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How Rent Control Drives Out Affordable Housing Part II – by William Tucker

Posted on 01. Aug, 2018 by in all, Magazine Articles

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Nevertheless, rent control is proving vulnerable. On January 1, 1997, Boston, Cambridge, and Brookline became the first major American cities to abandon rent controls since 1950. The process was not altogether voluntary. The initiative came from a statewide campaign organized by Boston and Cambridge property owners, who put up a state ballot initiative banning rent control. The initiative that passed in 1994 required immediate removal of rent controls.Landlords, however, soon agreed to a two-year extension of controls for hardship cases.

The property owners during the referendum argued that the costs of rent control were being borne by other taxpayers. When landlords start losing money because of low rents, they are usually able to get their property assessments lowered. This leads to a general decline in property values in a rent-controlled city and thus less revenue going to governments. In Massachusetts, property tax receipts are shared at the state level through a complicated formula that

takes money from cities with high property tax bases and gives money to cities with low bases. The owners of rental units argued that lower rents in Boston, Cambridge, and Brookline were being subsidized by higher property taxes elsewhere. Massachusetts voters found this argument persuasive and passed an initiative phasing out rent control by a 51-49 margin–even though it lost 2-to-1 in the state’s three rent-controlled cities.

The aftermath has been encouraging to those who believe that rent control can be abolished without widespread disruption. Tenant activists had predicted huge rent increases, mass evictions, and a surge in the homeless population if the regulations were abandoned. None of this has occurred. Formerly regulated rents have risen, but construction of new apartments has also begun for the first time in 25 years. Since the overwhelming majority of rental units were
deregulated by 1995, and the rest by January 1, 1997, the worst is probably over.

To be sure, there have been individual cases of hardship that tend to attract a great deal of media attention. Almost without exception, these incidents involve tenants who have suffered a loss of income but still have been able to afford their apartments because of rent control. In one case, featured prominently in many newspapers, an elderly diabetic who had been unable to work for 10 years was losing his apartment in the Fenway district of Boston because the landlord was tripling the rent.[1]

But tenants frequently are forced to move when they suffer loss of income. Rent control only delays the process and its abolition cannot be held responsible for every instance of tenant displacement. Boston property owners have alleviated the situation considerably by setting up a bank of 200 apartments around the city that are immediately available for such emergencies.

Rent control is now under attack in New York as well. In December 1996, State Senate Republican majority leader Joseph Bruno announced that he intended to end “rent control as we know it” in New York City within the next few years. Bruno, a successful Rensselaer County businessman and free market advocate, says he is philosophically opposed to rent control and believes it is doing enormous harm to New York City. His vow to overturn the system is no idle boast. Under New York State’s arcane legislative proceedings, the majority leader wields enormous power, virtually controlling the entire legislative agenda. Because New York’s rent control ordinance is still only “temporary,” it must be renewed every two years. Bruno has said that if the Democratic Assembly does not agree to a two-to-four-year phase-out, the Senate will simply fail to renew the statute and rent regulations will [have expired] on June 15. Bruno’s effort has set off a firestorm among New York City’s regulated tenant population.

Shadow Markets

Although the battle over rent control is routinely portrayed as a contest of “tenants-versus-landlords,” in fact the situation is far more complex. Even in New York, which has some of the strictest rent control in the country, only 1.1 million of the city’s 1.7 million apartments–about 63 percent–are regulated. This produces a tenant population of about two million individuals, one of the most formidable political constituencies in the city, with a direct interest in retaining rent control. But since New York City has seven million inhabitants, what are the interests of the other five million? And what are the effects of rent control on those among New York State’s eighteen million inhabitants who do not live under rent control, or on individuals in other parts of the country who want to move to New York?

It is useful to analyze this issue in terms of the concept of “shadow markets.” This concept was developed by Denton Marks in a paper in the Journal of Urban Economics in 1984, [2]  and also suggested by George Horwich and David Leo Weimer that same year in the context of oil price controls.[3] Standard supply-and-demand theory predicts that any price controls, including rent controls, will produce an excess of demand over supply – an economic “shortage.” There is virtually no disagreement on this premise. In a survey of 75 of the world’s outstanding economists, J. R. Kearl and his colleagues found nearly unanimous agreement on the proposition: “A ceiling on rents will reduce the quality and quantity of housing.”[4] Of 30 propositions presented for review, only one other received the same level of support. Further, a poll by the American Economic Association of its members in 1992 produced a similar result. [5]Yet as Marks pointed out in his 1984 paper, rent control, or any other price control, rarely works in a straightforward fashion. It is virtually impossible for a government to control and regulate the entire supply of a commodity. Once a shortage appears, alternative markets and black markets will arise. The government can react in a variety of ways. Often, it will criminalize these markets and prosecute suppliers in draconian fashion. In Iran, merchants who sell above the government prices have their feet burned with hot irons in the public marketplace.

More often than not, however, governments may tolerate these markets as a way of relieving shortages. In many instances, governments will deliberately leave a portion of the market untouched by regulation in order to serve as a safety valve for excess demand. This unregulated portion of a regulated market becomes the “shadow market.”

The question posed by Marks and by Horwich and Weimer is “What happens to prices in this shadow market?” Using standard supply-and-demand theory, they predicted that prices in the unregulated portion of the market will be forced higher than their normal market value. This is because the limited supply in the shadow market must absorb the shortage, the excess of demand over supply, in the regulated part of the market. Because prices are pushed too low in the regulated sector, they are forced above what would otherwise be the market price in the unregulated sector. The result is that average prices in both sectors are likely to end up about as high as their free-market level. They could end up higher because of maldistributions and diseconomies in the regulated sector of the market.

[This is part II of a 10-part series.]

[1] Gregg Birnbaum, “Ill Man’s Apt. Bill Up 219%,” The New York Post, April 7, 1997.

[2] Denton Marks, “The Effects of Partial-Coverage Rent Control on the Price and Quantity of 

      Rental Housing,” Journal of Urban Economics 16 (1984), 360-369.

[3] George Horwich and David Leo Weimer, Oil Price Shocks, Market Response, and

      Contingency Planning (Washington: American Enterprise Institute,1984).

[4] J.R. Kearl, Clayne L. Pope, Gordon C. Whiting, and Larry T. Wimmer, “A Confusion of

     Economists,” American Economic Review, 69, May 1979, 28-37.

[5] “Survey of Members,” American Economic Review, December, 1992.

William Tucker is the author of The Excluded Americans: Homelessness and Housing Policies –

(Regnery), and Zoning, Rent Control, and Affordable Housing – (Cato). Reprinted with permission of The Cato Institute, a public policy research organization — a think tank – dedicated to the principles of individual liberty, limited government, free markets and peace. Its scholars and analysts conduct independent, nonpartisan research on a wide range of policy issues. For more information, visit www.cato.org.

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