July 19, 2024
In light of tweet threads like this one, I thought I’d resurrect a talk of mine—given a few years ago—on the “return of rent control.”
Here are the slides for it:
A point that deserves more price-theoretically informed research is that all price controls are, at their core, mechanisms for wealth redistribution.
It’s an insight that’s lurking in the background whenever we discuss margins of adjustment. In Barzel’s analysis of the Nixon price controls, he attributes redistribution to the inability of law to stipulate every margin of an exchange agreement. Nixon’s controls mandated that no seller exceed the highest price charged in the last ninety days. Since not all sellers sold the same grade of gasoline, some were able to set higher prices than others. The result? A redistribution scheme disguised as price stability, transferring income from sellers of low-octane fuel to their high-octane counterparts.
But that’s not the only channel by which price controls redistribute income. When I teach Econ 101, for instance, I emphasize that price controls alter rates of return, not merely in the market to which the control pertains, but in related markets also. Rent control raises the relative rate of return to investing in condominiums, cooperatives, luxury apartments, or dwellings outside the municipal limits. These are exempt from rent control ordinances.
In his underrated The Ownership of Enterprise, Henry Hansmann argues the following:
“By driving down the rate of return on rented apartments, rent control creates a strong incentive for forming cooperatives and condominiums.
There is good reason to believe that rent control is in large part responsible for the extensive spread of the cooperative and, especially, condominium housing in Western Europe. Rent control had its first widespread appearance during World War I, though it was repealed in many jurisdictions during the interwar years. Then, during the Second World War, rent control was widely reimposed and largely left in place afterwards; it has remained in effect throughout much of Western Europe since then. The spread of condominium and cooperative housing largely follows the same pattern. The first extensive use of the condominium form for multi-unit apartment buildings in Europe came after the First World War, and it was only after the Second World War that condominiums and cooperatives achieved their current dominance. Moreover, although good data on the market share of condominiums and cooperatives for most European countries seem to be lacking, it appears that this market share is largest in those countries with the most extensive rent control regimes. In Italy, for example, where rent control has been universal since the Second World War, the market for rental apartments seems to have virtually disappeared; condominiums and cooperatives appear to be nearly universal in multi-unit buildings.”
Rent control may therefore act as a subsidy—a wealth transfer—to the rich, who are more likely to live in these sorts of dwellings.
Richard McKenzie and Dwight Lee comment:
“When rent control only applies to housing for the poor or to rental units that carry rents under some specified monthly rent level (now $2,700 in New York City), the rich benefit. The poor get fewer units in their housing markets because landlords will reduce the stock of rent‐controlled units by leaving no‐longer‐profitable rental units vacant, converting their units to condos, or moving their investments to non‐controlled units with high rents (and to other industries). Concerning the latter two strategies, as developers move to build uncontrolled high‐price condos and rental units with luxury features, the supply of housing units for the rich increases. That, in turn, drives down high‐end units’ prices and rents as compared to what they would be otherwise, absent rent controls on housing for lower‐income groups. That is, the prices and rents of housing for the rich might still rise but by less than they would otherwise.”
For the United States, Hansmann is inclined to attribute the surge of condos to their ownership characteristics (the theme of his book). But even here, he notes that:
“It is possible, however, that the fear of rent control has provided at least some of the incentive for the surge in condominiums. In 1970, New York City was evidently the only American city with rent control. (It had never repealed its rent control statute after the Second World War.) But by 1979, rent control had been adopted in at least 250 local jurisdictions—including Los Angeles, San Francisco, Boston, and Washington, D.C.—and was continuing to spread rapidly. This development, following the earlier adoption of rent control in Western Europe, may have discouraged many potential landlords even in those jurisdictions to which rent control had not yet come.”
What people “think and believe” matters in rent control, just as much as in the oft-cited example of minimum wage and kiosks.
With this prologue out of the way, I was pleased to see a recent NBER paper, “Robbing Peter to Pay Paul,” that examines the redistributive impact of rent control. Consistent with my 101 logic, the authors find rent control redistributes from the poor to the wealthy.
Here’s the abstract:
“We use the price effects caused by the passage of rent control in St. Paul, Minnesota in 2021, to study the transfer of wealth across income groups. First, we find that rent control caused property values to fall by 6-7%, for an aggregate loss of $1.6 billion. A calibrated model of house prices under rent control attributes a third of these losses to indirect, negative externalities. Second, leveraging administrative parcel-level data, we find that the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities. For properties with high-income owners and low-income tenants, the transfer of wealth was close to zero. Thus, to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”
Future empirical work might profitably examine the magnitude of wealth and income shifts under other instances of price control. It ought also open additional research on public choice considerations as they pertain to price controls.
It’s “mere economics” par excellence, yet in my estimation, relatively overlooked.