The actual cause of the housing crisis
We ought to discard all misleading ideas and focus on the actual cause of the housing crisis. What do Paris, London, New York, and Montreal have in common? The answer is simple: rent control! Governments intervene with rent control laws to limit the amounts that landlords can charge for the apartments they own. By legislating such policies, the State effectively prohibits tenants and landlords from negotiating mutually advantageous rental rates. Instead, the State determines an artificially low rent, a price that happens to be lower than necessary to ensure balance between the supply and demand for apartments. This sort of statist intervention was born in Paris and London during the first World War, and it took root in New York and many other American cities during World War II.
In Quebec, rent control was initiated by the federal government in 1940 as part of the War Measures Act. The policy was supposed to be temporary. But like countless other interventions that were supposed to be temporary, the measure has never been repealed. Quite the reverse. The provincial government took over the federal role and passed the Act concerning the Regulation of Rents in 1951, and the Act establishing the Rental Board in 1979. The basic purpose of the Board is to regulate relations between tenants and landlords, and it puts particular emphasis on the protection of tenants. By virtue of this legislation, the Rental Board has jurisdiction over the setting of rental rates, the duration of a lease, and rights involving repossession, demolition, and conversion of a property into a co-proprietorship.
Current circumstances as they relate to the rental housing market can be summed up as follows: an individual uses his own money to acquire a revenue-earning property, but the State reserves the right to dictate how he can make use of that property. In other words the private sector takes the risk, while the State monopolizes control. «You pay, I decide.» Quite an interesting concept!
Rent control is a policy born of good intentions aimed at assisting lower income families. By preventing rents from rising above a certain limit, governments believe they’re responding to public pressure to protect vulnerable households from excessive price increases. The policy proceeds from the hypothesis that, in the absence of rent control, building owners who wish to rent out their apartments will do their best to fleece tenants by charging exorbitant rents. Given that housing is a vital necessity of life, the well-intentioned consider it imperative for governments to shield defenceless tenants from the slings and arrows of voracious landlords.
Housing is, without question, an essential requirement for each and every one of us. But so is food. And so is clothing. Yet the State does not intervene to keep the price of skirts, trousers, and T-shirts artificially low, and the poorer households among us are not thereby disadvantaged. It just so happens that the market offers an immense variety of clothes for all budgets. What’s more, competitive pressures force merchants to lower their prices as soon as their inventories grow too large.
In regard to food, the State does intervene, granted, but only to maintain the prices of certain agricultural commodities at an artificially high level. (Economists refer to this as price support.) Consequently consumers, including all consumers at the lowest end of the income scale, pay more for certain foodstuffs than they would in a totally free market. Is food any less vital to life than housing? It would seem that an arcane kind of logic is at work among our policy-makers. On the one hand, they keep the cost of rent low to protect poor people. On the other hand, they use their authority to deliberately boost the cost to those same poor people of putting food on their tables!
The contradiction is glaring, and leads us to a key question. Is it fair to postulate that tenants would be at the mercy of landlords if rent control did not exist? As in all other markets, each of the parties in a rental transaction has something that the other wants. The tenant wants housing from the landlord, and the landlord wants rental income from the tenant. They are thus motivated to reach a mutually beneficial agreement. In a market that operates freely and where competition is open, landlords would refrain from mistreating their tenants for fear of seeing them pack up and go elsewhere. No reason whatsoever exists to think that in the absence of statist controls people would ever consent to pay overpriced rents for hovels and slums.
Bakers, with zero coercion from the State, try to provide their customers with the best bread at the lowest possible price. Similarly, landlords operating in a free market will make every effort to offer high quality housing at the lowest possible price. They will do so not out of altruistic or philanthropic motives, but because they will be aiming to maximize their own interests. If it’s reasonable to assume that consumers are not liable to be exploited in other markets, why would they tend to fall prey in the rental housing market? Or, to put it another way, if we can agree that merchants go out of their way to attract customers in all other markets, why should we think otherwise in the case of business people who own apartment buildings?
To repeat: rent control stems from a worthy sentiment, namely to assist those of lower income. The goal of this analysis is not to judge whether such assistance is desirable. The choices that a society makes, the values it pursues, are matters for sociology or philosophy, not for economics. The role of the economist is limited; it is not to assess the objective of a given policy, but the effectiveness of the tools chosen to attain the objective. Rather than challenge the end goal that inspires the State’s intervention, the economist seeks to learn if the means employed actually work. In this case, is rent control helpful and successful? Does it deliver the desired end of benefiting our lowest income households?
Economists are unanimous in their answer.
A study published in the American Economic Review (J.R. Kearl, Clayne L. Pope, Gordon C. Whinting and Larry T. Wimmer, «A confusion of economists,» vol. 69, May 1979, pp. 28-37), reported that 98% of economists surveyed agreed that this form of intervention reduces both the number and quality of available housing units. The results of a similar study appear in Canadian Public Policy (Walter Block and Michael Walker, «Entropy in the Canadian economic profession: Sampling consensus on the major issues,» vol. 14, no. 2, June 1988, pp. 137-150). Here the authors report that 95% of economists surveyed were of the opinion that rent controls are clearly inefficient and in fact harmful. This view is shared by all economists, notwithstanding their political convictions. From Milton Friedman and Friedrich Hayek, both classical liberal economists and Nobel prizewinners, to Gunnar Myrdal, also a Nobelist in economics and principal architect of the Workers’ Party of Sweden, the entire profession affirms without reservation that rent controls are damaging and detrimental to tenants.
Commenting on the issue, the socialist economist Assar Lindbeck has written, «Rent control is the most effective method we know for destroying a city, except for bombing it.» (Assar Lindbeck, The Political Economy of the New Left, New York, Harper and Row, 1972, p. 39). All the experts who have studied the question conclude with near unanimity that rent control is not a desirable policy, since it reduces the number of available housing units and puts landlords at a severe disadvantage. Nevertheless, politicians and activists remain immune to the teachings of economic science, they ignore the empirical evidence no matter how compelling, and they insist on challenging the basic laws of the marketplace.
Nathalie Elgrably est économiste à l’Institut économique de Montréal et auteure du livre La face cachée des politiques publiques.