How Rent Controls Hurt the Poor
MARCH 01, 1975 by ALLAN BROWNFIELD
Mr. Brownfeld of Alexandria, Virginia , is a free-lance author, editor and lecturer especially interested in political science.
It is an unfortunate fact of life that government involvement in the economy is always initiated in "the public interest," and always ends up helping not the "public," but some smaller private concern.
Through the Civil Aeronautics Board, government was going to regulate the airlines in behalf of the American people. The result has been "regulation" against the public interest. Not one new airline has been permitted by the government to engage in interstate commerce since the CAB was created. Air fares in interstate commerce —controlled by the CAB — are far higher than air fares within a given state, not controlled by the CAB. It is clear that the regulators regulate not in behalf of the public but in behalf of the airlines.
A similar story is now unfolding with regard to government imposed rent controls in a variety of cities and states. The stated reason for the imposition of rent controls is to protect the poor from exorbitant rent increases by allegedly "greedy" landlords. The result —unexpected by those who have initiated such programs but viewed as almost inevitable by those who understand the dangers of government attempts at economic manipulation — is that the poor are finding it difficult to locate a place to live. The rental market is shrinking dramatically, and men and women are being forced out of the homes in which they have lived for many years.
A recent front page article in The New York Times (September 28, 1974) discussed the case of Kathleen M. Jackson, a retired college professor who had lived in a quiet old building on Connecticut Avenue in Washington, D.C. for 14 years. Suddenly she was given the option of buying her apartment or moving out. Her new landlords, citing a backbreaking interest rate, an expensive renovation program, and a belief that residential properties are no longer attractive investments, had announced plans to convert their units into condominiums.
Miss Jackson never seriously considered buying her apartment. The price would have been $40,000 which involved a $2,000 down payment and, if she could get a loan, mortgage payments, taxes, and operating expenses of $422.50 a month. The rent had previously been $155. Where she will live in the future is not yet clear. That her situation is becoming commonplace in our large cities is much clearer.
By last June 30, according to estimates of the Metropolitan Washington Council of Governments, 20,618 apartments in the area had been converted from rental to condominium units. There were 572 conversions in 1971, 3,563 in 1972, 8,439 in 1973, and 4,923 in the first half of 1974. New construction, meanwhile, has produced more than 24,000 additional units.
In 1970, 87 per cent of the area’s new multifamily housing was rental and 12 per cent was condominium; this year the figures are reversed: 86 per cent is condominium and 13 per cent is rental.
Restricting the Supply
The Wall Street Journal of October 4, 1974 declared that, "In many areas, the conversion of existing apartments to condominiums has . . . constricted the supply of units available for rental." In its Fall, 1974 survey of 20 major markets, Advance Mortgage Corporation, a large mortgage banking concern and subsidiary of Citicorp, found that the apartment vacancies in the majority of these areas were continuing to vanish. The Houston market, for example, was one of the softest in the nation in 1973 with about 17 per cent of its units vacant. By late in 1974 the vacancy rate was 9 per cent and falling "at a rate of one per cent a month," according to Philip L. Hendershot, a vice president of Advance Mortgage.
The effect of this state of affairs may be more serious than many imagine at this time. "People will have to be doubling up, living more with relatives," says Robert Sheehan, director of economics for the National Association of Home Builders. The fastest formation of households will be by people in the 30-44 year old age group, reflecting the "baby boom" after World War II. Mr. Sheehan predicts that this group will increase its rate of forming households to about 650,000 annually by 1980 from approximately 225,000 a year at present.
Less Rental Housing
Predictions have it that within 20 years half of the nation’s population will live in condominiums — a prediction which implies a shift in housing patterns so vast as to require wholesale conversions throughout the country. David Clurman, an Assistant Attorney General in New York and a leading condominium authority, states that, "I think the time will come when most of the soundly built, well-situated buildings in the United States will be converted." (New York Times, September 28, 1974.)
The reason for the destruction of the rental housing market — a market of importance to the nation’s poorer families — is clearly government economic intervention. U.S. News and World Report declared in its June 24, 1974 issue that condominiums were replacing rental housing because "Landlords fed up with tenant complaints and with rent control or the threat of control often find conversion … an attractive way out."
Today, more and more, investors regard the risks of rental property as no longer acceptable. Taxes, utility bills and labor costs are soaring, they complain, while rent controls either hold down income or threaten to do so.
In New York City, which has long had rent controls, the plight of the poor in seeking housing is probably the worst in the nation. The rental vacancy rate is below 1 per cent and private building is at a near paralysis. Richard Stone, writing in The Wall Street Journal in 1971, notes that, "Increasing numbers of landlords simply give up, abandoning buildings they can neither afford to maintain nor sell at any price. Tenants, left with no heat, water or electricity, vacate such buildings in a matter of days. When that happens, blight swallows up whole neighborhoods, almost overnight. Every day there are fewer housing units available in New York City than the day before. New York ‘s archaic rent-control law keeps the marginally poor whose fortune is improving from moving out of slum neighborhoods."
In his important book, A Humane Economy, Wilhelm Röpke points to rent control as an example of an "economic policy" which tends to be "irrational, that is, determined by what is ‘politically feasible’ rather than by what is economically rational and just."
He calls rent controls "irrational, ill-considered and at the same time unsocial and inequitable." Röpke notes that, "Rent control is really nothing but the protection of one privileged special kind of tenants, those with old leases, at the expense of the landlords and later tenants alike. Yet it persists, and the explanation is no doubt that, on the one hand, it does need a little reflection and intelligence to see its full implications and that, on the other hand, politicians are afraid to denounce this object of cheap demagogy."
The entire philosophy of coercive government controls on rent may satisfy the statist predilections of some politicians and economists, but surely adds to the burden of the poor — those they were meant to help.
"Rent ceilings," declares economist Milton Friedman, "cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction. The legal ceilings on rents are the reason there are so few places for rent. Because of the excess of demand over supply, rental property is now rationed [in New York] by various forms of chance or favoritism. As long as the shortage created by rent ceilings remains, there will be a clamor for continued rent controls. This is perhaps the strongest indictment of ceilings on rent. They, and the accompanying shortage of dwellings to rent, perpetuate themselves, and the progeny is even less attractive than the parents." (Newsweek, March 22, 1971.)
Those who are really concerned about proper housing for the poor should seek to stimulate private investment in rental housing, not retard it.
Rent controls do the poor — and all of us — significant harm. It is one more example of the manner in which government intervention in the economy hurts the very people in whose name such intervention was initially undertaken. When the politicians finally learn this lesson, some hope for an improvement in the housing market will become possible — but not until then.