As Any Economist Can Tell Mayor Wu, Rent Control Never Works
Economists disagree on many subjects. The harm caused by rent control is one subject on which virtually all of them agree.
In November 2021, voters in St. Paul, Minn., approved a strict new rent control measure that imposed a 3 percent annual ceiling on allowable rent hikes. Opponents warned that the new law would prove to be a disaster.
Before the law took effect, developers and builders moved quickly to freeze or cancel plans to erect new housing. During the first four months of 2022, the city issued just 200 residential building permits, compared with 1,391 during the same period a year earlier — an 86 percent drop. With energy costs and inflation surging, some landlords rushed to raise rents before the cap kicked in. Others notified tenants that they would henceforth have to pay a separate fee for utilities and trash pickup.
As the scope of St. Paul’s fiasco became apparent, the City Council partially backtracked. The rent-control ordinance was amended to exempt buildings under 20 years old, and landlords are now permitted to raise rents by 8 percent plus inflation when a tenant moves out. That moved the city a few steps back toward economic common sense. But as long as rent control remains on the books, the distortion of St. Paul’s housing market will continue. Property owners, prevented from charging market rates, will be less likely to rent out their housing units — or to properly keep up the units they do rent out. Turnover will shrink as tenants grow ever more reluctant to give up an apartment with low rent. More landlords will convert their properties to condos. The cost of apartments not covered by rent control will skyrocket.
Such outcomes are predictable wherever rent control is imposed. Invariably, the shortage of affordable housing grows worse, maintenance deteriorates, and the cost of living rises. St. Paul is learning the hard way that there is no end run around the law of supply and demand.
Boston will learn that lesson too, if Mayor Michelle Wu succeeds in bringing rent control back to the city for the first time in nearly three decades.
Massachusetts voters abolished rent control in 1994 over the wails of fearmongers who predicted that thousands of renters would end up on the streets and elderly heart attack patients would die. What actually resulted was a surge in the supply and quality of rental housing. The end of rent control in Cambridge, one study found, led to a $1.8 billion increase in the value of the entire city’s housing stock. Stanford economist Rebecca Diamond showed that lifting rent control boosted the “amenity value” of whole neighborhoods, making them more desirable places to live. The idea that governments can keep housing more affordable by controlling rent is a short-term illusion, she concluded. “In the long run [rent control] decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood.”
In the 1994 election, Cambridge residents voted to retain rent control, but in due course they came to realize what a boneheaded policy it had been. When tenant activists succeeded in placing a measure to reestablish rent control on the city’s 2003 ballot, Cambridge voters defeated it in a landslide.
There are countless issues — inflation, government spending, taxes, international trade, interest rates, the labor market — over which economists debate, often vehemently. But on some matters, virtually all economists are in accord. The quintessential example: rent control.
In his acclaimed introductory textbook, “Principles of Economics,” Harvard professor N. Gregory Mankiw lists 20 economic statements that are not controversial among economists. At the top of the list, commanding all-but-unanimous assent, is the proposition that “a ceiling on rents reduces the quantity and quality of housing available.”
Across the political spectrum, economists consistently condemn the folly of rent control.
“The analysis of rent control is among the best-understood issues in all of economics,” the very liberal Paul Krugman, a Nobel laureate in economics, has written. “Its known adverse effects” — the absence of new construction, bitter relations between tenants and landlords, desperate renters with no place to go — “illustrate the principles of supply and demand.” His fellow liberal economist Noah Smith likewise says that “rent control does more harm than good.” There is good reason, he notes, why government efforts to regulate rents have acquired “bogeyman status among economists.”
From the other side of the aisle, the renowned conservative economist Thomas Sowell agrees. Rent control policies, he said in a 2019 interview, turn everyone into losers:
“The tenants lose because they can’t find a place to stay. Landlords lose because they don’t make the profit they would have made otherwise. The builders lose because there’s no demand for apartment buildings if no one can make a profit on them.” By and large, observed Sowell, politicians are the only class of people who come out ahead. “They get the reputation of being for the poor and the downtrodden [and] preventing the evil landlords from raising the rent.”
As if that isn’t enough, rent control is infamous among economists for other negative impacts. It exacerbates racial discrimination in housing. It multiplies bureaucracy. It disproportionately hurts those it is intended to help. And what is true in America is true everywhere. When rent control has been tried in other countries, from Canada to Germany to Sweden, the outcomes have been dismal. Even communist Vietnam abandoned rent control after its destructive impact became apparent.
Wu, who studied economics as an undergraduate at Harvard, must know at some level that the economic case against rent control is ironclad. But the hubris of politicians has a tendency to occlude their judgment. The mayor may have convinced herself that she can come up with a rent control scheme that will succeed where so many others have failed. Let’s see if she can convince anyone else.
Start a conversation using these share links: