By Nathan Tankus, a writer living in New York City
Inefficiencies abound in our society. One major instance of such inefficiency is the residential housing rental market. As Paul Krugman wisely explained many years ago:
Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand. Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go — and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended?*
This is, of course, correct; unfortunately, our usually excellent guide to the world underplays just how inefficient the rental market is.
What if real estate developers fear that rent control will be extended even further – to housing price control? After all, what is in the price of a home besides its discounted future rental value? And what if the perhaps well-intentioned but over-reaching local government extends all leases by or to five years? As we all know (or ought to know), these kinds of concerns keep real estate developers up at night. They simply have no way of knowing, let alone influencing, the plans and decisions of politicians regarding real estate. After all, surely the people with the least amount of actual or potential influence and power in Urban America are the real estate developers.
Further, why should we have tenant protections like property deeds or leases? Rent control is a horrible policy stymying the housing market, but what is rent control but a contract protecting the rights of occupancy of a tenant? It’s a piker compared to the real forces stymying the market. Even worse, future home buyers and leasees are a much stronger political contingent than future rent control beneficiaries. We won’t be able to eliminate these uncertainties for developers until property deeds and leases don’t yield any benefits (at least). It’s curious that Paul Krugman and other economists so uniformly in favor of eliminating rent control haven’t realized this.
Even if developers foolishly built housing for sale or long term lease and the government, by some miracle, didn’t impose price controls or extend the leases, problems would remain. After all, what if the value of those property deeds and leases were to rise? In other words, what if they experience a capital gain? That means they have paid/will pay less than the actual rental value of the housing! Some of those people likely wouldn’t be able to pay the market rental value, and if they had to would move, just like those in rent control! Their continued occupancy of those homes within city limits drives the rents skyhigh for everyone else. Even worse, there are so many more owners and long term leasees than rent controlled apartments. Can you imagine how much they’re distorting the market by not paying market rates? At least those with leases are eventually charged the higher prices and thus forced to leave if they can’t afford them. The homeowners, though!? They are never forced to adjust to market prices, and can even distort markets after death by letting their children inherit their home! Action must be taken.
My modest proposal for making the rental market efficient is thus this: I understand that we can’t cancel all the property deeds (on the other hand…) and all leases unilaterally. Still, what we can do is, starting the first calendar day of next year, charge all those individuals a monthly sum equal to the difference between the rental value they are/did pay and the market rental value (as estimated by a citywide index of similar apartments or ”going rents”). Those who can’t afford market rents will sell their leases to their landlords /deeds back to the city at the prices they purchased them at, minus of course the imputed rent they’ve already received by living there. Once these people leave the city, the vacancy rate will rise and rents will fall. Since we all agree rent control property rights distort the rental market, and we all agree all market distortions are bad, I’m sure my modest proposal will be quickly and speedily taken on by the Economics profession. I can’t think of a reason it wouldn’t be.
* Tto be serious for a moment, this tale falls apart from the start, even before we get to the political unreality of the story being spun. Land prices are the largest component of developer cost and land prices include the expected future rental value of the land being developed. If there were fears of rent control being imposed on newly built private housing, this would be priced into land prices and thus lower developer costs. Heck, this is true if they actually did impose rent control on all new construction. In fact, I would go further and say that since there’s always a chance that the city will bring back the boogeyman rent control, and that chance may hold back development, the only foolproof way of giving developers absolute certainty that building will be profitable is to impose rent control on all future construction (of course with passing on construction/maintenance cost overruns, which all actually existing rent control laws have allowed for decades).