WHAT RENT CONTROL DOES
GOVERNMENT CONTROL of the rents of houses and apartments
is a special form of price control. Most of its consequences are
substantially the same as those of price control in general, but a
few call for special consideration.
Rent controls are sometimes imposed as a part of general
price controls, but more often they are decreed by a special law.
A frequent occasion is the beginning of a war. An army post is
set up in a small town; rooming houses increase rents for rooms;
owners of apartments and houses increase their rents. This
leads to public indignation. Or houses in some towns may be
actually destroyed by bombs, and the need for armaments or
other supplies diverts materials and labor from the building
trades.
Rent control is initially imposed on the argument that the
supply of housing is not "elastic"—i.e., that a housing shortage
cannot be immediately made up, no matter how high rents are
allowed to rise. Therefore, it is contended, the government, by
forbidding increases in rents, protects tenants from extortion
and exploitation without doing any real harm to landlords and
without discouraging new construction.
This argument is defective even on the assumption that the
rent control will not long remain in effect. It overlooks an
immediate consequence. If landlords are allowed to raise rents
to reflect a monetary inflation and the true conditions of supply
and demand, individual tenants will economize by taking less
space. This will allow others to share the accommodations that
are in short supply. The same amount of housing will shelter
more people, until the shortage is relieved.
Rent control, however, encourages wasteful use of space. It
discriminates in favor of those who already occupy houses or
apartments in a particular city or region at the expense of those
who find themselves on the outside. Permitting rents to rise to
the free market level allows all tenants or would-be tenants
equal opportunity to bid for space. Under conditions of monetary
inflation or real housing shortage, rents would rise just as
surely if landlords were not allowed to set an asking price, but
were allowed merely to accept the highest competitive bids of
tenants.
The effects of rent control become worse the longer the rent
control continues. New housing is not built because there is no
incentive to build it. With the increase in building costs (commonly
as a result of inflation), the old level of rents will not
yield a profit. If, as often happens, the government finally
recognizes this and exempts new housing from rent control,
there is still not an incentive to as much new building as if older
buildings were also free of rent control. Depending on the
extent of money depreciation since old rents were legally frozen,
rents for new housing might be ten or twenty times as high
as rent in equivalent space in the old. (This actually happened
in France after World War II, for example.) Under such conditions
existing tenants in old buildings are indisposed to move,
no matter how much their families grow or their existing accommodations
deteriorate.
Because of low fixed rents in old buildings, the tenants already
in them, and legally protected against rent increases,
are encouraged to use space wastefully, whether or not their
families have grown smaller. This concentrates the immediate
pressure of new demand on the relatively few new buildings. It
tends to force rents in them, at the beginning, to a higher level
than they would have reached in a wholly free market.
Nevertheless, this will not correspondingly encourage the
construction of new housing. Builders or owners of preexisting
apartment houses, finding themselves with restricted profits or
perhaps even losses on their old apartments, will have little or
no capital to put into new construction. In addition, they, or
those with capital from other sources, may fear that the government
may at any time find an excuse for imposing rent
controls even on the new buildings. And it often does.
The housing situation will deteriorate in other ways. Most
important, unless the appropriate rent increases are allowed,
landlords will not trouble to remodel apartments or make other
improvements in them. In fact, where rent control is particularly
unrealistic or oppressive, landlords will not even keep
rented houses or apartments in tolerable repair. Not only will
they have no economic incentive to do so; they may not even
have the funds. The rent-control laws, among their other effects,
create ill feeling between landlords who are forced to take
minimum returns or even losses, and tenants who resent the
landlord's failure to make adequate repairs.
A common next step of legislatures, acting under merely
political pressures or confused economic ideas, is to take rent
controls off "luxury" apartments while keeping them on low or
middle-grade apartments. The argument is that the rich tenants
can afford to pay higher rents, but the poor cannot.
The long-run effect of this discriminatory device, however,
is the exact opposite of what its advocates intend. The builders
and owners of luxury apartments are encouraged and rewarded;
the builders and owners of the more needed low-rent
housing are discouraged and penalized. The former are free to
make as big a profit as the conditions of supply and demand
warrant; the latter are left with no incentive (or even capital) to
build more low-rent housing.
The result is a comparative encouragement to the repair and
remodeling of luxury apartments, and a tendency for what new
private building there is to be diverted to luxury apartments.
But there is no incentive to build new low-income housing, or
even to keep existing low-income housing in good repair. The
accommodations for the low-income groups, therefore, will
deteriorate in quality, and there will be no increase in quantity.
Where the population is increasing, the deterioration and
shortage in low-income housing will grow worse and worse. It
may reach a point where many landlords not only cease to make
any profit but are faced with mounting and compulsory losses.
They may find that they cannot even give their property away.
They may actually abandon their property and disappear, so
they cannot be held liable for taxes. When owners cease supplying
heat and other basic services, the tenants are compelled to
abandon their apartments. Wider and wider neighborhoods are
reduced to slums. In recent years, in New York City, it has
become a common sight to see whole blocks of abandoned
apartments, with windows broken, or boarded up to prevent
further havoc by vandals. Arson becomes more frequent, and
the owners are suspected.
A further effect is the erosion of city revenues, as the
property-value base for such taxes continues to shrink. Cities
go bankrupt, or cannot continue to supply basic services.
When these consequences are so clear that they become
glaring, there is of course no acknowledgment on the part of the
imposers of rent control that they have blundered. Instead,
they denounce the capitalist system. They contend that private
enterprise has "failed" again; that "private enterprise cannot do
the job." Therefore, they argue, the State must step in and
itself build low-rent housing.
This has been the almost universal result in every country
that was involved in World War II or imposed rent control in an
effort to offset monetary inflation.
So the government launches on a gigantic housing program—
at the taxpayers' expense. The houses are rented at a
rate that does not pay back costs of construction and operation.
A typical arrangement is for the government to pay annual
subsidies, either directly to the tenants in lower rents or to the
builders or managers of the State housing. Whatever the nominal
arrangement, the tenants in the buildings are being subsidized
by the rest of the population. They are having part of
their rent paid for them. They are being selected for favored
treatment. The political possibilities of this favoritism are too
clear to need stressing. A pressure group is built up that believes
that the taxpayers owe it these subsidies as a matter of
right. Another all but irreversible step is taken toward the total
Welfare State.
A final irony of rent control is that the more unrealistic, Draconian,
and unjust it is, the more fervid the political arguments
for its continuance. If the legally fixed rents are on the average
95 percent as high as free market rents would be, and only
minor injustice is being done to landlords, there is no strong
political objection to taking off rent control?, because tenants
will only have to pay increases averaging about 5 percent. But if
the inflation of the currency has been so great, or the rentcontrol
laws so repressive and unrealistic, that legally fixed
rents are only 10 percent of what free market rents would be,
and gross injustice is being done to owners and landlords, a
great outcry will be raised about the dreadful evils of removing
the controls and forcing tenants to pay an economic rent. The
argument is made that it would be unspeakably cruel and
unreasonable to ask the tenants to pay so sudden and huge an
increase. Even the opponents of rent control are then disposed
to concede that the removal of controls must be a very cautious,
gradual, and prolonged process. Few of the opponents of rent
control, indeed, have the political courage and economic insight
under such conditions to ask even for this gradual decontrol.
In sum, the more unrealistic and unjust the rent control
is, the harder it is politically to get rid of it. In country after
country, a ruinous rent control has been retained years after
other forms of price control have been abandoned.
The political excuses offered for continuing rent control pass
credibility. The law sometimes provides that the controls may
be lifted when the "vacancy rate" is above a certain figure. The
officials retaining the rent control keep triumphantly pointing
out that the vacancy rate has not yet reached that figure. Of
course not. The very fact that the legal rents are held so far
below market rents artificially increases the demand for rental
space at the same time as it discourages any increase in supply.
So the more unreasonably low the rent ceilings are held, the
more certain it is that the "scarcity" of rental houses or apartments
will continue.
The injustice imposed on landlords is flagrant. They are, to
repeat, forced to subsidize the rents paid by their tenants, often
at the cost of great net losses to themselves. The subsidized
tenants may frequently be richer than the landlord forced to
assume part of what would otherwise be his market rent. The
politicians ignore this. Men in other businesses, who support
the imposition or retention of rent control because their hearts
bleed for the tenants, do not go so far as to suggest that they
themselves be asked to assume part of the tenant subsidy
through taxation. The whole burden falls on the single small
class of people wicked enough to have built or to own rental
housing.
Few words carry stronger obloquy than slumlord. And what
is a slumlord? He is not a man who owns expensive property in
fashionable neighborhoods, but one who owns only rundown
property in the slums, where the rents are lowest and where
payment is most dilatory, erratic and undependable. It is not
easy to imagine why (except for natural wickedness) a man who
could afford to own decent rental housing would decide to
become a slumlord instead.
When unreasonable price controls are placed on articles of
immediate consumption, like bread, for example, the bakers
can simply refuse to continue to bake and sell it. A shortage
becomes immediately obvious, and the politicians are compelled
to raise the ceilings or repeal them. But housing is very
durable. It may take several years before tenants begin to feel
the results of the discouragement to new building, and to
ordinary maintenance and repair. It may take even longer
before they realize that the scarcity and deterioration of housing
is directly traceable to rent control. Meanwhile, as long as
landlords are getting any net income whatever above their taxes
and mortgage interest, they seem to have no alternative but to
continue holding and renting their property. The politi-
cians— remembering that tenants have more votes than landlords—
cynically continue their rent control long after they
have been forced to give up general price controls.
So we come back to our basic lesson. The pressure for rent
control comes from those who consider only its imagined
short-run benefits to one group in the population. But when we
consider its long-run effects on everybody, including the tenants
themselves, we recognize that rent control is not only increasingly
futile, but increasingly destructive the more severe it is,
and the longer it remains in effect.
GOVERNMENT CONTROL of the rents of houses and apartments
is a special form of price control. Most of its consequences are
substantially the same as those of price control in general, but a
few call for special consideration.
Rent controls are sometimes imposed as a part of general
price controls, but more often they are decreed by a special law.
A frequent occasion is the beginning of a war. An army post is
set up in a small town; rooming houses increase rents for rooms;
owners of apartments and houses increase their rents. This
leads to public indignation. Or houses in some towns may be
actually destroyed by bombs, and the need for armaments or
other supplies diverts materials and labor from the building
trades.
Rent control is initially imposed on the argument that the
supply of housing is not "elastic"—i.e., that a housing shortage
cannot be immediately made up, no matter how high rents are
allowed to rise. Therefore, it is contended, the government, by
forbidding increases in rents, protects tenants from extortion
and exploitation without doing any real harm to landlords and
without discouraging new construction.
This argument is defective even on the assumption that the
rent control will not long remain in effect. It overlooks an
immediate consequence. If landlords are allowed to raise rents
to reflect a monetary inflation and the true conditions of supply
and demand, individual tenants will economize by taking less
space. This will allow others to share the accommodations that
are in short supply. The same amount of housing will shelter
more people, until the shortage is relieved.
Rent control, however, encourages wasteful use of space. It
discriminates in favor of those who already occupy houses or
apartments in a particular city or region at the expense of those
who find themselves on the outside. Permitting rents to rise to
the free market level allows all tenants or would-be tenants
equal opportunity to bid for space. Under conditions of monetary
inflation or real housing shortage, rents would rise just as
surely if landlords were not allowed to set an asking price, but
were allowed merely to accept the highest competitive bids of
tenants.
The effects of rent control become worse the longer the rent
control continues. New housing is not built because there is no
incentive to build it. With the increase in building costs (commonly
as a result of inflation), the old level of rents will not
yield a profit. If, as often happens, the government finally
recognizes this and exempts new housing from rent control,
there is still not an incentive to as much new building as if older
buildings were also free of rent control. Depending on the
extent of money depreciation since old rents were legally frozen,
rents for new housing might be ten or twenty times as high
as rent in equivalent space in the old. (This actually happened
in France after World War II, for example.) Under such conditions
existing tenants in old buildings are indisposed to move,
no matter how much their families grow or their existing accommodations
deteriorate.
Because of low fixed rents in old buildings, the tenants already
in them, and legally protected against rent increases,
are encouraged to use space wastefully, whether or not their
families have grown smaller. This concentrates the immediate
pressure of new demand on the relatively few new buildings. It
tends to force rents in them, at the beginning, to a higher level
than they would have reached in a wholly free market.
Nevertheless, this will not correspondingly encourage the
construction of new housing. Builders or owners of preexisting
apartment houses, finding themselves with restricted profits or
perhaps even losses on their old apartments, will have little or
no capital to put into new construction. In addition, they, or
those with capital from other sources, may fear that the government
may at any time find an excuse for imposing rent
controls even on the new buildings. And it often does.
The housing situation will deteriorate in other ways. Most
important, unless the appropriate rent increases are allowed,
landlords will not trouble to remodel apartments or make other
improvements in them. In fact, where rent control is particularly
unrealistic or oppressive, landlords will not even keep
rented houses or apartments in tolerable repair. Not only will
they have no economic incentive to do so; they may not even
have the funds. The rent-control laws, among their other effects,
create ill feeling between landlords who are forced to take
minimum returns or even losses, and tenants who resent the
landlord's failure to make adequate repairs.
A common next step of legislatures, acting under merely
political pressures or confused economic ideas, is to take rent
controls off "luxury" apartments while keeping them on low or
middle-grade apartments. The argument is that the rich tenants
can afford to pay higher rents, but the poor cannot.
The long-run effect of this discriminatory device, however,
is the exact opposite of what its advocates intend. The builders
and owners of luxury apartments are encouraged and rewarded;
the builders and owners of the more needed low-rent
housing are discouraged and penalized. The former are free to
make as big a profit as the conditions of supply and demand
warrant; the latter are left with no incentive (or even capital) to
build more low-rent housing.
The result is a comparative encouragement to the repair and
remodeling of luxury apartments, and a tendency for what new
private building there is to be diverted to luxury apartments.
But there is no incentive to build new low-income housing, or
even to keep existing low-income housing in good repair. The
accommodations for the low-income groups, therefore, will
deteriorate in quality, and there will be no increase in quantity.
Where the population is increasing, the deterioration and
shortage in low-income housing will grow worse and worse. It
may reach a point where many landlords not only cease to make
any profit but are faced with mounting and compulsory losses.
They may find that they cannot even give their property away.
They may actually abandon their property and disappear, so
they cannot be held liable for taxes. When owners cease supplying
heat and other basic services, the tenants are compelled to
abandon their apartments. Wider and wider neighborhoods are
reduced to slums. In recent years, in New York City, it has
become a common sight to see whole blocks of abandoned
apartments, with windows broken, or boarded up to prevent
further havoc by vandals. Arson becomes more frequent, and
the owners are suspected.
A further effect is the erosion of city revenues, as the
property-value base for such taxes continues to shrink. Cities
go bankrupt, or cannot continue to supply basic services.
When these consequences are so clear that they become
glaring, there is of course no acknowledgment on the part of the
imposers of rent control that they have blundered. Instead,
they denounce the capitalist system. They contend that private
enterprise has "failed" again; that "private enterprise cannot do
the job." Therefore, they argue, the State must step in and
itself build low-rent housing.
This has been the almost universal result in every country
that was involved in World War II or imposed rent control in an
effort to offset monetary inflation.
So the government launches on a gigantic housing program—
at the taxpayers' expense. The houses are rented at a
rate that does not pay back costs of construction and operation.
A typical arrangement is for the government to pay annual
subsidies, either directly to the tenants in lower rents or to the
builders or managers of the State housing. Whatever the nominal
arrangement, the tenants in the buildings are being subsidized
by the rest of the population. They are having part of
their rent paid for them. They are being selected for favored
treatment. The political possibilities of this favoritism are too
clear to need stressing. A pressure group is built up that believes
that the taxpayers owe it these subsidies as a matter of
right. Another all but irreversible step is taken toward the total
Welfare State.
A final irony of rent control is that the more unrealistic, Draconian,
and unjust it is, the more fervid the political arguments
for its continuance. If the legally fixed rents are on the average
95 percent as high as free market rents would be, and only
minor injustice is being done to landlords, there is no strong
political objection to taking off rent control?, because tenants
will only have to pay increases averaging about 5 percent. But if
the inflation of the currency has been so great, or the rentcontrol
laws so repressive and unrealistic, that legally fixed
rents are only 10 percent of what free market rents would be,
and gross injustice is being done to owners and landlords, a
great outcry will be raised about the dreadful evils of removing
the controls and forcing tenants to pay an economic rent. The
argument is made that it would be unspeakably cruel and
unreasonable to ask the tenants to pay so sudden and huge an
increase. Even the opponents of rent control are then disposed
to concede that the removal of controls must be a very cautious,
gradual, and prolonged process. Few of the opponents of rent
control, indeed, have the political courage and economic insight
under such conditions to ask even for this gradual decontrol.
In sum, the more unrealistic and unjust the rent control
is, the harder it is politically to get rid of it. In country after
country, a ruinous rent control has been retained years after
other forms of price control have been abandoned.
The political excuses offered for continuing rent control pass
credibility. The law sometimes provides that the controls may
be lifted when the "vacancy rate" is above a certain figure. The
officials retaining the rent control keep triumphantly pointing
out that the vacancy rate has not yet reached that figure. Of
course not. The very fact that the legal rents are held so far
below market rents artificially increases the demand for rental
space at the same time as it discourages any increase in supply.
So the more unreasonably low the rent ceilings are held, the
more certain it is that the "scarcity" of rental houses or apartments
will continue.
The injustice imposed on landlords is flagrant. They are, to
repeat, forced to subsidize the rents paid by their tenants, often
at the cost of great net losses to themselves. The subsidized
tenants may frequently be richer than the landlord forced to
assume part of what would otherwise be his market rent. The
politicians ignore this. Men in other businesses, who support
the imposition or retention of rent control because their hearts
bleed for the tenants, do not go so far as to suggest that they
themselves be asked to assume part of the tenant subsidy
through taxation. The whole burden falls on the single small
class of people wicked enough to have built or to own rental
housing.
Few words carry stronger obloquy than slumlord. And what
is a slumlord? He is not a man who owns expensive property in
fashionable neighborhoods, but one who owns only rundown
property in the slums, where the rents are lowest and where
payment is most dilatory, erratic and undependable. It is not
easy to imagine why (except for natural wickedness) a man who
could afford to own decent rental housing would decide to
become a slumlord instead.
When unreasonable price controls are placed on articles of
immediate consumption, like bread, for example, the bakers
can simply refuse to continue to bake and sell it. A shortage
becomes immediately obvious, and the politicians are compelled
to raise the ceilings or repeal them. But housing is very
durable. It may take several years before tenants begin to feel
the results of the discouragement to new building, and to
ordinary maintenance and repair. It may take even longer
before they realize that the scarcity and deterioration of housing
is directly traceable to rent control. Meanwhile, as long as
landlords are getting any net income whatever above their taxes
and mortgage interest, they seem to have no alternative but to
continue holding and renting their property. The politi-
cians— remembering that tenants have more votes than landlords—
cynically continue their rent control long after they
have been forced to give up general price controls.
So we come back to our basic lesson. The pressure for rent
control comes from those who consider only its imagined
short-run benefits to one group in the population. But when we
consider its long-run effects on everybody, including the tenants
themselves, we recognize that rent control is not only increasingly
futile, but increasingly destructive the more severe it is,
and the longer it remains in effect.
No comments:
Post a Comment