Theresa Dolata’s voice failed when she asked Minneapolis city leaders to support amendments that would give board members the authority to regulate rental prices in the city.
“I don’t want to end up homeless again, I don’t want to be expelled,” said Dolata, a resident of the Windom neighborhood, at a city council meeting on February 23.
Following the testimony of Dolata and other local citizens, Minneapolis City Council members unanimously approved a proposal for a regulation that would allow the city to enforce rent control (or put the matter in a future vote).
“The fact that homeowners can increase rents with very little notice is impacting people’s lives and housing stability,” said council chairwoman Lisa Bender.
Rental control is back on a grand scale
Minneapolis is not the only city (or state) in the United States where politicians are trying to impose rent control in an effort to prevent house prices from rising.
From Downey, California, to Ashbury Park, New Jersey and beyond, rental 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 approved rent control in one way or another. Meanwhile, in 2019, Oregon passed the first state rental control law in the United States.
In most cases, rental control policies are a response to an economic reality: rental prices tend to be high, especially in urban areas, consuming 40-45% of the average wage on average in some cities.
Why did building permits decrease 90% in Santa Monica, California in 1979, compared to just a few years earlier? Rent control.
For example, according to the RENTcafe website, the average price for a 785 square foot apartment in Minneapolis is $ 1,552. Proponents of rent control say this is more than many residents can afford, especially after a year-long pandemic.
“Simply put, our neighbors are losing their homes because they can’t pay their rent,” said Minneapolis council member Jeremiah Ellison, author of the city’s proposal, in January. “This is a housing issue. This is a homeless problem. “
Berlin: a case study in rent control
The United States is not the only country to witness a revival of rent control, a policy that an overwhelming percentage of economists say is damaging.
In February 2020, Berlin introduced the so-called Mietendeckel – a rent ceiling – to prevent Berlin from becoming the next London or New York, cities where expensive rents have driven many middle and lower class residents out. The rental limits did not apply to everyone, however. They applied to properties built before 2014, freezing the rent at June 18, 2019 levels.
The right answer to the housing deficit would be to increase supply – for example, by reducing bureaucracy in zoning and construction.
As in the United States, Berlin’s rental control policy was motivated by a legitimate problem. Rents have skyrocketed in recent years as a result of increased demand for housing and restricted supply. This was a problem for Berliners, a city proud to be “dirty and accessible”. (It should be noted, however, that Berlin’s rental prices 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 this shortage would be to increase supply – for example, by reducing bureaucracy in zoning and construction,” wrote Andreas Kluth, who covered Berlin’s housing issues for Bloomberg.
Insead in Berlin opted for rent control, a policy that Swedish economist Assar Lindbeck once observed was the most effective way to destroy a city “except for bombings”. (Although some have noted that rent control has destroyed Hanoi more effectively than bombs in the United States.)
Well, a year later, and the results of the Berlin experiment arrived.
“After a year, Berlin’s experience with rent control is a failure,” The Economist declared Tuesday. “Rents may be low, but so are the supply of housing.”
In fact, as Bloomberg puts, if you’re looking for a place to live, “good luck finding an apartment”. The supply of housing has declined and many homeowners have reportedly left the market, making shortages much worse.
“The number of classified ads for rent has dropped by more than half,” The Economist explains. “Tenants, of course, cling to their apartments with glazed rental ceilings. Owners use apartments for themselves, sell them or simply keep them empty in the hope that the court will overturn the new regulation. “
Why wasn’t a single housing unit built in Melbourne in the nine years after World War II in Melbourne? Rent control.
But there is more to this story. Kluth points out that by exempting some units from their rental limit, Berlin (in a very predictable way) essentially created two real estate markets.
“Unsurprisingly, rental controls have divided houses in Berlin into two distinct markets: the much larger one, which consists of all apartments built before 2014, which is now regulated; and the smallest unregulated of relatively new buildings. “
Citing new research by four economists at the Ifo Institute in Munich, Kluth shows that rental prices have risen in the unregulated market, rising faster than average growth in the next 13 largest German cities.
“Newly built apartments have therefore become even more inaccessible to most people,” notes Kluth.
A History of Failure
Hearing Theresa Dolata express fear of being homeless again because she is struggling to pay the rent is impactful. It is natural and human to want to do something to help people who are struggling. But it is important to offer solutions that are constructive, not destructive.
A constructive solution to the housing deficit is simple: more supply. The construction of more houses will increase the supply of units, reducing costs. It is the most obvious solution in the world and constructive in the literal sense. You’re building something.
Rent control is a destructive policy. In his book Basic Economics, economist Thomas Sowell spends entire chapters documenting flaws in rental control policies around the world, from Australia and Sweden to New York and San Francisco.
We have decades of research showing that rent control worsens housing shortages, which explains why there is almost universal opposition to rent control policies among economists.
Why wasn’t a single housing unit built in Melbourne in the nine years after World War II in Melbourne? Because rent control laws had made buildings unprofitable.
Why did Washington, DC, see its stock of rental properties drop from 199,000 to less than 176,000 in the 1970s? Because fewer people were willing to rent for their homes due to price controls.
Why did building permits decrease 90% in Santa Monica, California in 1979, compared to just a few years earlier? Again, because rental control laws have made building new units unprofitable.
The lesson? Rent control has effects on the supply of housing, and these effects are not good. And that is only half of the equation.
The control of rent also has adverse effects on the demand for housing. Since property prices are below market rates, people tend to consume more than otherwise. In some cases, Sowell points out, this resulted in housing shortages in the absence of real shortages, such as Sweden in the 1950s, which saw the average waiting time for a place to live reach 40 months, even though Sweden was building more dwellings per person than any nation in the world.
“In 1948, there were about 2,400 people on housing waiting lists in Sweden, but, twelve years later, the waiting list had grown to ten times more, despite the frantic construction of more housing,” writes Sowell. “When rent control laws were repealed in Sweden, a housing surplus suddenly appeared, as rents increased and people reduced the use of their homes as a result.
The evidence is overwhelming. Rental control laws are destructive. We have decades and decades of research showing that this exacerbates the housing deficit, which explains why there is an almost universal opposition to rent control policies among economists.
However, the dangers of rent control seem to be a lesson that we must relearn. Bad ideas, like old habits, are hard to die for.