Rent control also ultimately reduces, in whole or in part, the value of income property, since the value of such property corresponds to tenant-generated revenue. In addition, since municipal taxes are calculated as a function of property value, cities see their revenues decrease as a result of rent control and they must turn to other sources to meet their financial requirements. All taxpayers thus find themselves indirectly penalized by the policy. We could debate for endless hours about the fairness of this means of distributing the tax burden.
As we have mentioned, the goal of our analysis is limited to assessing the use of a particular policy – namely rent control – and to determine if this approach contributes to the welfare of lower income households. What we have found is that rent control in fact becomes an insidious cancer that not only reduces the availability of rental housing over time but actually makes life harder for needy families.
It remains for us to identify what factors might encourage investors to develop income property, as well as induce existing landlords to upgrade their apartments. The solution is straightforward; they must be assured that apartment buildings will again become attractive investments, i.e., profitable. The only way to render them profitable is by abandoning rent control and by returning to owners their full property rights. Faced with the idea of rent control being eliminated, however, activists on the Left have never been slow to vent righteous indignation. They declare that repeal of the policy will cause rents and evictions to skyrocket, and that an army of homeless will shortly be camping in the streets.
Experience has shown such speculation to be baseless fearmongering. Let’s examine how the apartment market actually responded in cities where rent control was abolished. In January 1977, Boston, Cambridge, and Brookline were the first major American cities to repeal the policy. The results were favourable and none of the nasty predictions from those opposed to abolition came to pass. As a result of deregulation, construction of income property increased for the first time in a quarter century, which served to ease skyrocketing rents. A study conducted by the City of Cambridge, Massachussetts (Housing Market Information, Cambridge Community Development Department, June 20, 2003) shows that the average rent for a two-room apartment went down by 9.2% between August 2002 and April 2003.
It should be said that while the preferred path is abolition of rent control, no government is thereby obliged to turn away from the goals that orginally inspired the policy. Disadvantaged families can still be helped. Financial aid in the form of rental subsidies or vouchers can be calculated on the basis of household income. This option has the merit of being relatively inexpensive, and above all of being efficient, because it does not remove the incentive for new apartment construction or for the proper upkeep of existing apartments. As the housing shortage is sure to disappear in a deregulated system, landlords will rapidly feel the pressure of competition and they will intensify their efforts to attract tenants. The quality of apartments for rent will improve, and it will thus be possible for our less affluent families to live in suitable housing, this without breaking their budget just to put a roof over their heads – and without having to bribe anyone!
If rent control indeed results in the dire consequences that we have identified, and if it harms the very people it’s meant to help, how do we explain the readiness of our law makers to commend and adopt the policy? In reality, considerations that have nothing to do with efficacy often provoke governments to institute rent control. They do it because the primary concern of politicians is to look good to the people who elect them. They do it because policies like rent control give the impression of a big-hearted State looking out for the disadvantaged. Even if politicians are aware that rent control will create severe adverse effects over the long term, and that the wiser course would be to liberalize the market, how many of them would risk their careers on a strategy that will bear fruit only long after they have left office?
Rent control is a blunt tool of intervention that provides a short term solution, delivers the instant gratitude of a bloc of voters to politicians, and involves no public expenditure. These three criteria, unfortunately, often suffice to justify a policy that was introduced without in-depth analysis and without careful regard for the consequences it would inflict upon an entire sector of the economy.
Nathalie Elgrably is an Economist at the Montreal Economic Institute and author of the book La face cachée des politiques publiques.