Housing policy megathread

[garbon]

Why, when there are no restrictions on the rent you can charge, isn't there a glut of rental building from the private sector?

This doesn't pass a basic logic check. Yi send rent controls tend to depress new private construction. For that to be true doesn't necessitate the inverse that absent rent control construction will boom. Removing one disincentive need not be game changing.

[grumbler]

Well this has all been terribly unedifying. Glad it got its own thread.

It's like a train wreck - you just can't look away.  I'm astonished that anyone is still responding to Jos's cavalcade of misunderstandings when it's obvious he is oblivious to argument and evidence.

[viper37]

Rent control is horrible. If you need a place to live in Stockholm you have to buy it or wait decades in line to rent.

And if there was no rent control then things would be great for high earners moving into the city. They'd have little trouble just slapping down their crowns and getting a place.
But for the regular working class locals whose landlord sees all this foreign money on the table and the opportunity to quadruple rents?.... Yeah. They're out on the street.

Let's an appartment in the center of Montreal with 2 bedrooms is priced cap at 1500$/month.
Currently, the costs of maintaining such an older appartment are evaluated at 1100$/month.

Building a new one would cost between 2000$/month and 2500$/month, depending on the luxury.

Already, you must make excemptions because of the age of the building.  Ok, fine.


Then, the price of electricity starts jumping by 9%-10%/year.
And the city's taxes increase by 30% every 3 year.

My numbers aren't fictional.  There are rumors that electricity costs will increase by a lot come 2027-2028.  As for city taxes, they are known to play with their valuation roles and get greedy.  These are not unheard of.  Sometimes, they smooth out the shock by lowering the taxes, but not always.

The cap increases by 3% every year.

So what happens then?

The small owners sell the apartments to bigger corporation who then demolish them and build luxury flats or multiplex.

And you increase the shortage.

And meanwhile, no one builds new apartment buildings because the costs you can rent them are too low compared to the construction costs, the energy costs, the taxes costs and city delays imposed on you which increase the risks of the project.  And I'm not talking about the interest rates.

So in the end, it does not do much for the housing crisis.

Space is finite.  You don't have room to expand, you don't invade other people's territories to assign them new lands for colonization, therefore your rent price increase.  Israel is smart that way.  Russia too.  They keep themselves in a state of perpetual war with a weaker neighbour so they can justify grinding at them and replacing their population with their own as it expands, all the while maintaining their rent under control.

This is the way to rent control.  The way America did it when it was great.  The way Canada did it when it was great.

[Norgy]

One of the biggest arguments against rent control in the EU and EEA area now would be the clean water directive.

It means, at least in the case of Norway, that councils have to upgrade water supply and sewage handling for, well, billions before 2030.
This is solved by "self-financing", basically meaning you, the homeowner, pay more in council tax to finance these projects. I have little reason to think they are unnecessary, even in fairly clean Norway, but if you rent out a place, you still have to pay, and add something to the rent. My council tax proportion has increased by a whopping 80 percent in two years. It includes sewage, water, renovation and that the council at least makes a half-hearted attempt at snow clearing in winter.

Not on my property, mind you, but on council roads. And then you have the county roads. And the state roads. It's... not such a mess as it sounds like.

I think we have to put an end to this thread soon before we dig ourselves into something unhealthy.
My stance is this: As long as you rent out a room, a flat, a building, and abide by the rules, you should be able to capitalise on the market. Just don't be an arse.
Government, in some way or the other, be it with loans or direct intervention, should build more, let's say, social housing projects. And those could well be in the style of "connected living", where you get a mix of elderly and young families gathered in smaller buildings centered around a small plaza or park. It would invite to more socialising and perhaps offer some measure to cure this common disease called loneliness our part of the world is suffering from.

[Josquius]

It's like a train wreck - you just can't look away.  I'm astonished that anyone is still responding to Jos's cavalcade of misunderstandings when it's obvious he is oblivious to argument and evidence.

The housing sector is something I've read pretty widely about and worked in the area professionally. I'm not oblivious at all. I perfectly understand the basic liberal economist arguments against rent control.
The thing is, they're completely out of touch with reality. The housing sector does not work according to an 'economics for dummies' green field supply and demand setup.
The very idea that economists are the sole authority to be asking about housing... It seems flawed.
Consistently when you see people pointing towards cities with dire housing situations and blaming rent control for this, there's a myriad of other explanations and usually the rent control came in response to a broken situation rather than in anyway being the cause.
Its not about asking what 2+2 is and saying 4. The main challenge is in figuring out what the fundamental questions even are- and I'm not familiar with anywhere the issue was actually rent control. The whole thing is a complete distraction when it comes to fixing the housing crisis.

Why, when there are no restrictions on the rent you can charge, isn't there a glut of rental building from the private sector?

This doesn't pass a basic logic check. Yi send rent controls tend to depress new private construction. For that to be true doesn't necessitate the inverse that absent rent control construction will boom. Removing one disincentive need not be game changing.

Exactly.
Yet the opposition to rent control would have that it is.

Let's an appartment in the center of Montreal with 2 bedrooms is priced cap at 1500$/month.
Currently, the costs of maintaining such an older appartment are evaluated at 1100$/month.

Building a new one would cost between 2000$/month and 2500$/month, depending on the luxury.

Already, you must make excemptions because of the age of the building.  Ok, fine.


Then, the price of electricity starts jumping by 9%-10%/year.
And the city's taxes increase by 30% every 3 year.

My numbers aren't fictional.  There are rumors that electricity costs will increase by a lot come 2027-2028.  As for city taxes, they are known to play with their valuation roles and get greedy.  These are not unheard of.  Sometimes, they smooth out the shock by lowering the taxes, but not always.

The cap increases by 3% every year.

So what happens then?

It sounds like the issue here isn't that there is a rent cap and rather that it is badly set to change by a fixed amount unrelated to any outside factors.
Not to say we are the best example in the world, but just for an example of how things can be better, in the UK social housing is a very regulated sector where the general amount by which rent can be increased is based on a formula taking into account a myriad of factors and is regularly reviewed.

The small owners sell the apartments to bigger corporation who then demolish them and build luxury flats or multiplex.

And you increase the shortage.

Again sounds like the issue here isn't that the low income housing existed and rather it wasn't adequately protected- less regulation isn't the way to improve this.

And meanwhile, no one builds new apartment buildings because the costs you can rent them are too low compared to the construction costs, the energy costs, the taxes costs and city delays imposed on you which increase the risks of the project.  And I'm not talking about the interest rates.

I've no idea about the situation there. But as said in the UK housing targets are persistently missed with those organisations subject to rent control doing a far better job of producing rental homes than companies which aren't subject to any such controls.
What is happening however is that owner occupied housing, some of it originally social housing, keeps falling into the private rental sector where extortion is common place- which furthers the increase in house prices which further disincentivises building rental accommodation by the private sector.

So in the end, it does not do much for the housing crisis.

This is getting at a key flaw in many people's views of rent control.
They assume getting rid of rent control will be a magic bullet that will fix all our problems or that those who are calling for more of it believe it will also magically solve all our problems.

Generally where it is introduced on the private sector it is in reaction to a seriously fucked up market- if you can't fix things then at least take a pain killer to stop them hurting quite so bad.
The only actual solution is to build more.

Space is finite.  You don't have room to expand, you don't invade other people's territories to assign them new lands for colonization, therefore your rent price increase.  Israel is smart that way.  Russia too.  They keep themselves in a state of perpetual war with a weaker neighbour so they can justify grinding at them and replacing their population with their own as it expands, all the while maintaining their rent under control.

This is the way to rent control.  The way America did it when it was great.  The way Canada did it when it was great.

....wut?

[garbon]

I read this earlier that had two case studies based on places I know - San Francisco and Cambridge, Mass.

https://www.brookings.edu/articles/what-does-economic-evidence-tell-us-about-the-effects-of-rent-control/

What does economic evidence tell us about the effects of rent control?

Steadily rising housing rents in many of the US's large, productive cities have reignited the discussion whether to expand or enact rent control provisions. Under pressure to fight rising rents, state lawmakers in Illinois, Oregon, and California are considering repealing laws that limit cities' abilities to pass or expand rent control. While rules and regulations of rent control vary from place to place, most rent control consists of caps on price increases within the duration of a tenancy, and sometimes beyond the duration of a tenancy, as well as restrictions on eviction.

New research examining how rent control affects tenants and housing markets offers insight into how rent control affects markets. While rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighborhood.

A substantial body of economic research has used theoretical arguments to highlight the potential negative efficiency consequences to keeping rents below market rates, going back to Friedman and Stigler (1946). They argued that a cap on rents would lead landlords to sell their rental properties to owner occupants so that landlords could still earn the market price for their real estate. Rent control can also lead to "mis-match" between tenants and rental units. Once a tenant has secured a rent-controlled apartment, he may not choose to move in the future and give up his rent control, even if his housing needs change (Suen 1980, Glaeser and Luttmer 2003, Sims 2011, Bulow and Klemperer 2012). This mis-allocation can lead to empty-nest households living in family-sized apartments and young families crammed into small studios, clearly an inefficient allocation. Similarly, if rental rates are below market rates, renters may choose to consume excessive quantities of housing (Olsen 1972, Gyourko and Linneman 1989). Rent control can also lead to decay of the rental housing stock; landlords may not invest in maintenance because they can't recoup these investment by raising rents. (Downs 1988, Sims 2007).

Of course, rent control also offered potential benefits for tenants. For example, rent control provides insurance against rent increases, potentially limiting displacement. Affordable housing advocates argue that these insurance benefits are valuable to tenants. For instance, if long-term tenants have developed neighborhood-specific capital, such as a network of friends and family, proximity to a job, or children enrolled in local schools, then tenants face large risks from rent appreciation. In contrast, individuals who have little connection to any specific area can easily insure themselves against local rental price appreciation by moving to a cheaper location. Those invested in the local community are not able to use this type of "self-insurance" as easily, since they must give up some or all of their neighborhood specific capital. Rent control can provide these tenants with this type of insurance.

Until recently, there was little data or natural experiments with which to assess the importance of these competing arguments, and to assess how rent controls affects tenants, landlords, or the broader housing market. But newly-available housing-market data spanning periods of dramatic change in rent control laws in Cambridge, MA and in San Francisco, CA have allowed economists to examine these questions empirically. While these studies do find support for the idea that existing tenants benefit from the insurance provided by rent control, they also find the overall cost of providing that insurance is very large.

From December 1970 through 1994, all rental units in Cambridge built prior to 1969 were regulated by a rent control ordinance that placed strict caps on rent increases and tightly restricted the removal of units from the rental stock. The legislative intent of the rent control ordinance was to provide affordable rental housing, and at the eve of rent control's elimination in 1994, controlled units typically rented at 40-plus percent below the price of nearby non-controlled properties. In November 1994, the Massachusetts electorate passed a referendum to eliminate rent control by a narrow 51–49 percent margin, with nearly 60 percent of Cambridge residents voting to retain the rent control ordinance. This law change directly impacted properties previously subject to rent control, enabling landlords to begin to charge market rents.

Autor, Palmer, and Pathak (2014) (APP), studies the impact of this unexpected change and find that newly decontrolled properties' market values increased by 45 percent.  In addition to these direct effects of rent decontrol, APP find removing rent control has substantial indirect effects on neighboring properties, boosting their values too. Post-decontrol price appreciation was significantly greater at properties that had a larger fraction of formerly controlled neighbors: residential properties at the 75th percentile of rent control exposure gained approximately 13 percent more in property value following decontrol than did properties at the 25th percentile of exposure. This differential appreciation of properties in rent control–intensive locations was equally pronounced among decontrolled and never-controlled units, suggesting that the effect of rent control had been to reduce the whole neighborhood's desirability.

The economic magnitude of the effect of rent control removal on the value of Cambridge's housing stock is large, boosting property values by $2.0 billion between 1994 and 2004. Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly controlled units, while $1.7 billion is due to the indirect effect. These estimates imply that more than half of the capitalized cost of rent control was borne by owners of never-controlled properties. Rent controlled properties create substantial negative externalities on the nearby housing market, lowering the amenity value of these neighborhoods and making them less desirable places to live.  In short, the policy imposed $2.0 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.

Diamond, McQuade, and Qian (2018) (DMQ) examine the consequences of an expansion of rent control on renters, landlords, and the housing market that resulted from a unique 1994 local San Francisco ballot initiative. In 1979, San Francisco imposed rent control on all standing buildings with five or more apartments. Rent control in San Francisco consists of regulated rent increases, linked to the CPI, within a tenancy, but no price regulation between tenants. New construction was exempt from rent control, since legislators did not want to discourage new development. Smaller multi-family buildings were exempt from this 1979 law change since they were viewed as more "mom and pop" ventures, and did not have market power over rents.

This exemption was lifted by a 1994 San Francisco ballot initiative. Proponents of the initiative argued that small multi-family housing was now primarily owned by large businesses and should face the same rent control of large multi-family housing. Since the initial 1979 rent control law only impacted properties built from 1979 and earlier, the removal of the small multi-family exemption also only affected properties built 1979 and earlier. This led to a differential expansion in rent control in 1994 based on whether the small multi-family housing was built prior to or post 1980—a policy experiment where otherwise similar housing was treated differently by the law.

To examine rent control's effects on tenant migration and neighborhood choices, DMQ examine panel data that provides address-level migration decisions and housing characteristics for the majority of adults living in San Francisco in the early 1990s. This allows them to define a treatment group of renters who lived in small multi-family apartment buildings built prior to 1980 and a control group of renters living in small multi-family housing built between 1980 and 1990. Their data allows them to follow each of these groups over time up until the present, regardless of where they migrate.

Between five and ten years after the law change, the beneficiaries of rent control are 19 percent less likely to have moved to a new address, relative to the control group's migration rate. Further, impact on the likelihood of remaining in San Francisco as whole was the same, indicating a large share of the renters that rent control caused to remain at their 1994 address would have left San Francisco had they not been covered by rent control.

These effects are significantly stronger among older households and among households that have already spent a number of years at their address prior to treatment. This is consistent with the fact that both of these populations are likely to be less mobile. Renters who don't need to move very often are more likely to find it worthwhile to remain in their rent controlled apartment for a long time, enabling them to accrue larger rent savings. Finally, DMQ find these effects are especially large for racial minorities, likely indicating that minorities faced greater displacement pressures in San Francisco than whites.

While expansion of rent control did prevent some displacement among tenants living in San Francisco in 1994, the landlords of these properties responded to mitigate their rental losses in a number of ways. In practice, landlords have a few possible ways of removing tenants. First, landlords could move into the property themselves, known as move-in eviction. Second, the Ellis Act allows landlords to evict tenants if they intend to remove the property from the rental market, for instance, in order to convert the units to condos. Finally, landlords are legally allowed to offer their tenants monetary compensation for leaving. In practice, these transfer payments from landlords are common and can be quite large.

DMQ find that rent-controlled buildings were 8 percentage points more likely to convert to a condo than buildings in the control group. Consistent with these findings, they find that rent control led to a 15 percentage point decline in the number of renters living in treated buildings and a 25 percentage point reduction in the number of renters living in rent-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by converting existing structures to owner-occupied condominium housing and by replacing existing structures with new construction.

This 15 percentage point reduction in the rental supply of small multi-family housing likely led to rent increases in the long-run, consistent with standard economic theory. In this sense, rent control operated as a transfer between the future renters of San Francisco (who would pay these higher rents due to lower supply) to the renters living in San Francisco in 1994 (who benefited directly from lower rents). Furthermore, since many of the existing rental properties were converted to higher-end, owner-occupied condominium housing and new construction rentals, the passage of rent control ultimately led to a housing stock that caters to higher income individuals. DMQ find that this high-end housing, developed in response to rent control, attracted residents with at least 18 percent higher income. Taking all of these points together, it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy's intended goal. Indeed, by simultaneously bringing in higher income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city.

It may seem surprising that the expansion of rent control in San Francisco led to an upgraded housing stock, catering to high-income tastes, while the removal of rent control in Cambridge also lead to upgrading and value appreciation. To reconcile these effects, it is useful to think about which types of landlords would respond to a rent control expansion versus a rent control removal. In the case of rent control expansion, some landlords will choose to recoup some of their losses by converting to condo or redeveloping their building to exempt it from rent control. However, other landlords may choose to accept the rent control regulation, and no longer perform maintenance on the building and allow it to decay. In the rent control expansion case, one would see an increase in condo conversions and upgrades, driven by the landlords that chose to respond in this way. However, when rent control is removed, the landlords who own the rent controlled buildings are the ones who didn't choose to convert to condo or redevelop in response to the initial passage of rent control. Indeed, one would expect this subset of landlords to choose to upgrade and invest in their properties once the rent control regulation is removed.

Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood. These results highlight that forcing landlords to provide insurance to tenants against rent increases can ultimately be counterproductive. If society desires to provide social insurance against rent increases, it may be less distortionary to offer this subsidy in the form of a government subsidy or tax credit. This would remove landlords' incentives to decrease the housing supply and could provide households with the insurance they desire. A point of future research would be to design an optimal social insurance program to insure renters against large rent increases.

The authors did not receive any financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.

[Admiral Yi]

If profit isn't your main motive then how on earth does reduced rental income decrease your incentive to build?

I will repeat, because this sentence shows that you do not understand what I have been saying.

Private builders, profit important, hence rent control important.

The state, profit not important, hence rent control not important in determining how much to build.

[Grey Fox]

Viper did a really bad job explaining Quebec's rent control system.

[Josquius]

A substantial body of economic research has used theoretical arguments to highlight the potential negative efficiency consequences to keeping rents below market rates, going back to Friedman and Stigler (1946). They argued that a cap on rents would lead landlords to sell their rental properties to owner occupants so that landlords could still earn the market price for their real estate.

This is bizarre.
They say they will highlight the potential negative consequences of rent control then for their example they give an argument of everything working well.

Rent control can also lead to "mis-match" between tenants and rental units. Once a tenant has secured a rent-controlled apartment, he may not choose to move in the future and give up his rent control, even if his housing needs change

Yes. This is definitely a tricky point. It exists too in the private sector of course, not all landlords are cunts. But definitely more potential for it if you enforce fair treatment.

A clear solution exists to this one, the main solution to housing issues overall: build more of it.
In lieu of this perfect solution there's also other fiddling that can be done to incentivise people living in appropriate sized homes; the infamous bedroom tax, property exchanges, making small housing near facilities particularly appealing to pensioners, and then outright housing officer persuasion.

But also worth considering are  factors the economists won't go near such as that a house can be a home and not necessarily just something you keep based on your logical needs for the moment.

Of course, rent control also offered potential benefits for tenants. For example, rent control provides insurance against rent increases, potentially limiting displacement. Affordable housing advocates argue that these insurance benefits are valuable to tenants. For instance, if long-term tenants have developed neighborhood-specific capital, such as a network of friends and family, proximity to a job, or children enrolled in local schools, then tenants face large risks from rent appreciation. In contrast, individuals who have little connection to any specific area can easily insure themselves against local rental price appreciation by moving to a cheaper location. Those invested in the local community are not able to use this type of "self-insurance" as easily, since they must give up some or all of their neighborhood specific capital. Rent control can provide these tenants with this type of insurance.

Not really mentioned here but need highlighting this isn't necessarily just a benefit for the tenants themselves.
Allowing workers vital to the community to continue to live there such as nurses, teachers, and so on benefits others far more than the key worker themselves.
This is a factor in places like central London where highly paid professionals would otherwise completely price out these more modestly paid key workers, and less reported but equally important, is in places like the Lake District and Ceredigion where house buying becomes the problem and social housing the solution with the threat of second home buyers forcing out people who are vital to the health of the community (and where 'just move further out' is far less practical than in London).

Diamond, McQuade, and Qian (2018) (DMQ) examine the consequences of an expansion of rent control on renters, landlords, and the housing market that resulted from a unique 1994 local San Francisco ballot initiative. In 1979, San Francisco imposed rent control on all standing buildings with five or more apartments. Rent control in San Francisco consists of regulated rent increases, linked to the CPI, within a tenancy, but no price regulation between tenants. New construction was exempt from rent control, since legislators did not want to discourage new development. Smaller multi-family buildings were exempt from this 1979 law change since they were viewed as more "mom and pop" ventures, and did not have market power over rents.

Sounds like the problem here is that they incentivised building new blocks that had less than 5 apartments, potentially replacing far more efficient older larger blocks. This sounds very silly and obviously doomed to worsen the housing situation.
Its not the fact that rent control was introduced that was the problem here, its that it was selectively imposed in completely the wrong way.

This exemption was lifted by a 1994 San Francisco ballot initiative. Proponents of the initiative argued that small multi-family housing was now primarily owned by large businesses and should face the same rent control of large multi-family housing. Since the initial 1979 rent control law only impacted properties built from 1979 and earlier, the removal of the small multi-family exemption also only affected properties built 1979 and earlier. This led to a differential expansion in rent control in 1994 based on whether the small multi-family housing was built prior to or post 1980—a policy experiment where otherwise similar housing was treated differently by the law.

I mean why on earth would you give an exemption to small newly build housing?

Rent control appears to help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood. These results highlight that forcing landlords to provide insurance to tenants against rent increases can ultimately be counterproductive.

If you get mauled by a bear and take some pain killers then sure you're going to feel a bit better, but you really still ought to see a doctor about the actual problem.

If society desires to provide social insurance against rent increases, it may be less distortionary to offer this subsidy in the form of a government subsidy or tax credit. This would remove landlords' incentives to decrease the housing supply and could provide households with the insurance they desire. .

No.
The UK does this.
It just means private landlords get to extort local government rather than residents.
Which again, yeah, lessens the pain on needy people, but doesn't really solve the overall problem, it only worsens it by incentivising buy to let people and draining council budgets.

If profit isn't your main motive then how on earth does reduced rental income decrease your incentive to build?

I will repeat, because this sentence shows that you do not understand what I have been saying.

Private builders, profit important, hence rent control important.

The state, profit not important, hence rent control not important in determining how much to build.

You've basically just summed up a chunk of what I was saying there.
Though social doesn't necessarily mean "the state", nor even government of any level.

[garbon]

What bizarre nonsense. I guess I admire...your dedication?

[DGuller]

Why can't people with curiosity and humility have this kind of dedication? 

[Josquius]

I'm not curious?
And I'll always admit when I don't know something- most people here won't do that.

What bizarre nonsense. I guess I admire...your dedication?

Well thats my points proven wrong.

[garbon]

What bizarre nonsense. I guess I admire...your dedication?

Well thats my points proven wrong.

You are distoring all evidence to fit your preconceived notions. That's not fertile ground for a good faith discussion.

[Josquius]

What bizarre nonsense. I guess I admire...your dedication?

Well thats my points proven wrong.

You are distoring all evidence to fit your preconceived notions. That's not fertile ground for a good faith discussion.

How am I distorting them?
I'm pointing out the flaws in them directly.
This isn't a black and white issue.

[DGuller]

I'm not curious?
And I'll always admit when I don't know something- most people here won't do that.

I don't think it's possible for anyone to always admit that, for that you have to know when you don't know something first.  I'm not convinced the latter part happens all that often for you.

What bizarre nonsense. I guess I admire...your dedication?

Well thats my points proven wrong.

Lots of people are trying to prove you wrong, only to run into total unwillingness to engage.  You reply, but you don't engage.  I'll pass on that experience, thank you.