Rent Control: The Most “Peaceful” Way to Destroy a City

by | Jun 17, 2012 | Housing, POLITICS

Swedish economist Assar Lindbeck once wrote, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” In the late 1970s, a poll of American economists found that ninety-eight percent agreed that “a ceiling on rents reduces the quantity and quality of housing available.” Despite the […]

Swedish economist Assar Lindbeck once wrote, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” In the late 1970s, a poll of American economists found that ninety-eight percent agreed that “a ceiling on rents reduces the quantity and quality of housing available.” Despite the views of economists, many of America’s largest cities, including New York, Los Angeles, and San Francisco, have rent control. Do the leaders of these cities know something that economists do not? Is rent control really destructive, or is it really just a means to protect tenants? Before we answer these questions, let us look at the nature of rent control.

Wikipedia states that “rent control refers to laws or ordinances that set price controls on the renting of residential housing. It functions as a price ceiling.” While rent control laws vary in terms of their details, all serve to limit the prices that landlords can charge for their properties. For example, rent control might limit rent increases to four percent per year during a tenant’s occupancy. In addition, rent control usually stipulates the conditions in which a landlord can evict a tenant.

Such controls prohibit freedom of contract on the part of the landlord and the tenant. In many cases, rent control prohibits a landlord from charging a rent that he judges to be appropriate. A tenant is prohibited from offering a higher price than that allowed by law, even when he has a strong desire to rent a particular property. Neither the landlord nor the tenant can act as he judges best. But this is only a part of the story.

Most rent control laws are heavily skewed towards tenants. For example, one New York City landlord wrote:

Rent control is based on a denial of the notion of equality before the law. For example, in New York City, any and all statements by tenants are automatically accepted at face value as true, while every allegation by a landlord must be accompanied by documented proof. While there are dozens of official complaint forms, telephone hotlines, and agencies dedicated to protect tenants against their landlords, nothing similar is available—for landlords’ protection against their tenants. While tenants are given free legal counsel by the city, landlords must assume these costs privately.

In other words, government sides with tenants. Not only does the government set the terms and conditions of the landlord/tenant relationship, it provides almost unlimited assistance for tenants to lodge complaints against their landlord, and then government adjudicates the dispute.

As one example, in Los Angeles, a landlord must register his rental unit with the city. If he fails to do so, a tenant can legally refuse to pay rent. Further, evicting a tenant can become almost impossible. As one pro-tenant Web site states:

In court, the tenant has even greater protections. In a normal eviction, the landlord generally only has to prove that he gave the notice and that you’re still there. Under rent control, the landlord has to convince the judge of his real reason for the eviction, show that it is a legal reason, and prove every part of it with stronger evidence than you have. If the evidence is 50-50, you win. If the landlord missed one technicality of the rent control law, you win.  It is much harder to evict a tenant than non-controlled cites.

To put this in perspective, let us apply this to a baseball game. Let us imagine that the manager of the home team is always the umpire for the game. Not only will he call balls and strikes, but he can offer advice to his players while doing so. If there is a close play, who do you think will get the benefit of the doubt? How often do you think that the visiting team will win? The integrity of baseball would obviously be destroyed if such a policy were enacted. Yet, landlords are expected to live under such an absurdity. So how did such laws come to be?

Rent control first appeared in America during World War I. It was designed to prevent “profiteering” and protect tenants from greedy landlords. Today, rent control

is considered necessary by the state of New York to protect the public and to prevent landlords from imposing rent increases that cause key workers or vulnerable people to leave an area. Maintaining a supply of affordable housing is believed to be essential to sustaining the local society.

Others, such as the Socialist International, argue that individuals have “the right to decent housing in a liveable environment.” Whether it is legislators in Albany or socialists (is there a difference?), both agree that housing is a right and landlords may properly be forced to fulfill that right. In other words, a landlord has an obligation to fulfill the needs and desires of tenants, no matter his own judgment. He is not free to act as he chooses, but instead must act according to the dictates of politicians and bureaucrats. Such a policy is immoral, and as we are about to see, it is also impractical.

It is an established economic fact that price caps discourage production and encourage consumption. When prices are held below market value, consumers purchase more of the product. At the same time, because they cannot earn a sufficient return, producers provide less of the product. This is true of gasoline, candy bars, and coffee. It is true of clothing, automobiles, and cell phones. It is also true of rental housing.

As a landlord, I am well aware of the costs to provide rental housing. I must purchase a property, repair it, pay taxes, buy insurance, and provide regular maintenance. If I cannot generate a sufficient profit, the time, effort, and money would be better invested elsewhere. For each perspective property, I calculate my anticipated return to determine whether the investment is worthwhile. And, because I live in a city without rent control, I know that if my costs rise, I can increase my rents.

However, if I lived in a city with rent control, I would lose this ability. If I wanted to replace a roof or paint the exterior, I may not be able to recover those expenses. My ability to raise rents would be dictated by government, not the market. In other words, I would lose the incentive to maintain my properties. And I might also lose the financial ability to do so.

For example, in Los Angeles, I might be limited to a four percent increase in rents. If my property taxes—which are set by government—increase ten percent, some of my profit has been eroded. If this occurs too many times, I could suddenly find that my expenses exceed my income, and that does not encourage anyone to invest in rental real estate. The result is a slow decline in the supply of rental housing.

But this is not just theory. Between 1943 and 1993, property owners in New York City essentially abandoned more than 100,000 apartments. With no financial incentive (and often the inability) to maintain or improve their properties, landlords simply gave up. The result is a perpetual housing shortage in New York City. As one writer puts it, “Gotham hasn’t had a functional housing market in nearly a century, because generations of New York politicians, confusing rational housing policy with utopian social policy, won’t trust the market to do its job.”

As is often the case, the alleged beneficiaries of this government intervention—tenants—often suffer. Not only do they have fewer housing options, but those that exist often fall into disrepair:

“We are always falling behind,” says Ken Haron of Artimus Construction, a Harlem builder and landlord. “Rents don’t change as fast as costs change.” Further, due to the pro-tenant bias of New York’s courts, says Haron, if just three of, say, 20 tenants are not paying their rent, or are damaging the building, “it takes three years to get them out. The other 17 lose their services, because you cannot keep up the building.”

Rent control does not occur in a vacuum. Typically, cities with rent control also have other onerous controls on property use, such as zoning and building codes. And those controls discourage construction of new buildings, including rental properties. Further, those controls add to the cost of construction, which places an additional financial burden on landlords and developers. Professor Edward Glaeser once wrote about the high cost of housing in New York: “The permitting process in Manhattan is an arduous, unpredictable, multiyear odyssey involving a dizzying array of regulations, environmental, and other hosts of agencies.” Combined with rent control, these land-use regulations discourage the construction of affordable rental housing. Who wants to spend years begging for permission to construct an apartment building and then continuously fight bureaucrats to operate that building profitably?

If rent control is so destructive, is the free market any better? Wouldn’t landlords be able to raise their rents at will? Wouldn’t tenants have to choose between the hassle and expense of moving or submitting to the whims of their landlord? To answer this, let us examine the rental market in Houston, which does not have rent control and has fewer land-use regulations than other cities.

Because developers in Houston have relatively few regulations, they are able to quickly respond to changing market conditions. For example, when demand for housing in downtown Houston rose, developer Randall Davis began converting vacant buildings into lofts and apartments. And because other developers were also free to act on their judgment, they too began to build more rental housing. In the mid-1990s there were only about nine hundred apartments and condominiums in downtown Houston. Today, there are more than 2,400 apartments and condominiums in downtown Houston. Responding to market demand, developers nearly tripled the housing stock. Free to act on their own judgment, and profit when they judged correctly, Houston’s developers provided the affordable housing desired by the city’s renters.

Contrast this with the shrinking supply of housing in New York City. Certainly, some New Yorkers “benefit” from rent control—they are able to obtain housing far below market value through government coercion. But what of the landlords, developers, and property owners who are forced to accept those rents? What of the potential tenants who are unable to secure affordable housing because property owners are not free? Some are forced to sacrifice their well-being, interests, and rights for the alleged benefit of others.

Why does rent control persist? Why do New York and other cities insist on maintaining policies that are clearly impractical? The answer cannot be found in economics. The answer can be found in morality.

The dominant morality of America—altruism—holds that we have a moral obligation to self-sacrificially serve others. We must place the welfare and interests of others before our own. We are, as our President frequently reminds us, our brother’s keeper. Our brother’s need supersedes our rights. If tenants need low rents, landlords have a moral duty to provide them. And if they won’t do so voluntarily, it is proper for government to force them to do so.

Fundamentally, rent control is not an economic issue. It is a moral issue. Property owners, including landlords, have a moral right to use their property as they judge best, so long as they respect the mutual rights of others. If tenants do not like the rents that landlords are asking, those tenants are free to find other housing. They do not have a right to force landlords to fulfill their desires.

Rent control is impractical because it is immoral. However, until the morality that “justifies” rent control is rejected, government will continue to violate the rights of property owners. Until property owners defend their moral right to use their property as they choose, their rights will continue to be sacrificed.

Brian Phillips has been actively defending individual rights for the past twenty-five years. He has successfully helped defeat attempts to implement zoning in Houston, Texas, and Hobbs, New Mexico. His writing has appeared in The Freeman, Reason, The Orange County Register, The Houston Chronicle, The Objective Standard, Capitalism Magazine, and dozens of other publications. He is the author of Individual Rights and Government Wrongs

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