAPRU would have government become more pro-active with massive investments in subsidized housing. Unfortunately, these Don Quixotes of the economy also fail to grapple with the root cause of the problem. They do not care to understand why the private sector scrambles to erect condominiums and single family homes while steering clear of the apartment market. One might think that with an apartment vacancy level so low, investors would rush to build precisely that kind of accommodation. Has private enterprise been afflicted with such a narrowly focused myopia? Has it suddenly developed an aversion to opportunity and profit?

As a last resort, public housing activists point to increasing poverty as a cause of the apartment shortage. Maybe they have access to secret statistics, but according to Statistics Canada and the Institut de la statistique du Québec the numbers contradict their assertion. The average household in Quebec is in fact growing more prosperous. From 1996 to 2003, the number of jobs in Quebec grew by 16%, whereas the total population rose by a modest 3.3%. In addition, the real gross domestic product went up by 23.4% from 1997 to 2003.

Nathalie Elgrably is an Economist at the Montreal Economic Institute and author of the book La face cachée des politiques publiques.