Rent control: economic effects and policy implications

Rent Control

The basis for the argument against rent control is that rent control takes the market for rental accommodation is taken out of equilibrium, creating a deadweight loss (Investopedia, 2013). Under equilibrium conditions, the supply and demand in the market will match up. In the real world, especially with something like real estate, the market will never truly arrive at equilibrium, but it should trend close to it. What rent controls do is they move both supply and demand away from equilibrium. Rent control is a price cap. If the natural equilibrium point moves upward in terms of price, then the rent cap will mean that P. is not at the natural equilibrium point. If P. is below its natural equilibrium point, then demand will be higher and supply will be lower.

From a purely economic point-of-view, this situation creates a deadweight loss where there is surplus demand that is not being met in the economy. Some people who want an apartment cannot find one. Further, from a social perspective not only will the quantity of rental stock decline, but the quality will as well. The reason for this is that, seeing unmet demand, more potential suppliers will seek to find a way to enter the market profitably, and they will only be able to do this with lower prices that would be normal. To cut costs, buildings are not maintained. Thus, from both an economic and social perspective, rent control is undesirable. In equilibrium, benefits of the market are evenly distributed. Under rent control, economic winners and losers are created, so that some people benefit from the system at the expense of others. Moreover, the lack of efficiency creates the deadweight loss -- potential economic benefit that nobody receives.

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Rent controls are not introduced because of economic efficiency, they are the product of political desirability. Economic efficiency, after all, does still create adverse outcomes for people and that creates asymmetry between the economically optimal solution and the politically optimal solution. Housing costs are often a political issue, as they affect the economic well-being of the population. While the reality is that sometimes people are priced out of housing markets, such a situation can be politically undesirable. This is because a) these people vote and b) sometimes these people are the current occupants and may be out of the economy -- seniors especially. Thus, while some people can afford rent increases others cannot. A politician seen as throwing octogenarian widows onto the street is going to have trouble getting elected. Thus, we have the introduction of rent controls because natural market outcomes are socially undesirable.

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