A Price Ceiling Has Unintended Consequences

Do You Like Rent Control?

Nov 30, 2012 • Demand, Supply, and Markets, Economic Debates, Economic History, Households, Regulation, Thinking Economically, Uncategorized • 465 Views    No Comments

Asked if it makes sense to mandate lower rents for some apartments in large cities, many of us say yes. Lower rents facilitate diversity and they enable middle income municipal workers to live close to home. Affordability is good. Yes?

The residents of Cambridge, Massachusetts displayed their support for rent control when they voted to continue it in 1995. However, because the rent control mandate lost in a statewide referendum, Cambridge residents were defeated.

Maybe, though, they really won.

Looking closely at the impact of capping apartment rents on all properties built before 1969 in Cambridge, 2 researchers uncovered a steep downside. Reducing rents 25% to 40% lower than nearby apartments made the value of all housing– controlled and non-controlled–decline. In addition, for rent controlled properties, the peeling paint and loose railings were examples of generally poor upkeep. And, as all econ books remind us, rent ceilings create shortages because, at a lower price, more quantity is demanded than the amount supplied.

After 1995, when the controls were lifted, assessed values rose. For previously controlled properties, they went up approximately 20%. For non-controlled buildings, the increase was even more. Totally, the amount values rose from 1994 to 2004 because rent control ended was estimated as close to $1.8 billion.

Our bottom line: The connection might seem distant but let’s return to a previous post on price gouging. Both rent control and anti-price gouging laws sound like attractive public policies with considerable voter appeal. However, both have negative externalities– a harmful impact experienced by an uninvolved third party–that represent the hidden cost we all pay.

A final fact: There are approximately 1 million rent controlled units in NYC.

Sources and resources: Thanks to Timothy Taylor for the Conversable Economist post that explains the impact of rent control in Cambridge, MA and for his link to the original study. If you want to read more about rent control, here is the story of a challenge in NYC that involved the Supreme Court. For anti-price gouging laws, here is what NJ Governor Christie is enforcing and here is a criticism.

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