Rent Control, Redux
by Mike Kimel
Rent Control, Redux
There’s been a small dustup on rent control lately on the blogosphere. Peter Dorman has been pointing out that the theory everyone knows may not fit the facts. I myself covered the topic before here. Its worth a read, I think, but here’s the takeaway
Now, I haven’t been in NYC in decades, but I do know this. After a few decades, there’s time for a market to adjust. If it doesn’t pay to be a landlord, expect fewer people to want to be landlords – the supply of dwellings for rent relative to dwellings for sale will dwindle. If it doesn’t pay to be a renter, expect fewer people to want to be renters – the demand for dwellings for rent relative to dwellings for sale will dwindle. Either way, if rent control “ruined New York City real estate markets” and has been doing so since 1943, one thing we should expect is that the percent of occupied housing units that are owner-occupied (as opposed to renter occupied) in NYC is much higher than in places where the real estate markets were not ruined by rent control.
Following a look at the data:
Put another way, in NYC, where generations of rent control has destroyed the rental market, two thirds of all occupied dwellings are rentals. In the rest of the US, two thirds of all occupied dwellings are not rentals. By the numbers, it seems the rental market is extremely healthy in NYC relative to the rest of the country. And BTW… the bottom three slots of the national ranking of states and the District of Columbia, the three locations with the lowest percentage of owner occupied housing as a percentage of total occupied housing, were taken up by the Washington DC, New York, and California. It just so happens that when I hear people talk about how rent control has destroyed a market, driving out landlords and renters alike, the story is usually about DC, NYC, or San Francisco. Funny, huh?
Two more points… fourth from the bottom of the list, right above California, is Hawaii, while at the other end (i.e., at the top of the list) we find we find Minnesota, West Virginia, Michigan and New Hampshire. Also, if you work your way through the data, you’ll find that big cities like Boston, LA and Houston all tend to have relatively low homeownership rates. I’m guessing anyone whose mouth isn’t automatically programmed to say “rent control” can noodle out for him/herself exactly what is going on here.
The saddest thing about the economics profession today is not the number of economists who believe things that make little sense and who refuse to look at data that is so readily available. The saddest thing, frankly, is that the fairy tales told in the profession make their way out into the real world and affect real decisions.
Here’s more on rent control.
Pt 1
http://slackwire.blogspot.com/2012/02/economicsts-actively-evil-neoliberal.html
This also gets at some of the neoliberalism I posted on yesterday.
Pt 2
http://slackwire.blogspot.com/2012/02/quick-note-on-rent-regulation.html#comment-form
Cheers!
JzB
damn, Mike.
always with the facts.
what do you want, mere facts?
or that ol’ time religion?
rent control and the profit — economic rents — from housing in general is a complicated but fascinating topic.
I think to fix our economy we’re really going to have to go hammer & tongs on rent-seekers of all stripes, and landlords are certainly in the first rank of that group.
The intelligent policy — taxing land value — is, unfortunately, the most difficult to evangelize, since everyone who matters owns land and likes the way things are now, TYVM.
Troy,
We tax land. A lot! We also tax the value of the land with all the improvements. Have you missed paying your property tax lately? (which if you rent you pay for with you monthly rental check)
And explain to me why if I buy a house or apartment complex with my own money I can’t charge rents for it for the renters to live there? You do know that being a landlord is a tough business don’t you? Guys like you and the parade of horrer stories is why I sold everytime I moved while in the military.
Or are you one of the looney left that thinks since you rent something you own it? Or if you work for a business you receive ownership rights in it?
Give me a break.
Islam will change
I’d like to be clear, I’m not in favor of rent control, nor against it. As a very small landlord, I’m against it for properties that don’t start under rent control. But I am agnostic between buying a property that is already rent controlled and buying one that isn’t rent controlled. If rents are lower in rent controlled environments, the properties will sell for less and property taxes will be lower.
And, on the plus side, will have a lower vacancy rate, all else being equal. And all else being equal, happy tenants that don’t move out are more profitable than tenants who pay a higher rate but exhibit greater turnover. Hence, we charge below market rates – call it our own version of rent control – which affords us better tenants.
I notice that despite all the theory about how rent control is bad, the rental markets seem to be thriving in areas where there is rent control. After several of rent control, anyone who has read an introductory econ book would have expected that nobody would be willing to own rental properties in places like NYC, SF or Washington DC. By now every landlord would have paid off his/her tenants to move out, and then converted the property into condos. Or gone bankrupt. And yet somehow that isn’t the case.
Yes, rent control creates arbitrary winners and losers. So does the lack of rent control. The difference is that in one case, having money is enough to make one a winner in the rental market as a renter. But under a rent controlled environment, that isn’t what makes for winners or losers.
This is yet another instance where the facts don’t fit the theory, but Maier’s Law rules.
Another statistic worth looking at is vacancy rates. NYC is lowest in the country. DC is second lowest in the country. SFO is also pretty low. This stat seems to support the theory that rent control distorts markets. Although the absolute level of rentals in these markets is very high, they are still lower than what demand seems to want.
Brian L,
Yes and no. As per the quotes I provided, the areas where there’s rent control happen to be areas where people want to live and there’s limited space to grow out (e.g., parts of NY, all of SF) or for which farther out spots are less desirable (all of NY, SF and DC – there isn’t a soul alive who wouldn’t prefer to live on Nob Hill than in Colma). You can tell that without looking at rents – look at what a condo costs (a condo being the obvious alternative to a rental) in those areas relative to outside those areas.
That means you will either face very high rates and/or low vacancies compared with, say, twenty three miles outside Lincoln Nebraska whether you have rent control or not. You will also have high sales price and low vacancies for condos in the area.
On the other hand, the textbooks tell you what to expect from rent control – it makes it undesirable for people to own rental properties because it artificially reduces the return on the investment. Landlords have an easy out – they can pay renters to move out and sell the apartments as condos. Heck, they don’t have to pay renters to move out… after a few decades, landlords should have wised up, and every time there’s a vacancy, they should be simply converting the unit into a condo and selling it. The textbooks tell me only an idiot would do otherwise. I haven’t been to NYC in a while, but I’d be surprised if every time a rent controlled apartment gets vacant, it is sold off as a condo. Now, unless I’m wrong, the implication is obvious: either landlords in NYC collectively can be described as idiots, or the theory isn’t quite right.
And explain to me why if I buy a house or apartment complex with my own money I can’t charge rents for it for the renters to live there?
Chain of title issue. Just buying something with your own money doesn’t mean you necessarily rightfully own it.
If I went around claiming you owed me rent for the air you breathe I’d be locked up.
The philosophy of this goes back a long way, actually, to Thomas Paine if not earlier.
http://geolib.com/essays/sullivan.dan/royallib.html
and
http://www.wealthandwant.com/docs/Tideman_et_al_Gorbachev.htm
lay the issues out.
And, also, no, we don’t tax land “a lot”. Quite the opposite.
And explain to me why if I buy a house or apartment complex with my own money I can’t charge rents for it for the renters to live there?
Chain of title issue. Just buying something with “your own money” doesn’t mean you necessarily rightfully own it.
If I went around claiming you owed me rent for the air you breathe I’d be locked up.
The philosophy of this goes back a long way, actually, to Thomas Paine if not earlier.
http://geolib.com/essays/sullivan.dan/royallib.html
and
http://www.wealthandwant.com/docs/Tideman_et_al_Gorbachev.htm
lay the issues out.
And, also, no, we don’t tax land “a lot”. Quite the opposite.
There were more than two million units under rent control in 1950. In 2008, there were only 43,000.
Rent stabilized units, which cap the increase on a 2 year lease to “only” 7.25%, are also shrinking. The exception to the trend is converted buildings, where owners seek a temporary rent stabilized category for tax breaks.
Going by the numbers, NYC’s housing market is telling us something. If the concept is so effective, why is its use shrinking instead of being widely adopted? Why attribute vacancy rates to an almost extinct policy?
An interesting article about the topic: http://www.nytimes.com/2010/05/25/nyregion/25appraisal.html
kevin,
I didn’t say it was effective at anything. As I noted upthread, I am neither in favor nor against it. As a landlord, I am pretty certain I would buy a rent controlled unit under the right circumstances, but “under the right circumstances” also applies to other properties. (To my kknowledge, there isn’t any rent control around here, and I doubt the kind of properties we have – single family residences offering greater value than the rent would indicate – are rent controlled in most places anyway.)
My only problem with it would be if I bought a property that wasn’t rent controlled and it then became rent controlled midstream, so to speak.
If anything, people who are vehemently against rent control are the ones who attribute to it all sorts of properties, such as the miniscule vacancy rates…. when you note that only a small and shrinking percentage of NYC’s apartments are rent controlled, you have to remember that people still attribute the lack of housing in NYC to that small and shriking percentage of dwellings.
I’m not surprised the result of rent control is poor quality. But there is a market for poor quality elsewhere too. People have tried to sell us hovels in Akron, Ohio, already with renters in them.
Troy
when tom paine raised the issue it made more sense. a lot of land was owned by the hereditary rich and did not contibute to the general welfare.
nowadays, in spite of the sovereign retaining “ownership” of the land, the “buyer” acquires and pays for some rights to its use.
i find the taxes sufficient to keep my from acquiring more land than i can use. i am not at all sure i don’t think it wouldn’t be better if the rich kept it as “parks,” as opposed to develop it for taxed strip malls. but these days the rich are all for turning everything into money. just like the poor and their liberal supporters.
i find the taxes sufficient to keep my from acquiring more land than i can use
yeah, well, we can be a land of renters or be a land of owners.
We’re going the wrong way now, and this is one of the major imbalances in the system, how the lower quintiles are being sucked dry by the parasitical top 1-5%.
If you can’t see this then you can’t see this I guess.