Monday, May 26, 2008
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Many cities in the United States and the rest of the world have rent controls. The primary motive for rent controls is to provide affordable housing for low-income people. Most economists argue that rent controls are a lousy way to achieve that objective.
In their strictest sense, rent controls prevent the owners of housing (typically apartments) from increasing the rent they charge. Rent controls are examples of the type of price controls known as price ceilings. The law does not allow the price to rise above the ceiling.
The rent-controlled price is necessarily below the market equilibrium price. (Otherwise, there would be no need for rent controls.) What does supply and demand analysis suggest about the effect of imposing rent controls?
Suppose that in the absence of price controls a particular type of apartment in New York City would rent for $2,000 per month. Suppose New York has price controls that do not permit the landlord to charge more than $1,500 per month. In equilibrium, the number of apartments supplied at $2,000 per month equals the number of apartments demanded at that price.
At the rent-controlled price, however, the number of apartments supplied is smaller than in equilibrium. (For example, some apartment building owners may decide to convert their buildings into condominiums or office space if they are not allowed to charge the market rent for apartments.) The number of apartments demanded at the rent-controlled price exceeds the number of apartments supplied. The rent controls cause a shortage of apartments.
How well do rent controls achieve the objective of providing affordable housing for low-income people? If someone is lucky enough to have a rent-controlled apartment, they benefit from the policy. In practice, however, many of the people with rent-controlled apartments have middle or high incomes. (The rents are controlled, but the apartments may be available to anyone.)
Interfering with markets by controlling prices can lead to strange results. For example, tenants who want to move might continue to lease the apartment and sublet it at the higher market rate. (Thus the landlord is not receiving full compensation for providing the apartment, and the one who sublets the apartment receives substantial income just for keeping the lease.) Landlords also respond to rent controls by foregoing normal maintenance on the buildings. Landlords also might charge tenants extra fees to try to skirt the price controls and receive something closer to the market rent. Because of the shortage of apartments, many people who want an apartment at the rent controlled price are unable to find one. FEWER apartments are available to be rented with rent controls than without rent controls. Is this what we had in mind when choosing to implement rent controls?
Alternatives to rent controls which might achieve the objective of providing affordable housing for low income people:
• Provide low-income people with more income.
• Provide vouchers that can be used to pay for housing.
• Provide subsidized housing for low-income people.