Rent Control

Walter Block
Professor and chair of economics, college of business administration, at Loyola University

New York State legislators defend the War Emergency Tenant Protection Act—also known as
rent control—as a way of protecting tenants from war-related housing shortages. The war
referred to in the law is not the recent Gulf war, nor the Vietnam war. It is World War II. That
is when rent control started in New York City. Of course, war has very little to do with
apartment shortages. On the contrary, the difficulty is created by rent control, the supposed
solution. Gotham is far from the only city to have embraced rent control—a form of housing
socialism. Many others across the the United States have succumbed to the blandishments of
this legislative "fix."
Rent control, like all other government-mandated price controls, is a law placing a maximum
price, or a "rent ceiling," on what landlords may charge tenants. If it is to have any effect, the
rent level must be set at a rate below that which would otherwise have prevailed. (An
enactment prohibiting apartment rents from exceeding, say, $100,000 per month, would have
no effect since no one would pay that amount in any case.) But if rents are established at less
than their equilibrium levels, demand will necessarily exceed supply, and rent control will
lead to a shortage of dwelling spaces. Absent controls on prices, if the amount of a
commodity or service demanded is larger than the amount supplied, prices rise to eliminate
the shortage (by both bringing forth new supply and by reducing the amount demanded). But
controls prevent rents from attaining market-clearing levels and shortages result.
With shortages in the controlled sector, this excess demand spills over onto the noncontrolled
sector (typically, new upper-bracket rental units or condominiums). But this noncontrolled
segment of the market is likely to be smaller than it would be without controls because
property owners fear that controls may one day be slapped on them. The high demand in the
noncontrolled segment along with the small supply, both caused by rent control, boost prices
in that segment. Paradoxically, then, even though rents may be lower in the controlled sector,
they rise greatly for uncontrolled units and may be higher for rental housing as a whole.
As in the case of other price ceilings, rent control causes shortages, diminution in the quality
of the product, and queues. But rent control differs from other such schemes. With price
controls on gasoline, the waiting lines worked on a first-come-first-served basis. With rent
control, because the law places sitting tenants first in the queue, many of them can benefit.
The Effects of Rent Control
Economists are virtually unanimous in the conclusion that rent controls are destructive. In a
late-seventies poll of 211 economists published in the May 1979 issue of American Economic
Review, slightly more than 98 percent of U.S. respondents agreed that "a ceiling on rents
reduces the quantity and quality of housing available." Similarly, the June 1988 issue of
Canadian Public Policy reported that over 95 percent of the Canadian economists polled
agreed with the statement. The agreement cuts across the usual political spectrum, ranging all
the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the "right" to
their fellow Nobel Laureate Gunnar Myrdal, an important architect of the Swedish Labor
Party's welfare state, on the "left." Myrdal stated, "Rent control has in certain Western

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countries constituted, maybe, the worst example of poor planning by governments lacking
courage and vision." Fellow Swedish economist (and socialist) Assar Lindbeck, asserted, "In
many cases rent control appears to be the most efficient technique presently known to destroy
a city—except for bombing."
Economists have shown that rent control diverts new investment, which would otherwise
have gone to rental housing, toward other, greener pastures—greener in terms of consumer
need. They have demonstrated that it leads to housing deterioration, to fewer repairs and less
maintenance. For example, Paul Niebanck reports that 29 percent of rent-controlled housing
in the United States is deteriorated, but only 8 percent of the uncontrolled units are in such a
state of disrepair. Joel Brenner and Herbert Franklin cite similar statistics for England and
France.
The economic reasons are straightforward. One effect of government oversight is to retard
investment in residential rental units. Imagine that you have $5 million to invest and can place
the funds in any industry you wish. In most businesses governments will place only limited
controls and taxes on your enterprise. But if you entrust your money to rental housing, you
must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and
rent ceilings. Under these conditions is it any wonder that you are less likely to build or
purchase rental housing?
This line of reasoning holds not just for you, but for everyone else as well. As a result the
supply of apartments for rent will be far smaller than otherwise. And not so amazingly, the
preceding analysis holds true not only for the case where rent controls are in place, but even
where they are only threatened. The mere anticipation of controls is enough to place a chilling
effect on such investment. Instead, everything else under the sun in the real estate market has
been built: condominiums, office towers, hotels, warehouses, commercial space. Why?
Because such investments have never been subject to rent controls, and no one fears that they
ever will be. It is no accident that these facilities boast healthy vacancy rates and only slowly
increasing rental rates, while residential space suffers from a virtual zero vacancy rate and
skyrocketing prices in the uncontrolled sector. Evidence for this is seen in the comparative
vacancy rates for residential and commercial real estate; exceedingly small in the former case,
reaching double-digit levels in the latter.
Although many rent-control ordinances specifically exempt new rental units from coverage,
investors are too cautious (perhaps too smart) to put their faith in rental housing. In numerous
cases housing units supposedly exempt forever from controls were nevertheless brought under
the provisions of this law due to some "emergency" or other. New York City's government,
for example, has three times broken its promise to exempt new or vacant units from control.
So prevalent is this practice of rent-control authorities that a new term has been invented to
describe it: "recapture."
Rent control has destroyed entire sections of sound housing in New York's South Bronx. It
has led to decay and abandonment throughout the entire five boroughs of the city. Although
hard statistics on abandonments are not available, William Tucker reports estimates that about
thirty thousand New York apartments were abandoned annually from 1972 to 1982, a loss of
almost a third of a million units in this eleven-year period. Thanks to rent control, and to
potential investors' rational fear that rent control will become even more stringent, no sensible
investor will build rental housing unsubsidized by government.
Effects on Tenants

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Existing rental units fare poorly under rent control. Even with the best will in the world, the
landlord cannot afford to pay his escalating fuel, labor, and materials bills, to say nothing of
refinancing his mortgage, out of the rent increase he can legally charge. And under rent
controls he lacks the best will; the incentive he had under free-market conditions to supply
tenant services is severely reduced.
The sitting tenant is "protected" by rent control but, in many cases, receives no real rental
bargain because of improper maintenance, poor repairs and painting, and grudging provision
of services. The enjoyment he can derive out of his dwelling space ultimately tends to be
reduced to a level commensurate with his controlled rent.
There are exceptions to this general rule. Many tenants, usually rich ones who are politically
connected, or who were lucky enough to be in the right place at the right time, can gain a lot
from rent control. Tenants in some of the nicest neighborhoods in New York City pay a
scandalously small fraction of the market price of their apartments. Former mayor Ed Koch,
for example, pays $441.49 for an apartment worth about $1,200 per month. Some people in
this fortunate position use their apartments like a hotel room, visiting only a few times per
year.
Then there is the "old lady effect." Consider the case of a two-parent, four-child family that
has occupied a ten-room rental dwelling. One by one the children grow up, marry, and move
elsewhere. The husband dies. Now the lady is left with a gigantic apartment. She uses only
two or three of the rooms and, to save on heating and cleaning, closes off the remainder.
Without rent control she would move to a smaller accommodation. But rent control makes
that option unattractive. Needless to say, these practices further exacerbate the housing crisis.
Repeal of rent control would free up thousands of rooms very quickly, dampening the impetus
toward vastly higher rents.
What determines whether or not a tenant benefits from rent control? If the building in which
he lives is in a good neighborhood, where rents would rise appreciably if rent control were
repealed, then the landlord has an incentive to maintain the building against the prospect of
that happy day. This incentive is enhanced if there are many decontrolled units in the building
(due to "vacancy decontrol" when tenants move out) or privately owned condominiums for
whom the landlord must provide adequate services. Then the tenant who pays the
scandalously low rent may "free-ride" on his neighbors. But in the more typical case the
quality of housing services tends to reflect rental payments. This, at least, is the situation that
will prevail at equilibrium.
If government really had the best interests of tenants at heart and was for some reason
determined to employ controls, it would do the very opposite of imposing rent restrictions: it
would instead control the price of every other good and service available, apart from
residential suites, in an attempt to divert resources out of all those other opportunities and into
this one field. But that, of course, would bring about full-scale socialism, the very system
under which the Eastern Europeans suffered so grimly. If the government wanted to help the
poor and was for some reason constrained to keep rent controls, it would do better to tightly
control rents on luxury unit rentals and to eliminate rent controls on more modest dwellings—
the very opposite of present practice. Then, builders' incentives would be turned around.
Instead of erecting luxury dwellings, which are now exempt, they would be led, "as if by an
invisible hand," to create housing for the poor and middle classes.
Solutions

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The negative consequences of rent legislation have become so massive and perverse that even
many of its former supporters have spoken out against it. Instead of urging a quick
termination of controls, however, some pundits would only allow landlords to buy tenants out
of their controlled dwellings. That they propose such a solution is understandable. Because
tenants outnumber landlords and are usually convinced that rent control is in their best
interests, they are likely to invest considerable political energy in maintaining rent control.
Having landlords "buy off" these opponents of reform, therefore, could be a politically
effective way to end rent control.
But making property owners pay to escape a law that has victimized many of them for years
is not an effective way to make them confident that rent controls will be absent in the future.
The surest way to encourage private investment is to signal investors that housing will be safe
from rent control. And the surest way to do that is to eliminate the possibility of rent control
with an amendment to the state constitution that forbids it.
It may seem paradoxical to many people that the best way to help tenants is to grant economic
freedom to landlords. But it's true.
About the Author
Walter Block holds the Harold E. Wirth Eminent Scholar Chair in Economics at Loyola
University's Joseph A. Butt, S. J. College of Business Administration.
Further Reading
Block, Walter, and Edgar Olsen, eds. Rent Control: Myths and Realities. 1981.
Brenner, Joel F., and Herbert M. Franklin. Rent Control in North America and Four
European Countries. 1977.
Niebanck, Paul L. Rent Control and the Rental Housing Market in New York City. 1968.
Tucker, William. The Excluded Americans: Homelessness and Housing Policies. 1990.

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