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Rent control creating housing shortages

By Kyle Wheeler
web posted December 2, 2019

Is rent control the solution to help people find proper housing? Is it necessary for the government to step in and control how much owners can charge their renters? Sweden was reported to have suffered from a housing shortage, and according to a new report issued by the National Housing Board, it is due to rental control. While rental control was believed to be the solution to giving everyone affordable housing, it seems to have resulted in there being housing shortages instead, making it more difficult for people to find housing. The National Housing Board stated that “the rent control system means that not enough new rental apartments are being built.”  Not only that, but we are even finding housing shortages in the United States such as the state of California. I would argue that rent control is what causes housing shortages and that it produces the opposite results of its intended purpose to create more housing.

One reason why housing shortages take place with rent control is because builders no longer want to build houses and apartments with rent control laws. Imagine that there is a group of builders who make houses to rent out to the public. In order to build a house or a series of apartments, they must invest a good deal of money to build it. The way they make a profit after investing in and building houses is the rent they charge from renters. Renters will pay to live in the houses and those builders then make money off it. The builders (suppliers) rent their houses (goods) and renters (demanders) pay to live in them. However, if the government implements rent control on housing, those builders are likely to lose the incentive to build houses. Why exactly would they lose the incentive to build houses? Well, it is because they no longer have the freedom to set their own prices or change them the way they desire to, and the opportunity costs of selling housing becomes too high for them to keep selling housing. Sellers will make far less after investing in and producing housing for people, so the opportunity cost of producing them is much higher than before.

Imagine that a group of builders were renting out a series of apartments in a city. They charge $2,700 a month per apartment. While this price works for most of the renters, the government feels like the price should be lower to make things fair for everyone. In attempt to make rent fair, they implement a price ceiling. The government sets a price ceiling on apartments to be no higher than $2,200. This looks amazing at first sight, right? Having a smaller rent would create huge savings for renters, but for how long? For the builders, this immediately creates an issue. Losing $500 a month on every apartment creates a huge profit loss for the builders. They likely will no longer want to build apartment buildings because the opportunity cost of building them is too high. They cannot make enough money off building an apartment when they are limited to the prices they can charge. Now that the builders are no longer making apartment buildings, there is not enough supply of apartment buildings to satisfy the quantity demanded of them. With no more apartments being constructed, finding one becomes much more difficult for renters.

Another factor that plays into housing shortages is the actual condition of the houses. Whenever rent control is implemented, sellers still have to try and find a way to make money off the houses or apartments they are renting out to people. In order to still make money on the properties they rent to people, sellers will not put much money into the property. They may do less maintenance on the house or not put quality work into house to offset their losses with rent control, because now there is no profit in doing so. However, this solution makes properties lose their value, and renters are far less likely to rent an apartment or house that is left in poor condition. If any houses are left in proper condition though, the process in finding one becomes much more competitive for renters and creates further complications for finding an apartment or house.           

Another reason why having rent control has negative outcomes on housing is because some people will just sell their house instead of renting it to people due to rent control’s income losses. Whenever rent control is implemented, some sellers may to sell their house or apartment instead of renting it to renters because they simply cannot make enough money off renting the property. When this occurs, there is shortage of available places for renters. About a year ago, whenever rent control laws were going to be passed, our landlords told us they were going to increase our rent by 22%, or they would just sell the house instead. Our landlords did not want to incur losses from rent control, so they chose to either have our rent much higher before rent control was implemented, or they would sell the house. Obviously, my family did not want to pay an additional 22% per month on our rent, so our landlords ended up selling the house. What we see here creates problems for both the renters and sellers. Sellers do not want to deal with rent control, so they sell their house. Basically, it does not make economic sense for sellers to rent out their homes at such a deficit, which motivates them to sell rather than rent. This reduces the amount of housing available in the house rental market. This affects renters too because now they may be forced to leave the house they are living in and have less options for finding new housing. The quantity of houses being supplied for rent can still decrease even after builders stop producing houses. An even greater shortage of housing is created when more houses are being sold instead of rented.

Considering everything, I believe rent control is something that would in fact reduce housing in the rental market. When rent control laws are in action, we eliminate the benefits of a free market that allows our economy to operate without government intervention. With rent control, we can almost see a domino effect with how housing shortages happen. People stop producing housing, they can let their properties lose their value, and they may even sell their houses instead of renting. All of these factors result in there being housing shortages. While having rent control can be beneficial for some people, it creates negative results for the economy as a whole. ESR

Kyle Wheeler is an AP Macroeconomics student in high school. © 2019 Kyle Wheeler

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