Why Rent Control Is Destructive

Why Rent Control Is Destructive March 8, 2011

Put simply, rent control is a price ceiling that restricts landlords from charging above a certain rate for a housing unit. Started in the World War II era, this program to provide affordable housing to lower income people has resulted in an economic nightmare. It’s a case in point example of how good intentions don’t always equal good policies with respect to economics.

How Rent Control Affects Supply

If you were a landlord and couldn’t charge more than $350 for an apartment unit while other similar units rent for $800-$1,200, would you be incentivized to provide continuous upkeep or excellent service? For most, the answer lies on the bottom line. Rent controlled apartments are notorious for poor maintenance and upkeep, because it’s just not worth it for the landlord to pour money into something that doesn’t bring enough of a return to support itself.

How does this affect the surrounding apartments? You’ll find an increased average cost for surrounding apartments because developers avoid the rent control fiasco by building luxury apartments. This artificial shortage of apartments causes prices for every other apartment to shoot up, leaving the city with two extremes: cheap, under maintained apartments, and expensive apartments.

How Rent Control Affects Demand

Families have the natural tendency to upgrade to a larger home when they have kids and then to downsize when the kids move out. If you’re in a 3 bedroom rent controlled unit paying $450 in New York, why would you want to downsize to a 1 bedroom and pay $1400? Sure, you have extra space you don’t need, but you have no incentive to downsize.

When rent control is in place, you’ll find more multi room apartments occupied by a single renter simply because ‘they can.’ The quantity demanded for those apartments rise and people just can’t get into a unit (very little turnaround…can you blame them?). This shortage of available (subsidized) units will cause the surrounding apartments to rise in price and the renters ultimately suffer.

The Wall Street Journal posted this segment about rent controls that really highlights the backward nature of rent controls:

“Les Katz, a 27-year-old acting student and doorman, rents a small studio apartment on Manhattan’s Upper West Side for $1,200–with two roommates. Two sleep in separate beds in a loft built atop the kitchen, the third sleeps on a mattress in the main room.

Across town on Park Avenue, Paul Haberman, a private investor, and his wife live in a spacious, two-bedroom apartment with a solarium and two terraces. The apartment in an elegant building on the prestigious avenue is worth at least $5,000 a month, real-estate professionals say. The couple pay around $350, according to rent records.”

What do you think about rent controls?

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