November 7, 2013

Want a $650 two bedroom apartment in Manhattan?

By Want a $650 two bedroom apartment in Manhattan?

Sorry, you should have moved in 20 years ago. Several recent stories demonstrate the absurdity of policies that allow tenants to control their landlords. Recently, an apartment owner in New York paid a woman’s $23,000 debt and offered to let her stay in her apartment for the rest of her life, at a rent $3,000 cheaper than the neighborhood average. The tenant rejected this offer and sued. In San Francisco, a homeowner offered a tenant $45,000 to move out– the tenant demanded $70,000. Meanwhile, in a case where PLF filed a brief, the Ninth Circuit Court of Appeals upheld a rent control ordinance that transferred more than $95 million from a landowner to individuals who owned mobile homes.

Although opponents of rent control are painted as unjust, the reality is that these policies take from property owners, many of whom are small business owners, and gives property to tenants (including the 25 percent of rent control tenants who earn more than $100,000 a year). Beyond the injustice of taking property from one individual and transferring it to another, rent control has another problem ——it doesn’t work. In a survey of American and Canadian economists 93 percent agreed that rent control was a bad policy. In fact, its failure is predicted by elementary economics.

Rent control fails because it limits rental rates. As a result, landlords do not have an incentive to increase the supply of housing offered tenants. In locations with rent control, landlords don’t provide rooms because they aren’t compensated for producing better quality or more units. In fact, in San Francisco, tenant free houses are assessed a higher value than those with tenants. Unsurprisingly, 31,000 units are no longer available for rent.  Price signals also let tenants know how much space they should use. When prices increase, they use less space freeing it up for others to move. However, because rent control blocks this signal the supply of housing stagnates and the prices for uncontrolled apartments soar.

Additionally, because there is a large price difference between rent controlled and market rate apartments, incumbency is rewarded. People who obtain rent controlled apartments are unwilling to leave because their apartments are much cheaper than alternatives. Rent control thus favors those who arrived first, such as congressmen and governors, over newcomers. Another result of these policies is that landlords are forced to choose tenants for reasons other than ability to pay. Although this helps keep the neighborhood free of lawyers, there is a downside—landlords choose tenants based on race or age.

In the face of these restrictions, a shadow market has developed. Tenants regularly sublet their extra space at market rates, thus obtaining market rents from using someone else’s property. Technological innovations, such as AirBnb, have also increased the housing supply by allowing people to rent out small spaces. Unfortunately, rather than acknowledging rent control’s failure, cities are doubling down on these mistaken policies.

Fortunately, Pacific Legal Foundation continues to be the voice of reason in challenging these policies.

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