Note: An expanded version of this post was released as this week’s Acton Commentary.
This week, Democratic presidential hopeful Senator Bernie Sanders, I-VT, tweeted the following reaction to a story from The Economist describing rising American rent payments:
This is a crisis. We need national rent control. https://t.co/e1M46veUm9
— Bernie Sanders (@BernieSanders) January 19, 2020
Sanders is certainly right that we face a housing crisis. Prices for housing have continued to rise with the decline in housing stock relative to population. In his book, Shut Out, Kevin Erdmann makes the convincing case that:
The United States suffers from a shortage of well-placed homes. This was true even at the peak of the housing boom in 2005. Using a broad array of evidence on housing inflation, income, migration, homeownership trends, and international comparisons, Shut Out demonstrates that high home prices have been largely caused by the constrained housing supply in a handful of magnet cities leading the new economy.
Senator Sanders’ call for national rent control does nothing about this underlying shortage but rather exacerbates it. Rent control is a price control, fixing a maximum price that landlords can charge tenants. To have any effect, rent controls must be set below the prevailing market rent. Any nationally set control, like that recommended by Sanders, would have large effects in pricey housing markets like New York or San Francisco but none in less dynamic housing markets like Albion or Saginaw.
And just what would those large effects be? The quantity of housing demanded will necessarily exceed the supply, exacerbating the acute housing shortage of well-placed homes. This is a fact almost universally acknowledged by economists:
In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available.” Similarly, another study reported that more than 95 percent of the Canadian economists polled agreed with the statement.
New York state’s nearly seventy-year-long experiment with rent control has not prevented New York City from becoming the third most expensive city in which to rent a two-bedroom apartment. The state of Oregon’s new statewide rent control policy promises to cap rent hikes at seven percent plus inflation annually. (This came to 10.3 percent in 2019.) At 2019 rates, that would mean a maximum possible increase of 63 percent over five years. That is two percent greater than the rise in rent payments over a 66-year period which Sanders rightfully bemoans as a crisis!
So, what is the solution? We need fewer barriers to building well-placed homes. This involves adopting more flexible zoning. Oregon’s banning of single family zoning and California’s SB 50, allowing single-family homes to be replaced by apartment buildings, are excellent examples of this approach. Sometimes economics can be counterintuitive, but the best solution to a housing crisis is pretty straight forward: Build more homes.
(Photo credit: Gage Skidmore. CC BY-SA 2.0.)
