There should be no doubt that rent control is a bad policy. However, it is still in effect in many areas. Why is it so? If this policy was so bad, why was it adopted in the first place? What problems it can cause? Does it affect affordable housing industry in any way? There are many questions that need answers.
Finding answers from history
To find answers to these questions, we have to consider an example from what happened with rent market in Winnipeg.
Back in 1960s, everything in Winnipeg used to be competitive. To make a living, you had to work hard. To go to a university, you needed to do an extra job and then you had to find a scholarship. However, when the generation of 1960s entered parenthood and started living out of their parents’ homes, the rental market didn’t go competitive like crazy. There were a lot of affordable units in Winnipeg despite thousands of new families having started to establish their own households. What kept it so balanced?
A quick look at the history of Winnipeg indicates that housing market was allowed to function during those decades. Many new apartment buildings were built in Winnipeg during that period and many of them had about 40 apartments each. This helped rental prices stay within limits.
How does it involves rent control?
This was all good until the new trend from rental markets in Europe found its footing in United States. This new regime was ‘rent control’ and it was soon established in all major cities around the country. Tenant associations were happy as it provided legal protection for renters.
Rent control regimes rarely meet opposition from government due to its political appeal. These regimes do a lot of damage as has been proven over time. For example:
- Devaluing existing units
- Heavy involvement of private investment in housing
- Decrease in availability of affordable housing for the poor
It’s understandable that rent control causes shortage of affordable housing by controlling the price. Builders usually show lesser interest in building new affordable housing as their profits are taken away by rent control. In this situation, many landlords withhold their property whether to use by themselves or to give it to a relative or a friend. Above all, rent control ignores homeless and therefore puts them in a situation where they can never own a house.
Effects of rent control
Rent control does a lot of damage to the society, economy and culture. It widens the divide between the rich and the poor. By making affordable housing scarce, it makes it impossible for the poor to become homeowners.
Price control causes demand/supply problems
When the government controls prices, it almost always results in access demand. The market never rests at the market-clearing price and it continues to push towards a temporary monopoly that either buyers or sellers achieve in the end. The government will hold the prices above the market value to encourage suppliers that will end in surplus.
Hoarding and shortage due to price control
In case of housing market, the government holds prices low through rent control to encourage tenants to stay in the same apartment for his entire life. This makes hoarding a natural reaction since buildings (commodity in housing market) can last for centuries and can be consumed for all that time. As a result, rent control causes housing shortage and hoarding.