The economic perils of rent control.
Most western economies today stem from the classical liberalist philosophy of “Laissez-faire”, a French phrase for “let do”. The central principal in this type of thought is the economy should be left alone to its own devices, with minimal interference from the government. Letting the “invisible hand” drum its own beat. The economy must be un-chained, in order to be a free-market. This attitude toward a financial system with minimalist traits affects all things within that economy, including the prices for rent.
Most economists today oppose the regulation of rents, or any type of cap on rent prices because, through intervention on the economy, rent regulation produces inferior housing and lowers the quantity of residences available for families. While many supporters of ceilings on rent prices claim that rent regulation would assist households, a large majority of economists strongly believe that an interventionist policy within the rent market would undermine families, instead of aiding them.
Gunnar Myrdal, an important architect of the Swedish Labour Party, once stated that "Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision." The regulation of rent has been criticised by economists because of its negative domino effect on the economy. Assuming a market establishes a board to regulate the rents, publicly funded of course, it is natural to assume that the demand for cheaper apartments and condominiums will rise. It is also easy to perceive that rents were high. Too high for anyone one to pay, which would be the logical reason of why people would allow their rents to become regulated in the first place. So, we have enough people to complain about rent prices, and a board that would directly adjust rent prices to a value that the majority could afford. It doesn’t take an economist to know that demand for apartments and condos will rise, and quickly. The demand will rise so quickly that there wont be enough roofs for everyone. The supply, the apartments and condos, will decrease - creating a shortage. In an uncontrolled sector, prices would rise in a shortage to stimulate production and discourage demand for housing, but in a controlled economy prices couldn’t attain the prices that would clear a market, keeping it cheap, and continuing the perpetual shortage.
Keep in mind that there is a difference between shortage and scarcity. Scarcity can exist when there is a high demand for the goods that nature cannot supply. A shortage can be the result of prices being set below their equilibrium values, that is, the demand/supply balance - situations that can be avoided if prices are allowed to rise naturally.
Economists also show that investors, because of the punitive amount of money they would be able to generate, are discouraged to invest into economies that practice rent control. Rental units available for students at the University of California dropped by 31 percent in five years following the application of rent control in 1978. Rental units in Brookline, Massachusetts also fell by 8 to 12 percent in the eighties, following tough regulations on rent prices.
A combination of lack of investments and deficient funds make rent control disastrous for proper maintenance of housings. Landlords, because the ability to adjust prices with current market trends are gone due to rent control, cannot afford to pay the proper bills to keep a business running smoothly. The quality of buildings deteriorate due to the lack of funds contributed for maintenance. Granted, the tenet is paying less for rent, but receives no real bargain because of improper maintenance. The is especially evident in many parts of Boston and New York, where many areas are rent regulated.
The adverse affects of rent control often falls to upon the poor and the less well off. The poor is at a disadvantage when it comes to mobility. As opposed to a middle class family who can move freely because of their standing, it is very expensive for a family with little income to move. As a result these poor families must cope with the detereriorating housing available to them. In a market with demand for housing very high, landlords have little choice but to choose their tenets with discretion. These factors could be very bias - including income, gender, and race. This is a very large disadvatage for many poor families, many lower income families would never be accepted because of their salary. It is also not hard to believe discrimaination against women and minorities would not be out of the question, being that the income compared to a white male would be significantly less.
Rent control runs contary to its own philosophy. Admitially its intentions are noble, however economically, it’s a fact of greek tragedy. The regulation of rent prices in an economy, while lowering rent prices, produces inferior dwellings as opposed to the unregulated market, and fashions a housing shortage because of the high demand created. Rent control can also encourage sexism and racism because of landlords meticulous selection of potential candidates for tenets, as well as having a negative impact on lower income families. Swedish economics professor (and known socialist) Assar Lindbeck stated "In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing." Rent control is a failed housing policy. It does all the wrong thing to the wrong people. Rent regulation is a procedure we, as a democratic nation, cannot and should not let our governments allow to make law. The free market must remain free of intervention. In order to balance the demand/supply equilibrium - we must let do. As minimalists we must learn to trust, and respect, the invisible hand.