Incentivize, don’t mandate

As I suggested in my blog post yesterday, Scranton Joe has finally decided to step aside from the 2024 presidential race, leaving the democrats and the nation in unchartered territory.  In his comments on X, he said he wanted to devote the remaining time he has in official Washington doing the job he was elected to do in 2020 – fair enough, but then what else could he have said?

Meanwhile, last week he unveiled his latest hare-brained scheme – a nationwide rent-control plan in an attempt to curry favor with another segment of voters.  But the problem with this and all such government mandated policies is that whether an economic system is capitalist, socialist, feudal or anything else, we must look at economic policies in terms of the incentives they create, rather than the goals they proclaim.  In other words, consequences matter more than intentions.

Higher mortgage rates and home prices are pushing Americans out of the home-buying market resulting in a higher demand for rental housing, and one reason nationwide rents have risen by a third since Biden has been in office.  And in an attempt to buy votes, not dissimilar from his student loan forgiveness program, Biden wanted to condition federal tax breaks on landlords capping rent increases to a maximum of 5% annually.   Meanwhile, Mr. Biden told us his plan would apply only to “corporate” landlords with more than 50 units but failed to mention that “corporate landlords” control roughly half of country’s rental units.

We’ve heard this song before, rent control is often touted as a solution to housing affordability but it’s a canard designed to dupe the naïve and unthinking.  While the premise seems simple enough, i.e., put a cap on rents to make housing more affordable for low-income families, the underlying economic dynamics are a bit more complicated.  And while the intentions behind rent control are noble, its implementation will bring unintended consequences by exacerbating existing housing shortages, disincentivizing investment in new housing, and ultimately failing to achieve its intended goals.

By artificially capping rents below market rates, a mismatch is created between supply and demand.  Landlords facing rent control regulations will be far less inclined to maintain or upgrade their properties if they cannot fully recoup their investments through higher rents, resulting in an overall decline in the quality of the rental housing inventory.

When rents are capped, what incentive is there for the landlord to maintain, or improve his existing property or invest in a new rental property?   The answer is, little or none.  What inevitably occurs is a decrease in both the quality and quantity of available housing.  Rent control also discourages new construction, as developers will hesitate to invest in markets where their potential returns are limited by government regulations.  Another unintended consequence is that tenants in rent-controlled units have little incentive to move, even when their housing needs change and may  stay in prime locations longer than they otherwise would, thus reducing mobility in the housing market, making it harder for new renters to find suitable accommodation, especially in high-demand areas.

Common sense dictates that developers will choose to invest in other types of real estate without rent control regulations, further exacerbating housing affordability challenges.  Additionally, some landlords may convert rental properties into condominiums or other forms of housing that are exempt from rent control, shrinking the supply of affordable rental units even further.

In markets with strict rent control measures, a black market for housing often emerges, where landlords and tenants engage in illegal rent agreements outside of the regulated system. This undermines the intended goals of rent control while exposing tenants to exploitation and landlords to legal risks.  Moreover, the informal economy may lead to a lack of transparency and accountability in rental transactions, making it difficult to address issues such as tenant rights and housing standards.

While rent control may seem like a quick fix to address housing affordability, alternative approaches offer more sustainable and effective solutions, such as increasing the supply of affordable housing through incentives for developers, streamlined zoning regulations, and public-private partnerships.  By encouraging the construction of new rental units and expanding affordable housing options, policymakers can address housing shortages without distorting market dynamics.

But if the government is hell-bent on giving away things, then why not offer direct housing subsidies or vouchers to low-income individuals and families?  These subsidies can be targeted to those most in need, allowing recipients to afford housing at market rates while maintaining the flexibility and efficiency of the rental market.  There are no perfect solutions in these types of matters, however that’s the beauty of capitalism because it’s congruent with human nature, and incentives always produce better results than mandates.

Quote of the day:  “Always go to other people’s funerals, otherwise they won’t come to yours.” – Yogi Berra