Rent control—proof bad policy ideas die hard
Some bad ideas simply refuse to die. The Wynne government recently proved this painful fact of life once again by suggesting that it is considering expanding rent control in an effort to keep the cost of living down for Ontarians.
The details of exactly what the government has in mind haven’t been released yet. But after Housing Minister Chris Ballard recently promised to “address unfair rises in rental costs” through a “substantive rent control reform,” now is a good time to review the veritable mountain of economic theory and evidence showing rent control almost always does more harm than good.
Let’s start with the economic theory. The straightforward reality is that there are two parties to every transaction—and both sides must benefit in order for a voluntary transaction to take place. So if a government mandates that any good, including housing, be sold or rented at a price below market level, then production of that good becomes less attractive relative to other investment opportunities.
So what happens over time? Simple—less and less rental housing gets built. After all, investors can put money into just about any industry; why would they choose one where they can’t realize market returns on investment, if they do indeed gain value?
Once prices aren’t allowed to increase to meet demand, and people face such a strong disincentive to build new units, the term “affordable housing” quickly becomes oxymoronic. Some folks will luck out and hold onto apartments at a great price, but the outcome is disastrous for market newcomers (think young people with entry level jobs) who will have a harder time finding a place to live.
But that’s just one problem with rent control. A second is that the already existing stock of rental housing begins to deteriorate, as landlords lack incentives to upgrade their facilities or in some cases even maintain them adequately.
This is not because landlords are “bad” or “greedy” (isolated incidents notwithstanding) but because it makes no economic sense and may be simply unaffordable to invest more money into a building where tenants pay below-market rent and therefore face strong incentives to stay put rather than take their chances in a market with dwindling numbers of available units.
In short, a policy motivated by the good intention of helping renters winds up leading to fewer and worse rental units being available.
Experts agree almost unanimously on the economics behind these points. Surveys of economists regularly show that upwards of 90 per cent agree rent controls reduce “the quantity and quality of housing available.”
Swedish economist Assar Lindbeck expressed this view more colourfully, stating “rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
This economic theory is backed by evidence from around the world. From Sweden, to New York, to London and many places in between, rent control has consistently squeezed out affordable, quality housing.
In fact, the Fraser Institute analyzed the rent control phenomenon in one of its first publications way back in the 1970s, explaining the “popular paradox” of rent control and showing that this well-intentioned policy backfires consistently. The fact we’re still debating the issue four decades later shows that bad policy ideas die hard, in Ontario and beyond, and that the work of opposing them is often a multi-generational struggle.
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