Basic economics says rent controls are a lousy idea because as Steve Davies says, "If you restrict the price of anything to a level below the market price, the result will be a shortage." Most economists agree - and Ed Glaeser adds (pdf) that rent controls also misallocate the housing stock. But are they right?
Two things suggest perhaps not.
One is that there is not a single market in rented properties but rather very many individual markets, simply because many tenants have very specific demand; if you need a two-bed flat in central Leicester, a one-bed flat in Birmingham is no alternative. This gives landlords a degree of monopoly power, so that rents are above the marginal cost of supplying the property; the very fact that buy-to-letting is so popular is consistent with this possibility. To the extent that this is the case, rent controls would reduce landlords' monopoly rent, but might actually raise the supply of homes, to the extent that landlords go for volume to make up for lower margins.
But let's ignore this, and assume that rent controls do make letting less attractive to landlords. How would they adjust? There are several possibilities:
- They would reduce investment. But this doesn't necessarily mean a reduction in the housing stock. Many landlords don't build new homes, but simply buy existing ones. A reduction in this buy-to-letting activity would reduce house prices, but not (directly) the stock of houses. You might object that there'd be an indirect effect, as lower house prices reduce the incentive to build new homes. But this is a weak effect, because house supply is not very price-elastic; between 1995-96 and 2006-07 house prices rose by over 150% in real terms, but housing completions rose only 10.8%.
- They would cut investment in maintenance, causing homes to fall into disrepair. It is, however, not obvious how disastrous this would be. Sure, such decay might deter businesses from entering the area and attract crime. But cheap and shoddy housing might attract artists and bohemian types*, which could help regenerate an area.
- They would shift investment away from rent-controlled properties to uncontrolled ones. Paradoxically, this means there might be more case for capping high rents than lower ones.
However, I don't think it follows that there is a case for such controls. For one thing, they have perverse redistributional effects: stories of New York millionaires living in mega-cheap apartments aren't wholly apocryphal. And for another thing, there is a massive difference between there being an optimal rent control in theory and governments having the wisdom and honesty to implement it in practice.
A far better policy to reduce rents would - of course - be to massively increase housebuilding. But the power of the home-owning lobby seems to rule this out.
* This documentary (12'35" in) describes how Blondie moved into the Bowery in the 1970s. Sadly, however, there's no assurance that rent control would mean getting Debbie Harry for a neighbour; no policy can be that good.