(Foundation for Economic Education) — Theresa Dolata’s voice broke when she urged Minneapolis city leaders to support amendments that would give council members the authority to regulate rent prices in the city.
“I don’t want to end up homeless again, I don’t want to be pushed out,” said Dolata, a resident of the Windom neighborhood, speaking at a February 23 city council meeting.
Following testimony from Dolata and other local citizens, Minneapolis City Council members unanimously approved a proposed charter that would allow the city to impose rent control (or put the issue to a future ballot).
“The fact that landlords can increase rents with very little notice is impacting people’s lives and their housing stability,” said Council President Lisa Bender.
Rent control is back in a big way
Minneapolis is not the only US city (or state) where politicians are seeking to impose rent control in an effort to keep housing prices from rising.
From Downey, California, to Ashbury Park, New Jersey, and beyond, rent control policies are once again being debated at the local level. According to the Minneapolis City Council, some 180 local governments across the country have passed rent control in some form or another. Meanwhile, in 2019 Oregon passed the first statewide rent control law in the US.
In most cases, rent control policies are a response to an economic reality: rent prices are often high, especially in urban areas, eating up 40-45 percent of the median salary on average in some cities.
For example, according to the website RENTcafe, the average price for a 785 square foot apartment in Minneapolis is $1,552. Rent control advocates say that is more than many residents can afford, particularly following a year-long pandemic.
“Simply put, our neighbors are losing their homes because they cannot keep up with the rent,” Minneapolis Council Member Jeremiah Ellison, an author of the city’s proposal, said in January. “This is a housing issue. This is a homelessness issue.”
Berlin: a case study in rent control
The US is not the only country to witness a renaissance of rent control, a policy an overwhelming percentage of economists say is harmful.
In February 2020, Berlin introduced the so-called Mietendeckel — a cap on rent — to keep Berlin from becoming the next London or New York, cities where pricey rents have driven out many lower- and middle-class residents. The rent caps didn’t apply to everyone, however. They applied to properties built prior to 2014, freezing rent at June 18, 2019 levels.
Like in the US, Berlin’s rent control policy was driven by a legitimate problem. Rents had soared in recent years, the product of surging housing demand and constrained supply. This was a problem for Berliners, a city proud of being “grungy and affordable.” (It should be noted, however, that rental prices in Berlin remain modest compared to the most expensive cities in the world, and are about 50 percent lower than New York.)
What was the solution?
“The right answer to that shortage would be to increase supply — for instance, by cutting red tape in zoning and construction,” wrote Andreas Kluth, who has covered Berlin’s housing issues for Bloomberg.
Instead, Berlin opted for rent control, a policy Swedish economist Assar Lindbeck once observed is the single most effective way to destroy a city “except for bombing.” (Though some have noted that rent control destroyed Hanoi more effectively than US bombs.)
Well, a year later, and the results of Berlin’s experiment are in.
“After a year, Berlin’s experiment with rent control is a failure,” The Economist declared Tuesday. “Rents may be down, but so is the supply of homes.”
In fact, as Bloomberg puts it, if you’re looking for a place to live, “good luck finding a flat.” Housing supply has shrunk and many landlords have reportedly exited the market, making the shortage much worse.
“The number of classified ads for rentals has fallen by more than half,” The Economist explains. “Tenants, naturally enough, stick to their rent-capped apartments like glue. Landlords use flats for themselves, sell them or simply keep them empty in the hope that the court will nix the new regulation.”
But there’s more to the story. Kluth points out that by exempting some units from its rent cap, Berlin (rather predictably) essentially created two housing markets.
“Unsurprisingly, the rent controls have split housing in Berlin into two distinct markets: the much larger one, consisting of all apartments built before 2014, which is now regulated; and the smaller unregulated one of relatively new buildings.”
Citing new research from four economists at Munich’s Ifo Institute, Kluth shows rent prices have surged in the unregulated market, rising faster than the average growth in the 13 next-largest German cities.
“Newly built apartments have therefore become even more unaffordable for most people,” Kluth observes.
A history of failure
Hearing Theresa Dolata express fear about being homeless again because she’s struggling to pay rent is impactful. It’s natural and human to want to do something to help people who are struggling. But it’s important to offer solutions that are constructive, not destructive.
A constructive solution to a housing shortage is simple: more supply. Building more housing will increase the supply of units, lowering costs. It’s the most obvious solution in the world and constructive in a literal sense. You’re building something.
Rent control is a destructive policy. In his book Basic Economics, economist Thomas Sowell spends entire chapters documenting the failures of rent control policies around the world, from Australia and Sweden to New York and San Francisco.
Why wasn’t a single housing unit built in Melbourne in the nine years after World War II? Because rent control laws had made the buildings unprofitable.
Why did Washington, DC, see its available rental housing stock decline from 199,000 to less than 176,000 in the 1970s? Because fewer people were willing to rent to their homes because of price controls.
Why did building permits decline by 90 percent in Santa Monica, California, in 1979 from just a few years earlier? Again, because rent control laws had made the building of new units unprofitable.
The lesson? Rent control has effects on housing supply, and those effects are not good. And that’s only half the equation.
Rent control also has adverse effects on the demand for housing. Because properties are priced below market rates, people tend to consume more than they otherwise would. In some cases, Sowell points out, this has resulted in housing shortages in the absence of actual scarcity, such as Sweden in the 1950s, which saw the average wait time for a place to live reach 40 months even though Sweden was building more housing per person than any nation in the world.
“As of 1948, there were about 2,400 people on waiting lists for housing in Sweden, but a dozen years later, the waiting list had grown to ten times as many people despite a frantic building of more housing,” Sowell writes. “When eventually rent control laws were repealed in Sweden, a housing surplus suddenly developed, as rents rose and people curtailed their use of housing as a result.”
The evidence is overwhelming. Rent control laws are destructive. We have decades and decades of research that shows that it makes housing shortages worse, which explains why there’s near-universal opposition to rent control policies among economists.
Nevertheless, the perils of rent control seems to be a lesson we may have to relearn. Bad ideas, like old habits, die hard.