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Postwar Rent Controls

Mises Daily: Wednesday, February 08, 2012 by and

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The rent that a landlord charges for his accommodation is merely an instance of a price for a commodity, like all other prices for all other commodities. And like all other prices and all other commodities, rents have been a prime target for government restrictions. The postwar experience with rent control has been particularly revealing in regard to the adequacy of controls in general.

Governments have three main reasons for imposing rent control. The first is the fear that those who can pay will get all the housing and the poor will be left in the cold. The second is that landlords benefit too much from rents that can be indefinitely raised. The third is that a rise in rents is a form of inflation, and so should not be allowed.

The Housing Record of San Francisco

In a particularly penetrating article Milton Friedman and George Stigler examined the housing record of San Francisco.[1] After the earthquake of April 18, 1906, the heart of the city was utterly destroyed by fire. Some 225,000 people were homeless. "Yet," say the authors, "when one turns to the San Francisco Chronicle of May 24,1906 — the first available issue after the earthquake — there is not a single mention of a housing shortage! The classified advertisments listed 64 offers (some for more than one dwelling) of flats and houses for rent, and 19 of houses for sale, against five advertisements of flats or houses wanted. Then and thereafter a considerable number of all types of accommodation except hotel rooms were offered for rents."

In 1906, San Francisco allowed the free market mechanism to allocate accommodation, allowing rents to find their own level after the disaster. Even so, there was a great deal of low-cost accommodation available in San Francisco at that time. (Friedman and Stigler quote the 1906 advertisement "Six-room house and bath, with 2 additional rooms in basement having fire-places, nicely furnished; fine piano; … $45.")

To take another example of housing shortage, in 1946 the population of San Francisco had increased by about a third in six years as people migrated westward. The problem was much less severe than the 1906 shortage, at least on paper. But the newspapers billed the shortage as "the most critical problem facing California." Advertisements for apartments to rent ran at about one-sixteenth of the 1906 level, while advertisements of houses for sale were up threefold. In 1906 after the earthquake, there was 1 "wanted for rent" for every 10 "houses or apartments for rent"; in 1946, there were 375 "wanted for rent" for every 10 "for rent."

Why the disparity? Because in 1906, rents in San Francisco were free to rise. In 1946, the use of higher rents to ration housing had been made illegal by the imposition of rent ceilings.

And what of the arguments against the allocation of housing by price? The first is very questionable: as Friedman and Stigler observe, "At all times during the acute shortage in 1906, inexpensive flats and houses were available." The second is misleading. Of course landlords do benefit from a shortage like that of 1906. But the ultimate solution of a housing shortage must be the construction of new property, and nobody will construct new houses for rent if he is denied, through rent control, an attractive return on his money. As for the third argument, that high rents are a form of inflation, it must be observed that one does not keep prices down in an economy merely by taking commodities off the market, as rent controls do.

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Scandinavian Houses

Rent control was introduced in Sweden in 1942 as an "emergency" and temporary regulation. At least until the end of the Socialist government in 1976, it was still in effect. The wartime housing shortage reached its peak in 1942 and seems to have become much worse over the period that controls had been operating.

In Sweden, the record of rent control speaks for itself. Says Sven Rydenfelt:[2]

To the economist, it seems self-evident that a price control like the Swedish rent control must lead to a demand surplus, that is, a housing shortage. For a long period the general public was more inclined to believe that the shortage was a result of the abnormal situation created by the war, and this even in a non-participating country like Sweden.… This opinion does not, however, accord with the evidence … that the shortage during the war years was insignificant compared with that after the war. It was only in the post-war years that the housing shortage assumed such proportions that it became Sweden's most serious social problem.

The main demand-effect of Swedish rent controls has been to draw a huge number of single people — who would be more inclined to live with their families were rents allowed to rise — into the housing market.

Professor Frank Knight commented[3] on the phenomenon: "If educated people can't or won't see that fixing a price below the market level inevitably creates a 'shortage' … it is hard to believe in the usefulness of telling them anything whatever in this field of discourse."

Rent Controls in Britain

Rent controls were first introduced to Britain in December 1915, prohibiting landlords to charge rents higher than those charged in August 1914, when the Great War broke out on the Continent of Europe. After the war, controls were relaxed to some extent, but new controls were imposed on September 1, 1939.

The economic effects of rent controls were (as Professor Paish notes)[4] inadequate maintenance, reduction in mobility, and fewer houses to let.

In recent years the situation has become more and more complicated. In the first place, public housing has become so heavily relied upon as a means of meeting the inevitable shortage that followed controls that some 42 percent of the population of the United Kingdom now live in publicly-owned housing; in Scotland, the proportion is 48 percent. Minimal rents are charged to these tenants. Private landlords are thus forced to compete with an ultra-low-cost housing alternative, which explains why the waiting lists for public housing are so long (a normal wait is several years) and why landlords are withdrawing their property from the market.

Another series of restrictions derives from the government's attempts to tidy up the undesirable effects of restrictions themselves. When landlords cannot extract an adequate profit margin from their properties, then they let the buildings deteriorate, attempt to squeeze more tenants into the same building, and try to find ways around the rent restrictions. Hence the phenomenon of "Rachmanism," which hit Britain in the early '60s. To deal with these effects, it was thought necessary to introduce a new Rent Act in 1965, which gave security of tenure to many tenants. At the same time, rents of property not covered by the earlier regulations were "regulated" — that is, a "fair rent" was fixed and could be appealed from time to time by the landlord or the tenant. Since 1972, nearly all unfurnished rented property has been put under this rent regulation mechanism. And what has happened? The Francis Committee on the Rent Acts[5] published a table showing that the number of unfurnished vacancies advertised in the London Weekly Advertiser fell from 767 to 66 in the seven years up to 1970. In the same period, the number of furnished vacancies has increased from 855 to 1,290. "It is strange," is the cynical comment of F. G. Pennance,[6] "that the Francis Committee forebore to draw the obvious conclusion — that rent regulation had affected supply." And it had affected it for the worse. British landlords have become very reluctant to put their property up for rent, because the security of tenure offered to their customers means that they will often have difficulty in reclaiming the house. Nobody could estimate the numbers of landlords — especially small-scale operators — who have been driven from the housing market.

Other Effects of Rent Control

Many other severe side-effects of rent control are easily seen, other than mere shortage of housing.

The first is that controls, originally designed to help the poorer tenants, have now precipitated a situation in which many landlords are in fact poorer than their own tenants. For example, Dr. Willys Knight found in his study of Lansing, Michigan, that the median income of tenants was greater than the median income of landlords.[7] While the difference might be due to the effect of age (landlords are older and hence many of them have no income except rent), the encouragement of this difference does not seem to be a sensible way to solve our housing shortages. B. Bruce-Briggs, an urbanologist with the Hudson Institute, asserts flatly that "From the first, rent control [in New York] was actually a subsidy to the working and middle classes … partially levied on the very poor. "[8]

The second is that artificially low rents lead to misallocation of housing resources. Persons do not need to move into smaller apartments to reduce their rents, because rents are low. Similarly, homeowners with one or two spare rooms that they would rent out to single persons will not enter the housing market because they do not receive a sufficient return to justify the expense of repairs and redecoration. These and other effects generate a situation in which many individuals and families are homeless, while perfectly good accommodation is withdrawn from the market.

With the lack of money in the housing market comes lack of adequate facilities. In his 1942 essay on French rent controls, de Jouvenal[9] observed that controls meant that middle-class apartments with three or four reception rooms frequently cost about $2 a month. "Rent seldom rises above 4 per cent of any income," he commented. "Frequently it is less than 1 per cent." In Paris at that time there were about 16,000 buildings in such disrepair that they could only be demolished. And 82 percent of Parisians had no bath or shower; more than half had outside lavatories, and a fifth had no running water. The owners, who were not in a financial position to keep up their own buildings, could hardly be blamed.

As the capital stock deteriorates, slums are born. Since no economic incentive exists for owners to repair run-down properties in declining areas, the blight spreads. As the blight spreads, more and more buildings become uninhabitable. The effect of rent controls is ultimately to remove once-habitable dwellings from the housing stock.

The Decline of New York

These effects can be seen to have contributed to the demise of one city in particular, namely New York. Federal rent control went into effect there in November 1943 and the state took over its administration in May 1950. In 1962, the city became the administrator: in so doing, it made a stick to beat itself. The damage done by controls "cannot be properly assessed in dollars-and-cents alone. As even the hapless officials responsible now reluctantly concede, rent control is costing the City of New York, through abandonment and ultimate destruction, upwards of 30,000 dwelling units annually."[10]

Social effects in New York are both severe — as the crumbling tenements make clear — and subtle: by setting tenant against landlord, rent control fans the flames of social hatred and class warfare in a city once known as the nation's melting pot.

Urbanologist B. Bruce-Briggs has concisely summed up the consequences of rent control in New York City. He notes that:

Rent control reduces mobility by encouraging tenants to stay put. It also encourages people to occupy more space than they otherwise would. It offers the landlord incentives not to provide adequate services; he must be forced to do so by law, leading to endless litigation. (In 1975 nearly a half-million cases went to New York's Housing Court.) Rent control must be, administered, at a cost of $13 million to New York City and State. It creates unimaginable costs for tenants and landlords in time and administrative fees. It has resulted in massive tax delinquency.[11]

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Economic effects on the city itself are far-reaching. "Maximum Base Rents" are rarely increased by more than 8.5 percent per annum. In contrast, according to Barron's[12], "taxes and labor are rising at well over 10 percent per year, while in the past 18 months, the price of fuel oil, a ponderable part of total operating costs, has soared by 2000 percent. Small wonder that more and more buildings are being run at a loss, while tax delinquency, once largely confined to one or two rotten boroughs, has spread far and wide." Real estate tax delinquencies for fiscal year 1974–75 were estimated at $220 million, up from $148 million and $122 million in the two preceding years.

When government agencies insist that their policies have kept down the cost of accommodation, it seems fair to ask that costs such as these be taken into consideration. Rent controls in the postwar period, like most price and wage restrictions, have turned out to be an expensive failure.

Notes

[1] M. Friedman and G. Stigler, "Roofs or Ceilings? The Current Housing Problem," Popular Essays on Current Problems, Vol. 1, No. 2 (Irvington-on-Hudson: Foundation for Economic Education, 1946).

[2] Sven Rydenfelt, "Rent Controls Thirty Years On," Verdict on Rent Control (London: Institute of Economic Affairs, 1972). See also a Canadian version of this valuable work entitled Rent Control–A Popular Paradox (Vancouver, British Columbia: The Fraser Institute, 1975).

[3] Frank H. Knight, "Truth and Relevance at Bay," American Economic Review, December 1949, p. 274.

[4] F. W. Paish, "The Economics of Rent Restriction," Lloyds Bank Review, April 1950.

[5] Report of the Committee on the Rent Acts, Cmnd. 4609, H.M.S.O. London, 1971, p. 8.

[6] Introduction to Verdict on Rent Control, op. cit.

[7] W. Knight, Postwar Rent Control Controversy, Research Paper 23 (Atlanta: Georgia State College School of Business, 1962).

[8] B. Bruce-Briggs, "Rent Control Must Go," The New York Times Magazine, April 18, 1976. There are of course many anecdotal "horror stories" to illustrate this all too common phenomenon (the sad fact that many social programs designed to help the poor do the exact opposite in practice). The author offers his own pet example:

My favorite freeloader is a good friend who earns more than $30,000 a year. He has possession of a rent-controlled apartment in Yorkville that he rarely uses, since he prefers to live in his mistress's penthouse in the East 50's. He would be a fool to give up the rent-controlled apartment — they may split — so he uses it as an occasional office or pied-à-terre, lends it to friends, or occasionally subleases it for a short period of time. When asked to justify this, he will look you straight in the eye and tell you about the needs of the old people in rent-controlled apartments on his block.

[9] Bertrand de Jouvenal, "No Vacancies" (Irvington-on-Hudson: Foundation for Economic Education, 1962).

[10] Barron's, October 27, 1975, p. 7.

[11] B. Bruce-Briggs, op. cit.

[12] Barron's, op. cit.