Rent Controls are People Controls
A Freedom Party Issue PaperOn the basis of their performance over the last decade, rent controls must be condemned on both practical and moral grounds. They are objectionable in practice because they do not work; they are morally reprehensible because they violate individual rights.
When rent controls were first introduced to Ontario in 1975, they were justified as a necessary reaction to that period's inflationary surge. Even though average rent increases in 1974 were lower at 8.3% than the general increase in prices of 10.9%, a cry went out for rent controls to parallel the federal government's wage and price controls. Assurances were made that these controls would "only be temporary" and would expire with expiration of other government-imposed controls.
Needless to say, that never happened.
To understand the practical failures of rent control, consider the findings of the Fraser Institute which objectively analyzed the effect of rent control in six different countries over the last half-century. In every case, government intervention produced a mix of housing deterioration, haphazard income redistribution, an increase in racial tensions and discrimination, a decrease in tax base, a reduction in labour mobility, and a reduction --- often to zero --- in apartments available for rent.
Not surprisingly, this is becoming an accurate description of present-day conditions in Ontario. Rent controls in this province have produced a shortage in rental accommodation, not only because of income limitations placed on landlords and property owners, but also because of the uncertainty created within the rental and housing industry by government intervention.
Worse, when shortages occur, the government continues in the error of its ways by trying to compensate for the shortfall through the creation of "low-cost" housing --- housing that is heavily subsidized by all of us, and which is usually inferior in quality. Almost all slums in Ontario were expressly built by governments in an attempt to do something about the legacy of rent controls, our catastrophic social welfare system, and taxes and controls levied against the construction industry.
To understand why rent controls are morally objectionable, consider that great common-law precept inherited from ancient Greece and underlying much of modern law, namely, the doctrine of isonomia, which states that" The law must bear equally on all, and not favour one citizen over another."
Bearing this in mind, consider what rent control legislation actually does: it prevents landlords from exercising their right to the fair market value of the service they provide, a right freely available to all their fellow citizens. It forces landlords to give an unearned and unagreed-to benefit to tenants, without recompense. It limits landlords' income, but not their costs. It reduces the value of their property, and it erodes their right to property by requiring them to expend a good twenty to thirty hours of unpaid labour should they choose to appeal to the Residential Tenancies Commission.
And are our politicians punished for their legislative assault on the rights of this particular minority group? Not at all. They are, in fact, rewarded by grateful tenants who, falsely believing that they are benefitting from the process, give them votes bought and paid for by blatant discrimination against the landlord.
Freedom Party believes that the purpose of government is to protect our freedom of choice, not to restrict it.
When landlords lose their freedom of choice, we all lose, because our acceptance of discrimination against one particular group of individuals merely sets the stage for another group of individuals to be exploited for political gain. And of course, this is happening all the time. Rent controls, like all controls, are really people controls. And people --- all people --- are entitled to their freedom of choice.
Consent 20 - Mar 1994
The Slumlord
Walter Block
A Freedom Party supporter, Dr. Walter Block was past senior economist with the Vancouver-based Fraser Institute and now teaches economics at Holy Cross College in Worcester, Massachusetts. The following essay originally appeared in his 1976 book, Defending The Undefendable, and was introduced as an exhibit by Freedom Party leader Robert Metz when he defended London landlord Elijah Elieff before an Ontario Human Rights Commission Board of Inquiry in 1993. (See Dec/93 Freedom Flyer.) Surprisingly (given the venue), Block's arguments seemed to carry a significant amount of weight during the final arguments pertaining to Elieff's defence before the board.)
To many people, the slumlord --- alias ghetto landlord and rent gouger --- is proof that man can, while still alive, attain a satanic image. Recipient of vile curses, pin-cushion for needle bearing tenants with a penchant for voodoo, exploiter of the downtrodden, the slumlord is surely one of the most hated figures of the day.
The indictment is manifold: he charges unconscionably high rents; he allows his buildings to fall into disrepair; his apartments are painted with cheap lead paint which poisons babies, and he allows junkies, rapists and drunks to harass the tenants. The falling plaster, the overflowing garbage, the omnipresent roaches, the leaky plumbing, the roof cave-ins and the fires, are all integral parts of the slumlord's domain. And the only creatures who thrive on his premises are the rats.
The indictment, highly charged though it is, is spurious. The owner of ghetto housing differs little from any other purveyor of low cost merchandise. In fact, he is no different from any purveyor of any kind of merchandise. They all charge as much as they can.
First, consider the purveyors of cheap, inferior, and secondhand merchandise as a class. One thing above all else stands out about merchandise they buy and sell: it is cheaply built, inferior in quality, or secondhand.
A rational person would not expect high quality, exquisite workmanship or superior new merchandise at bargain rate prices; he would not feel outraged and cheated if bargain rate merchandise proved to have only bargain rate qualities. Our expectations from margarine are not those of butter. We are satisfied with lesser qualities from a used car than from a new car. However, when it comes to housing, especially in the urban setting, people expect, and even insist upon, quality housing at bargain prices.
But what of the claim that the slumlord overcharges for his decrepit housing? This is erroneous. Everyone tries to obtain the highest price possible for what he produces, and to pay the lowest price possible for what he buys. Landlords operate this way, as do workers, minority group members, socialists, babysitters, and communal farmers. Even widows and pensioners who save their money for an emergency try to get the highest interest rates possible for their savings.
According to the reasoning which finds slumlords contemptible, all these people must also be condemned. For they "exploit" the people to whom they sell or rent their services and capital in the same way when they try to obtain the highest return possible. But, of course, they are not contemptible --- at least not because of their desire to obtain as high a return as possible from their products and services. And neither are slumlords. Landlords of dilapidated houses are singled out for something which is almost a basic part of human nature --- the desire to barter and trade and to get the best possible bargain.
The critics of the slumlord fail to distinguish between the desire to charge high prices, which everyone has, and the ability to do so, which not everyone has. Slumlords are distinct, not because they want to charge high prices, but because they can. The question which is, therefore, central to the issue --- and which the critics totally disregard --- is why this is so.
What usually stops people from charging inordinately high prices is the competition which arises as soon as the price and profit margin of any given product or service begins to rise. If the price of Frisbees, for example, starts to rise, established manufacturers will expand production, new entrepreneurs will enter the industry, used Frisbees will perhaps be sold in secondhand markets, etc. All these activities tend to counter the original rise in price. If the price of rental apartments suddenly began to rise because of a sudden housing shortage, similar forces would come into play. New housing would be built by established real estate owners and by new ones who would be drawn into the industry by the price rise. Old housing would tend to be renovated; basements and attics would be pressed into use. All these activities would tend to drive the price of housing down, and cure the housing shortage.
If landlords tried to raise the rents in the absence of a housing shortage, they would find it difficult to keep their apartments rented. For both old and new tenants would be tempted away by the relatively lower rents charged elsewhere.
Even if landlords banded together to raise rents, they would not be able to maintain the rise in the absence of a housing shortage. Such an attempt would be countered by new entrepreneurs, not party to the cartel agreement, who would rush in to meet the demand for lower priced housing. They would buy existing housing, and build new housing. Tenants would, of course, flock to the non-cartel housing. Those who remained in the high price buildings would tend to use less space, either by doubling up or by seeking less space than before. As this occurs it would become more difficult for the cartel landlords to keep their buildings fully rented. Inevitably, the cartel would break up, as the landlords sought to find and keep tenants in the only way possible: by lowering rents. It is, therefore, specious to claim that landlords charge whatever they please. They charge whatever the market will bear, as does everyone else.
An additional reason for calling the claim unwarranted is that there is, at bottom, no really legitimate sense to the concept of overcharging. "Overcharging" can only mean "charging more than the buyer would like to pay." But since we would all really like to pay nothing for our dwelling space (or perhaps minus infinity, which would be equivalent to the landlord paying the tenant an infinite amount of money for living in his building), landlords who charge anything at all can be said to be overcharging. Everyone who sells at any price greater than zero can be said to be overcharging, because we would all like to pay nothing (or minus infinity) for what we buy.
Disregarding as spurious the claim that the slumlord overcharges, what of the vision of rats, garbage, falling plaster, etc.? Is the slumlord responsible for these conditions? Although it is fashionable in the extreme to say "yes", this will not do. For the problem of slum housing is not really a problem of slums or of housing at all. It is a problem of poverty --- a problem for which the landlord cannot be held responsible. And when it is not the result of poverty, it is not a social problem at all.
Slum housing with all its horrors is not a problem when the inhabitants are people who can afford higher quality housing, but prefer to live in slum housing because of the money they can save thereby. Such a choice might not be a popular one, but other people's freely made choices which affect only them cannot be classified as a social problem. (If that could be done, we would all be in danger of having our most deliberate choices, our most cherished tastes and desires characterized as "social problems" by people whose taste differs from ours.)
Slum housing is a problem when the inhabitants live there of necessity --- not wishing to remain there, but unable to afford anything better. Their situation is certainly distressing, but the fault does not lie with the landlord.
On the contrary, he is providing a necessary service, given the poverty of the tenants. For proof, consider a law prohibiting the existence of slums, and, therefore, of slumlords, without making provision for the slum dwellers in any other way, such as providing decent housing for the poor, or an adequate income to buy or rent good housing. The argument is that if the slumlord truly harms the slum dweller, then his elimination, with everything else unchanged, ought to increase the net well-being of the slum tenant. But the law would not accomplish this. It would greatly harm not only the slumlords but the slum dwellers as well. If anything, it would harm the slum dwellers even more, for the slumlords would lose only one of perhaps many sources of income; the slum dwellers would lose their very homes. They would be forced to rent more expensive dwelling space, with consequent decreases in the amount of money available for food, medicines and other necessities.
No. The Problem is not the slumlord; it is poverty. Only if the slumlord were the cause of poverty could he be legitimately blamed for the evils of slum housing.
Why is it then, if he is no more guilty of underhandedness than other merchants, that the slumlord has been singled out for vilification? After all, those who sell used clothes to Bowery bums are not reviled, even thought their wares are inferior, the prices high, and the purchasers poor and helpless. Instead of blaming the merchants, however, we seem to know where the blame lies --- in the poverty and hopeless condition of the Bowery bum. In like manner, people do not blame the owners of junk yards for the poor condition of their wares or the dire straits of their customers. People do not blame the owners of "day-old bakeries" for the staleness of the bread. They realize, instead, that were it not for junkyards and these bakeries, poor people would be in an even worse condition than they are now in.
Although the answer can only be speculative, it would seem that there is a positive relationship between the amount of governmental interference in an economic arena, and the abuse and invective heaped upon the businessmen serving that arena. There have been few laws interfering with the "day-old bakeries" or junkyards, but many in the housing area. The link between government involvement in the housing market and the plight of the slumlord's public image should, therefore, be pinpointed.
That there is strong and varied government involvement in the housing market cannot be denied. Scatter-site housing projects, "public" housing and urban renewal projects, zoning ordinances and building codes, are just a few examples. Each of these has created more problems that it has solved. More housing has been destroyed than created, racial tensions have been exacerbated, and neighbourhoods and community life have been shattered.
In each case, it seems that the spillover effects of bureaucratic red tape and bungling are visited upon the slumlord. He bears the blame for much of the overcrowding engendered by the urban renewal program. He is blamed for not keeping his buildings up to the standards set forth in unrealistic building codes, which if met, would radically worsen the situation of the slum dweller. (Compelling "Cadillac housing" can only harm the inhabitants of "Volkswagen housing". It puts all housing out of the financial reach of the poor.)
Perhaps the most critical link between the government and the disrepute in which the slumlord is held is the rent control law. For rent control legislation changes the usual profit incentives, which put the entrepreneur in the service of his customers, to incentives which make him the direct enemy of his tenant-customers.
Ordinarily the landlord (or any other businessman) earns money by serving the needs of his tenants. If he fails to meet these needs, the tenants will tend to move out. Vacant apartments mean, of course, a loss of income. Advertising, rental agents, repairs, painting and other conditions involved in rerenting an apartment mean extra expenditures. In addition, the landlord who fails to meet the needs of the tenants may have to charge lower rents than he otherwise could. As in other businesses, the customer is "always right," and the merchant ignores this dictum only at his own peril.
But with rent control the incentive system is turned around. Here the landlord can earn the greatest return not by serving his tenants well, but by mistreating them, by malingering, by refusing to make repairs, by insulting them. When the rents are legally controlled at rates below their market value, the landlord earns the greatest return not by serving this tenants, but by getting rid of them. For then he can replace them with higher paying non-rent controlled tenants.
If the incentive system is turned around under rent control, it is the self-selection process through which entry to the landlord "industry" is determined. The types of people attracted to an occupation are influenced by the type of work that must be done in the industry. If the occupation calls (financially) for service to consumers, one type of landlord will be attracted. If the occupation calls (financially) for harassment of consumers, then quite a different type of landlord will be attracted. In other words, in many cases the reputation of the slumlord as cunning, avaricious, etc., might be well-deserved, but it is the rent control program in the first place which encourages people of this type to become landlords.
If the slumlord were prohibited from lording over slums, and if this prohibition were actively enforced, the welfare of the poor slum dweller would be immeasurably worsened, as we have seen. It is the prohibition of high rents, by rent control and similar legislation, that causes the deterioration of housing.
It is the prohibition of low-quality housing, by housing codes and the like, that causes landlords to leave the field of housing. The result is that tenants have fewer choices, and the choices they have are of low quality. If landlords cannot make as much profit in supplying housing to the poor as they can in other endeavors, they will leave the field. Attempts to lower rents and maintain high quality through prohibitions only lower profits, drive slumlords out of the field, leaving poor tenants immeasurably worse off.
It should be remembered that the basic cause of slums is not the slumlord, and that the worst "excesses" of the slumlord are due to governmental programs, especially rent control. The slumlord does make a positive contribution to society; without him, the economy would be worse off. That he continues in his thankless task, amidst all the abuse and vilification, can only be evidence of his basically heroic nature.
Consent 27 - May 1997
The Evils of Rent Control
Gene McDonough and Professor Walter Block
Dr. Walter Block, formerly senior economist with the Fraser Institute in Vancouver, is professor of economics at College of the Holy Cross in Worcester, Massachusetts. This essay and two others published in Consent 27 (The Blessing of Saving Under Free Enterprise and Bottom Rung) are exclusive to Consent and were co-authored by Dr. Block and his students. Additional articles by professor Block's students, on a wide variety of subjects, have been published in other periodicals, including The Freeman, The Chalcedon Report, Nomos, The Review of Austrian Economics, The Free Market, The Journal of Commerce, Agorist Quarterly, Indiana Policy Review, Intercollegiate Review, Center for World Capitalism Backgrounder, Glendale Law Review, The Voluntaryist, Dollars and Sense, and Discourse.
Rent control is one of the most controversial economic issues today. It is a policy almost universally in effect throughout major American cities. Yet, it hurts tenants, landlords, and the housing supply.
Landlords lose money because they can not charge market value for their apartments. Therefore, fewer people will invest their money in residential rental construction. Also, many landlords do not have the money or the economic incentive to make repairs in their buildings, due to the adversarial relationship created between tenant and landlord.
Rent control also creates an artificially high demand for housing, making it very difficult to find an apartment. This interferes with labour mobility and hence GDP growth.
Workers will be more reluctant to give up their apartments, since they are not assured of finding a new one. This makes the economy a lot less efficient. Rent control also benefits the wealthy because their apartments are usually free of controls. Only the poor, it is widely thought, need the "protection" afforded by this law. As a result, residential investment money is funnelled into luxury dwellings, driving down the rents paid by the rich (2).
Finally, rent control leads to a greater amount of discrimination. Since landlords cannot choose their tenants based on ability to pay, they use other criteria, such as skin colour or religion, etc.
The first reason rent control is destructive is that it reduces incentives for landlords to build new dwellings or to improve their existing stock. Rent control places a ceiling on the prices which landlords can charge for their apartments. These ceilings are usually far below the market value for these units.
This phenomenon is represented by this graph:
Therefore, landlords lose money by renting out their apartments. Why would other landlords invest if they know they will lose money? "If a prospective entrant perceives that the rate of return that can be earned by using investment funds to provide rental units is low relative to what could be earned by investing in alternative markets, he will be eager not to supply additional rental units." (1)
It is simply a matter of economics. No investor will place his money in something he knows will not give him an adequate return. "With the increase in building costs, ...the old level of rents will not yield a profit." (3) However, if the landlord was allowed to charge market prices, more accommodations would be built, given the lure of profits. With rent control, that possibility is vitiated.
Along these same lines, rent control reduces landlord incentives to improve or repair apartments. "Not only will (the landlords) have no economic incentive to do so; they may not even have the funds." (3) Because they cannot charge market prices for their apartments, landlords often do not have the funds to make repairs, if they even have the incentive. Since they are taking a loss by renting out these controlled apartments, they often lack the necessary cash flow to make repairs. Even if they did have the means, they do not have the incentive.
Tenants cannot threaten to go to a cheaper apartment, because there are none. As there is no price competition between landlords, "the customer is always right" philosophy is nowhere in evidence. The landlord knows there will always be someone willing to take the apartment because at the controlled price, demand is much greater than the supply. This also prevents the tenant from moving because the odds of finding another apartment are slim.
Thus an adversarial relationship is created between the tenant and the landlord; the tenant does not get repairs done promptly and the landlord does not have the funds or the incentive to do them.
Let it not be thought that strife is a necessary result of landlord tenant relations. It only seems this way due to heightened hostility in the residential area. But property owners also rent other types of accommodations to tenants: office suites, commercial space, stores in shopping malls, subdivisions of factories, automobiles, etc. Since there are no rent controls in operation here, there is almost total amity. When was the last time a municipality had to set up special courts to protect renters from the likes of Hertz or Avis? Yet landlord-tenant antagonism was so severe that New York City had to do just that.
Imagine a situation where there were price control for rentals, but not for apartments. Then, amiability would reign supreme in the latter case, but not the former. Firms would purchase new capital equipment in rental housing, and keep up in the maintenance and repair, but not in auto rentals. Welcome to the twilight zone.
Rent control also hinders labour movement, so necessary for an efficient economy. Since prices for apartments are set at a level where demand is much greater than supply, it is very difficult to find a new apartment.
"Since under rent control living accommodations of any type become difficult to get, individuals are very reluctant to give up the apartments they have unless they have an apartment ready to move to." (1) This is very unlikely to happen with such a high demand. Therefore, workers are reluctant to move to an area of the country where their skills are truly needed. Thus, the economy is inefficiently using its resources.
The original justification of rent control was to help the poor and prevent them from being ripped-off by greedy landlords. This fear is, of course, economic illiteracy. If landlords indeed "rip off" tenants, this means they earn high profits. But big returns are a magnet. If they exist, they would attract everyone and their uncle to bring more supply to the market. But this, in turn, will lower prices, ending any incipient tendency for "ripping off" or "over charging." (Even were this process, somehow, not to occur --- per impossible --- how can we know that rents are 'excessive'? All we know is that a rental contract is a voluntary agreement between buyer and seller, and that therefore both gain, at least in the ex ante sense.)
In actuality, the reverse has happened; it is the rich who often benefit from rent control. Since rent control is city-wide, and not based on tenant income, there is a cap on the apartments of the rich as well, saving them a lot of money. These are the people who need to save money the least, and they are being helped the most by rent control.
"In 1979 rent control in New York City seemed to do as much for the rich as for the poor. The mayor of New York, for example, lived in a rent controlled apartment at $250 a month. The estimated fair market value...was $400 to $450. The president of the American Stock Exchange paid $660 a month for an apartment with a fair market value of $850 to $1200." (1) These men, both of ample means, only have to pay half the market price for their apartments because of rent control. Thus a law designed to help the poor has instead helped the rich.
Rent control also causes an increase in discrimination. Before rent control, a landlord could choose his tenant based on ability to pay. If he discriminated, he risked losing money by not being able to fill his apartments with tenants. Now, however, many more people have the ability to pay the lower rent, so the landlord can use another set of criteria without fear of profit loss. This can range from skin colour to religion to national origin to pet ownership.
"Because of rent control, landlords observe many applicants vying for each vacant unit; they can afford to be very picky about whom they rent their apartments to...(they) will tend to pick the applicant whose non economic characteristics --- e.g., race or religion --- are most appealing to him." (1) For example, before rent control, from 1939-1941, a Chicago newspaper ran 1,000 inches of apartment ads which precluded blacks. However, once rent control was enacted, this amount grew to 9,400 inches by the late 1940's.
If all of the evidence points to rent control harming the consumer rather than helping him, why are such laws still in effect? There are several reasons.
First, the 'benefits' of rent control are visibly obvious and immediate, while the costs are harder to see and more subtle. The tenant is not aware that fewer or no new buildings are being erected. He only sees that his rent is low and feels that without rent control it would be high. People also fear that rent would sky-rocket if controls were ended, because it would take a year or two for a new supply to come on stream. The fear is that landlords would escalate rents, even though over time competition would set in and rents would go down to affordable levels.
This fear is unfounded, however, due to the 'undoubling effect'. Under rent control, tenants tend to occupy excessive space. (The law of demand states that the lower the rent, the more quantity will be purchased.)
Consider an old woman with a 12 room apartment whose husband has died and 8 children have grown up and moved away. Without rent control, this matriarch would have long since transferred to a smaller, cheaper 3 room apartment. But under this law, her present spacious accommodation may actually be cheaper than this alternative in a new uncontrolled building. Now rent control ends, and this woman moves, in effect releasing an additional 9 rooms immediately, in one fell swoop. Thus, any tendency for rents to rise upon decontrol would tend to be ameliorated by this 'effect'.
Finally, politicians do not see the long run benefits of ending rent control. They only see what the voters see, and that is the short term 'harm' it would do. Rather than do something which may hurt some at first and help everyone later, politicians do only what will help win the next election. Rent control adjustment would take too long to help put them in office, therefore they do nothing about it.
Rent control is a harmful policy which must be ended. It limits the housing supply. It causes friction between tenants and landlords. It hinders worker mobility rendering the economy inefficient. It often benefits the rich more than the poor. It also exacerbates racial discrimination.
Politicians, however, will not touch rent controls because the benefits are short term (and visible), while the benefits of economic freedom are long term and more difficult to see.
References:
(1) Baird, Charles W., Rent Control: The Perennial Folly, (San Francisco, CA: The
Pacific Institute, 1980);
(2) Block, Walter. "A Reply to the Critics," in Rent Control: Myths and
Realities, Walter Block and Edgar Olsen, eds., Vancouver: The Fraser Institute, 1981;
(3) Hazlitt,
Henry. Economics In One Lesson, (New York: Crown Publishers, Inc., 1979)