September 20, 2019

The Rent Is Too Darn High

Government regulation took a bad situation and made it worse with rent control.

Seems like it’s hard to find an affordable place to live these days. Sure, employment is up across the board and overall the economy looks good. So why are so many people living on the streets? For one, we can thank government regulation for taking a bad situation and making it worse by imposing rent controls in some of America’s major cities.

Megan McArdle writes at The Washington Post, “Rent control doesn’t do anything about the reason that rents are rising, which is that there are more people who want to live in desirable areas than there are homes for them to live in. Housing follows the same basic laws of economics as other goods that consumers need: When the demand for a product consistently exceeds the supply, prices will rise until the quantity demanded is equal to the amount that suppliers have available.”

McCardle adds, “If you force the price of something below market level, people will supply less of it. Since cities tend not to impose rent controls unless they’re already experiencing a severe housing shortage, that would be bad.” In other words, why would developers consider building new housing when the government stands ready to cut into their profits?

Despite the poor track record of rent controls, government officials are still promising solutions that created the problem in the first place.

For one, Bernie Sanders thinks we need more government regulation. His latest presidential plank is a $2.5 trillion plan to cap rent increases to one and a half times the rate of inflation. This comes out to about 3%, which is lower than Oregon (5%) and California (7%) — places where rent control has reduced available housing and increased homelessness. A bill currently in the California legislature is seeking to reduce the cap to 5%.

So what’s the problem with helping low-income tenants keep their apartments when they’re already struggling to pay bills and put food on the table? Sure, rent control benefits some, but it has a disastrous ripple effect across cities that make the housing crisis even worse and leave many other residents unable to find a place to live.

“Rent control has long been derided by economists as a well-intentioned policy that comes with a host of unintended consequences: Limiting the return developers can make on new housing construction disincentivizes them from building more units,” Reason’s Christian Britschgi explains. “Some landlords, unable to pass on the costs of repairs or renovations to tenants, let their buildings deteriorate. Others might convert their regulated rental units into more expensive condominiums that can be sold at any price, reducing the overall supply of rental housing.”

And that’s one reason why the majority of states have laws prohibiting rent control. Only California, Maryland, New York, New Jersey, Oregon, and Washington, DC and allow the practice. But that’s not stopping tenant lobbyists from pushing for a broad expansion of rent control. According to The New York Times, other states, including Florida, Washington, Colorado, and Illinois are now considering rent-control programs.

While some states are embracing failed solutions, the Trump administration is taking a different approach. President Donald Trump signed an executive order in June creating the White House Council on Eliminating Regulatory Barriers to Affordable Housing. Regulation, according to the Council of Economic Advisers, is the real culprit driving up homelessness in areas with rent control. California, for example, is home to half the homeless population in the United States. In part, the executive order states, “Federal, State, local, and tribal governments impose a multitude of regulatory barriers — laws, regulations, and administrative practices — that hinder the development of housing.”

President Trump took his message into California this week, in part because the Golden State is, er, home to nearly half of the entire U.S. homeless population. He directly addressed those people most impacted by the housing shortage as well as those living in tents in Los Angeles and San Francisco. Furthermore, The Wall Street Journal reports, “The Trump administration plans to deliver a notice of environmental violation to San Francisco over its homelessness problem.

President Trump declared, "We can’t let Los Angeles, San Francisco and numerous other cities destroy themselves by allowing what’s happening.” Yet, other than addressing the problem and promising to discuss it with Housing and Urban Development secretary Ben Carson, the details of Trump’s plan are uncertain. The president has spoken recently about repurposing California’s tent cities, but otherwise there is no long-term solution currently in the works.

Ultimately, the only way to begin reducing homelessness is to make sure government regulation isn’t the answer.

The Washington Free Beacon’s Charles Fain Lehman writes, “Aggressive regulations, such as restrictive zoning, rent controls, and green mandates, drive up rents, pricing people out of the housing market and into homelessness.” Lehman adds “Using census data, the CEA simulated the effects of deregulation on homelessness across America. In general, it found that deregulation in the most regulated areas would cut homelessness by 13 percent nationwide. Major cities with stringent housing regulations would see the steepest drops.”

Now we’ll wait and see if the Trump administration is going to back up his rhetoric on the issue. By opening the door to free-market solutions, we can get people off the streets and into a place they can call home.

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