Monday, July 14, 2008

We Shouldn't Be Surprised That Rent Control Distorts Markets, Increases Non-Price Rationing

Economic theory predicts that rent control laws will result in these effects (from the Gwartney textbook):

1. Shortages and black markets will develop for housing.
2. The future supply of housing will decline.
3. The quality of housing will deteriorate.
4.
Non-price methods of rationing housing will increase in importance (discrimination).
5.
Inefficient use of housing will result.
6. Long-term renters will benefit at the expense of newcomers.


The New York Sun article "Don't Blame Rangel for His Rent" explains why we shouldn't necessarily blame Rep. Rangel for hoarding 4 rent-controlled apartments in NYC, we should blame the rent control laws themselves for distorting housing markets and creating the adverse, inefficient outcomes outlined above:

Consider the world as it appears to owners of New York City's million-plus apartments governed by rent regulation. By definition, they are asked to take a price which is different than that which the market might dictate — in most instances (especially in Manhattan neighborhoods), likely a lower price. This essential fact is what leads to situations such as that of Mr. Rangel — and other distortions.

If one cannot get the best possible price for one's premises, it is inevitable for owners to seek other, non-monetary forms of compensation (see #4 above). Having access to the chairman of the House Ways and Means Committee — a person with the presumed capacity to influence matters at the city level, as well — could be one such form of compensation.

There are other, much more common — and pernicious — forms of non-monetary compensation which owners in a rent-regulated world will find tempting. Far more likely, however, would be security. If one is going to be forced to sell a product at a discounted price, one has a strong motivation to at least make sure of being paid.

So it is that rent regulation — which forces landlords to sell at such a discount — provides an incentive to rent not to those of modest means but, rather, to the well-heeled: Congressmen, movie stars, and others whose income would lead one to conclude they'll pay the rent on time. Or to yuppie couples who have no children — and are thus more likely to paint and decorate than cause any damage to the floors and fixtures. They are the nomenklatura of this quasi-socialist system.

8 Comments:

At 7/15/2008 8:07 AM, Anonymous rvturnage said...

What's so bad, is everybody knows this is what happens under rent control...a quote from the NY Daily News article where Rangel defended his deals says it all:

"Every New Yorker knows somebody who's sitting on a rent-stabilized apartment. It's as New York as bagels."

 
At 7/15/2008 9:10 AM, Anonymous Anonymous said...

Are rent controls even legal?

"By definition, they are asked to take a price which is different than that which the market might dictate"

The Fifth Amendment to the Constitution says 'nor shall private property be taken for public use, without just compensation.'

If the government reduces the value of your rental property through rent control that is supposedly supposed to benefit the public isn't that a form of condemnation? Doesn't the use of eminent domain require just compensation?

 
At 7/15/2008 12:49 PM, Anonymous qt said...

Point well taken, Anon. 9:10. That would make an excellent legal approach for a supreme court challenge.

Having rented our home when my husband had heart problems, it is a most illuminating experience. All of the legislation is skewed to the advantage of the tenant.

One usually thinks of the tenant as the more vulnerable party especially if you are the tenant.

We rented our home through a real estate company to a married couple in their 50s who paid for 2 months then declared bankrupcty.

They did not notify us of the bankrupcty and were required to notify only their outstanding creditors. Since the rent was not in default, they did not have to notify us. Our lawyer took steps through the regular courts only to find out about the bankrupcty by accident when we learned that the couple had stiffed the real estate agent on the commission on the sale of their home. Evictions for a bankrupt are pursued through an entirely different set of courts in Ontario.

The couple finally agreed to vacate the premise in return for dropping the judgement and any legal claim. Recovering from heart bypass surgery, my husband was in no condition to pursue a lawsuit.

Then, we got a look at the damages. The husband went so far as removing coverplates, pulling lights down in the house to try to get the local hydro authority to declare that the house was not safe. He & his wife watered plants over the carpets, put burns in the kitchen counters, sprayed oven cleaner on a self-cleaning oven ruining the finish, ran a truck over the septic system smashing the downspout, took little care moving their furniture gouging walls & doors as they went.

In short, they did thousands of dollars worth of damage. The husband knew exactly how to game the system. Two months rent for 8 months of occupation. It is a better deal than Rangel is getting.

 
At 7/15/2008 1:38 PM, Blogger juandos said...

Apparently the lessons of previous price controls attempts are lost (either through ignorance or on purpose) would be reason enough to dump these rent control laws..

 
At 7/15/2008 2:34 PM, Anonymous Anonymous said...

qt your are lucky you don't live in California.

Here we have professional tenants that can game the system for years of free rent at the expense of the landlord with the protection of the court.

Sucks to be a landlord in California.

 
At 7/15/2008 4:40 PM, Anonymous Anonymous said...

Even though rent regulations make Manhattan apartments impossible to find, this is usually taken by the general public as a sign that even more rent control is needed. After all, there is a shortage! The public doesn't understand that profits are a signal to an unregulated market to increase supply. They believe profits are an evil that must be kept in check. That's why anything labeled a "windfall profits tax" is so popular.

 
At 7/15/2008 9:24 PM, Anonymous qt said...

Juandos,

Nice piece. Interesting how we are still blaming the oil companies this time around even though 90% of the world's oil supply is controlled by government enterprises rather than private oil companies.

 
At 7/17/2008 3:18 AM, Blogger juandos said...

qt says: "this time around even though 90% of the world's oil supply is controlled by government enterprises rather than private oil companies"...

You know qt what I found somewhat shocking is that a company the size of Exxon is only number 14 on the list of the world's energy companies and has control of something less than 3% of oil producing areas...

I heard this a speaker's supper a couple of weeks ago from Red Clancy, a long time oil man who was the speaker...

BTW as an aside to the housing market did anyone else see this?

Fannie, Freddie spent $200M to buy influence

If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions.

But the political tentacles of the mortgage giants extend far beyond their checkbooks.

The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home.

They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.

Fannie and Freddie’s aggressive political maneuvering has helped stave off increased regulation and preserve special benefits such as exemption from state and local income taxes and the ability to borrow at low rates.(there is more)...

Aren't Freddie Mac and Fannie Mae the sole source of home loans when people can't get a loan anywhere else?

What do they need to lobby for since they have a corner of the market?

Who's regulation are these two entities afraid of? Congress? Or the individual states?

From this airline employees point of view that $200 million can buy four 737 ER or one 777 aircraft...

This is amazing...

 

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