In the spirit of ‘tilling the Epistemic commons’ here I am trying to articulate some of my ideas around rent controls. They may be wrong and I welcome good faith disagreement, counter-argument, or contrary evidence. I’m putting this out there to facilitate my own learning and maybe that of others.
The argument against price controls is this: a higher price on a good is a signal to produce more of that good. This is what we want. If there is more demand for surgical mask than can currently be met, then letting the price rise means that more masks get produced and we end up with more people having a mask at a price they are willing to pay. This is a good outcome. The alternative scenario, price controls, results in fewer masks to go around, and they get allocated badly, maybe through queueing or some sort of lottery.
This is a cute argument! It's often correct. But I am sceptical about how well it applies to housing.
Let's imagine some form of limits on rent increases: once a property enters the rental market, quality-adjusted rents stay the same in real terms. That is, they can go up in line with CPI, or in line with an increase to the quality of the property. For fun, I'm going to call this "real stable rents" or RSR. What impact would this have?
The most important beneficiary is people who actually quite want to stay in their home. These people are vulnerable to unfair rent increases, because they like their home and are willing to pay a premium to stay there: although the property might only attract $500 in the open market, the incumbent tenants are willing to pay more because it is their home and they don't want the very high switching cost of a forced move. Their landlord can take advantage of this, because there is no way for the tenant to obtain the same service (renting this particular property) from someone else. There are also negative externalities from forced moves, as well as negative externalities from consuming so much of someone's income that they can't afford food or healthcare. I think this is a good case for regulating price increases where it's about tackling a market failure around both low competition and these negative externalities. (RSR is like a pigovian tax on the landlord with the revenue paid to the tenant).
What about when people want to move? Instability is a bad thing, but there are also efficiency benefits to people voluntarily moving to areas where they can be more productive.
Well the solution here is deceptively simple and it's about having a RSR system that is broad in scope so that the person can move into a similar priced property when they move. This is a lot like the current system but instead of swapping houses with someone in another city and we both end up paying 10% more rent for the privilege, we swap houses and pay the same.
OK then, but the population is growing. What about new supply?
Here is where it gets trickier. It's worth recognising that most landlord investment doesn't go into new housing, it goes into existing stock. If landlords are a bit put off, it mostly reduces speculation on existing properties, not new ones. THIS SEEMS LIKE A POSITIVE.
But for those new ones, I looked at the financing data going back to July 2019 (which is the earliest the data is available for investor finance) -- Tables 3 and 13, here. Over that period investors contributed about 25% of the total finance going into construction of dwellings or purchase of newly-erected dwellings. This is about $1 billion per quarter. I guess this is what is potentially at risk if investors feel that their investment returns are under threat. At the same time, I could imagine that if this investor demand decreased it would be partially offset by increased demand from owner-occupiers, including renters who would have more money.
However, I'm pretty sceptical that investors would be that put off. For this to be the case, investors would have to be very tuned into changes in rental laws, and RSR would have to make a material difference to their expected returns over time. Evidence suggests that investors are almost comically oblivious to rental laws. Even if they weren’t, for RSR to influence decisions landlords would have to be a priori expecting above-inflation rent increases year-on-year, and I doubt this is the case.
However, we ought to ask why there might be rent increases above inflation year-on-year, and I’m increasingly warming to the point that making it easier to build market-rate housing will shift the supply curve and we’ll have more houses built. If we do this, and get to a place where housing supply is more elastic, there is less downside to RSR (because landlords wouldn’t otherwise be anticipating big rent increases) but still the upsides I’ve described. If housing supply remains fairly inelastic, then RSR still offers a big benefit, maybe has some downside, but has a relatively marginal effect on supply relative to other constraints. Seems to me like it nets out positive one way or the other.
In this post I've discussed a model of limiting rent increases to inflation, which I call "real stable rents" or RSR. This model has welfare benefits for the people who can afford to remain in their homes, and for the communities that benefit from this stability. I see potential downsides if people don't move when it's otherwise good for them and society more broadly, but I think this is avoidable. The main concern I raise is around potential impacts on supply. Currently investors contribute around 25% of finance for new dwellings, or $1 billion per month. While there could be negative effects here, the expected value of positive effects outweighs the expected value of these negative effects.