President Biden recently said: plan It imposes a 5% cap on annual rent increases by large landlords. Rent Control It’s a notoriously counterproductive policy, and the reason is simple: rent control discourages the construction of new housing units because it makes building housing less profitable — and a reduced housing supply is exactly what we want. do not If our goal is to make affordable housing widely available, 2% of economists surveyed Rent control is “Cities that have adopted it have seen an increase in the quantity and quality of affordable rental housing available across a broad range of locations.”
To avoid this outcome, Biden’s proposed price caps would not apply to new homes. At first glance, this policy seems like the best of both worlds: It aims to lower the prices of existing homes without hindering the construction of new ones. But while the proposal is an improvement over old-style rent control, it has two problems.
First, it can create policy uncertainty. Imposing rent control with an exception for new construction signals that policymakers are willing to cap rents for older properties. But crucially, new construction will become old. If developers are concerned that policymakers will continue to cap rent increases for older properties, they will rightly fear that any new properties they build will eventually be subject to the cap. This will discourage them from building new properties because it will reduce their expected long-term profitability.
Second, even if rent controls don’t discourage the construction of new housing, they misallocate housing. Markets direct resources to their highest-value uses. Suppose a seller has an excess bag of ice. Alice needs ice to keep her son’s insulin cool, and Bob needs ice to keep his daughter’s Mountain Dew cool. All else being equal, Alice will outbid Bob for the ice, and this is the efficient outcome: it’s better for the son to keep his insulin cool than for Bob’s daughter to keep her Mountain Dew cool. But if price controls put a cap on how much Alice can offer for ice, she won’t be able to outbid Bob, and Bob might end up getting the ice.
The same goes for housing. Suppose Caroline is an exceptionally talented surgeon who has been offered a high-paying job at a hospital in a big city. She is looking for housing nearby. Dave is a professional YouTuber who can work anywhere, but films his content in an apartment near the hospital. Without rent control, Caroline can outbid Dave for the apartment, which is also an efficient outcome. It is more important for the surgeon to live near the hospital so he can perform his surgery than it is for the YouTuber to live near the hospital because he likes the local coffee shop. But if rent control caps how much Caroline can offer for an apartment, she may not be able to outbid Dave, and Dave may end up getting the apartment instead. And if Caroline cannot secure housing nearby, she may not be able to take the job. This outcome is not only bad for her, but also bad for the patients who would have benefited from her surgical expertise. So while rent control with exemptions is better than rent control without exemptions, Free Market.
Christopher Freiman is a general business professor in the John Chambers School of Business and Economics at West Virginia University.
