“Rent control protects tenants.”
By Henry Hazlitt
Government control of the rents of houses and apartments is a special form of price control. Its consequences are substantially the same as those of government price control in general.
Rent control is initially imposed on the argument that the supply of housing is not “elastic” — i.e., that a housing shortage cannot be immediately made up, no matter how high rents are allowed to rise. Therefore, it is contended, the government, by forbidding increases in rents, protects tenants from extortion and exploitation without doing any real harm to landlords and without discouraging new construction.
This argument is defective even on the assumption that the rent control will not long remain in effect. It overlooks an immediate consequence. If landlords are allowed to raise rents to reflect a monetary inflation and the true conditions of supply and demand, individual tenants will economize by taking less space. This will allow others to share the accommodations that are in short supply. The same amount of housing will shelter more people, until the shortage is relieved.
Rent control, however, encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space. Under conditions of monetary inflation or real housing shortage, rents would rise just as surely if landlords were not allowed to set an asking price, but were allowed merely to accept the highest competitive bid of tenants.
The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it. With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit. If, as commonly happens, the government finally recognizes this and exempts new housing from rent control, there is still not an incentive to as much new building as if older buildings were also free of rent control. Depending on the extent of money depreciation since old rents were legally frozen, rents for new housing might be ten or twenty times as high as rent in equivalent space in the old. (This happened in France, for example.) Under such conditions existing tenants in old buildings are indisposed to move, no matter how much their family grows or their existing accommodations deteriorate.
Because of low fixed rents in old buildings, the tenants already in them, and legally protected against rent increases, are encouraged to use space wastefully, whether or not the size of their individual family unit has shrunk. This concentrates the immediate pressure of new demand on the relatively few new buildings. It tends to force rents in them, at the beginning, to a higher level than they would have reached in a wholly free market.
Nevertheless, this will not correspondingly encourage the construction of new housing. Builders or owners of pre-existing apartment houses, finding themselves with restricted profits or perhaps even losses on their old apartments, will have little or no capital to put into new construction. In addition, they, or those with capital from other sources, may fear that the government may at any time find an excuse for imposing new rent controls on the new buildings.
The housing situation will deteriorate in other ways. Most importantly, unless the appropriate rent increases are allowed, landlords will not trouble to remodel apartments or make other improvements in them. In fact, where rent control is particularly unrealistic or oppressive, landlords will not even keep rented houses or apartments in tolerable repair. Not only will they have no economic incentive to do so; they may not even have the funds. The rent-control laws, among their other effects, create ill feeling between landlords who are forced to take minimum returns or even losses, and tenants who resent the landlord’s failure to make adequate repairs.
A common next step of legislatures, acting under merely political pressures or confused economic ideas, is to take rent controls off “luxury” apartments while keeping them on low-grade or middle-grade apartments. The argument is that the rich tenants can afford to pay higher rents, but the poor cannot.
The long-run effect of this discriminatory device, however, is the exact opposite of what its advocates contend. The builders and owners of luxury apartments are encouraged and rewarded; the builders and owners of low-rent housing are discouraged and penalized. The former are free to make as big a profit as the conditions of supply and demand warrant; the latter are left with no incentive (or even capital) to build more low-rent housing.
The result is an encouragement to the repair and remodeling of luxury apartments, and a boom in new building of such apartments. The effect is not only to provide better accommodations for comparatively wealthy tenants, but eventually to bring down the rents they pay by increasing the supply of luxury apartments available. But there is no incentive to build new low-income housing, or even to keep existing low-income housing in good repair. The accommodations for the low-income groups, therefore, will deteriorate in quality, and there will be no increase in quantity. Where the population is increasing, the deterioration and shortage in low-income housing will grow worse and worse.
When these consequences are so clear that they become glaring, there is of course no acknowledgment on the part of the advocates of rent control and the welfare statists that they have blundered. Instead, they denounce the capitalist system. They contend that private enterprise has “failed” again; that “private enterprise cannot do the job.” Therefore, they will argue, the State must step in and itself build low-rent housing.
This has been the almost universal result in every country that was involved in World War II or imposed rent control in an effort to offset monetary inflation. So the government launches on a gigantic housing program—at the taxpayers’ expense. The houses are rented at a rate that does not pay back costs of construction or operation. A typical arrangement is for the government to pay annual subsidies, either directly to the tenants or to the builders or managers of the state housing. Whatever the nominal arrangement, the tenants in these buildings are being subsidized by the rest of the population. They are having part of their rent paid for them. They are being selected for favored treatment. The political possibilities of this favoritism are too clear to need stressing. A pressure group is built up, which believes that the taxpayers owe it these subsidies as a matter of right. Another all but irreversible step is taken toward the total Welfare State.
A final irony of rent control is that the more unrealistic, Draconian, and unjust it is, the more fervid the political arguments for its continuance. If the legally fixed rents are on the average 95 per cent as high as free market rents would be, and only minor injustice is being done to landlords, there is no strong political objection to taking off rent controls, because tenants will only have to pay increases averaging about 5 per cent. But if the inflation of the currency has been so great, or the rent control laws so harsh and unrealistic, that legally-fixed rents are only 10 per cent of what free market rents would be, and gross injustice is being done to owners and landlords, a huge outcry will be raised about the dreadful evils of removing rent controls and forcing tenants to pay an economic rent. Even the opponents of rent control are then disposed to concede that the removal of rent controls must be a very cautious, gradual, and prolonged process. Few of the opponents of rent control indeed have the political courage and economic insight under such conditions to ask even for this gradual de-control. The more unrealistic and unjust the rent control is, the harder it is to get rid of it.
The pressure for rent control, in brief, comes from those who consider only its supposed short-run benefits to one group in the population. When we consider its effects on all groups, and especially when we consider its effects in the long-run, we recognize that rent control is not only increasingly futile, but increasingly harmful the more severe it is, and the longer it remains in effect.