Question

Economists agree that rent control results in inefficiency. What are the different ways that it can create inefficiencies? Why is rent control still practiced in many big cities? Write your answer based on your reading of the chapters and Hazlitt’s article. Use economic theory when writing your reply.

Answer 1

Because price is a consequence, not a cause. It is the result of group of owner of a good willing to sell, and a group of people willing to buy. If you control the price, you won’t change the willingness of these groups. If you define a price higher then the market price, you’ll prevent people to access this good even though both agree to make this transaction. If you set the price below, people will cease to produce this good. Unintended consequences.

                     

If rent control didn’t exist, the housing situation would be far worse than it is now.

Many of the responses on Quora and many of the articles that I’ve read over the years are critical of rent control.

The most common argument is that rent control is hurtful; both to the landlords of said buildings and to the real estate market of a city in general. The theory is that, if controls were abolished, there would be an influx of new residential construction which, ultimately, leads to a glut of housing which, in turn, would bring down the asking rents and level everything out. And then EVERYONE will be happy.

If we accept that theory, questions abound.

What will happen to the tenants who cannot afford the market rate?

In NYC, rent controlled leases are good for no more than two years. So let’s say that rent control was abolished today and that every single landlord decided to charge market rate for their properties. This would mean that, by 2018, hundreds of thousands and quite likely millions of people would need to find new housing. The housing market is very tight in NYC, thus the reason that rent control has yet to be abolished. Millions of displaced people would not be able to find other housing within the five boroughs. Within a span of two years, the population of NYC would drop precipitously as people are displaced and forced to the suburbs.

If you were living paycheck to paycheck in your rent controlled apartment and paying $127 for an unlimited metro card, things will not get any easier. In addition to renting an apartment outside of the city at rents comparable to rent controlled apartments in the city, you would now have an increase in commuting costs. Yes, you may be able to move further out for a cheaper rent, but, yes, your commuting costs will increase accordingly. You may even need to purchase a car to get the basics of life, like food shopping, etc. done.

This would be an issue for way too many people. Some would try and work things out, but others would either look for jobs closer to their new homes or move out of the area altogether.

The NYC job market will be affected. Some businesses won’t want to pay their employees’ wages that will allow them to live this new lifestyle. Some will leave the city in order to be closer to their employees or a job market that is commensurate with the pay that the business is willing to part with. Some businesses will raise the pay of employees and pass those increases on to their customers. Some businesses will fold. Some will never have a chance to open.

I’m not just talking about the delivery person or the Chipotle employee. I’m talking about retail, including the major department stores. I’m talking about the hotels that house the tourists that bring money into the city. I’m talking about the doormen who serve as a mark for luxury apartments and the maintenance engineers who keep said buildings running. I’m talking about sanitation workers, police, transit workers, cab/uber drivers. And all of this could happen within a span of a few years, maybe a decade.

Property taxes will have to increase in order to attract public employees who have been forced out of the city like many others. Storefronts will be empty because merchants cannot afford to pay the rent and the salary of the employees that they would need. Market rate tenants who moved to the city because of its convenience may find it a little less convenient to have to pay more rent for fewer services, either on site or local, in addition to the possibility that they will have to endure a reverse commute because their job is no longer in the city.

Accordingly, market renters will begin to leave the city. Landlords will have to reduce their rents and profit margins in order to bring in new tenants, but how many will be able to afford to do so with an increase in taxes? How many people will be attracted to buildings that are no longer optimally maintained? Some landlords will be forced out of business or have to write their losses off.

THIS is the point at which rents may begin to come down enough for previously rent stabilized tenants to afford, but there won’t be as many biting because they will have found employment outside of the city.

So, yes, it IS possible that lifting abolishing rent stabilization will reduce inequity and provide options for tenant. But at what cost to the vitality of the city?

How many people will be directly and indirectly affected?

How much inconveniences will need to be endured?

How long will it take for this equity to appear?

What will the city look like once that equity does appear?

And what will the city look like between the time of abolishiment and the time of equity?

And what if equity is never achieved?