Basic economic logic still applies to rent control. Earlier this week, the National Bureau of Economic Research (NBER) circulated a study that provides strong evidence of rent control’s damaging effects.
The study’s findings should be unremarkable to students of basic economics. As students learn in the first days of class, when regulation limits prices, quantity supplied decreases and quantity demanded increases. The resulting mismatch creates a shortage.
San Francisco is a veritable poster-child for housing shortages, and the NBER study focuses on the city’s rent control policy, which exacerbates housing shortages and associated housing affordability problems there.
San Francisco’s rent control policy caps rents for units built in 1979 or earlier. It remains in effect today and “covers most rental property,” according to the San Francisco Tenants’ Union.
The NBER study finds damaging impacts for this feel-good policy. The authors find rent control “reduced rental housing supply by 15 percent,” which consequently raised rents by more than 5 percent city-wide.
The study also estimates that 42 percent of rent losses were “paid by future residents,” while current residents bore the other 58 percent of losses. But because current residents also benefited from rent control, the losses were offset for them “at the great expense of welfare losses from future inhabitants.”
The adverse effects of San Francisco’s policy don’t stop there. Rent control also “increased renters’ probabilities of staying at their addresses by nearly 20 percent.” This is arguably undesirable, given geographic mobility’s recent decline and critical importance in a healthy economy.
Although the direction of the results are predictable given a rudimentary understanding of economic principles, rent control’s effects are clearly not widely understood enough. For example, Illinois, Oregon, and California are “considering repealing laws that limit cities’ ability to pass or expand rent control.” Legislators in these states would probably think twice if they were better acquainted with basic economics.