Rent controls don’t work, but the government appears to be heading that way

Liam Hehir writes about rent controls:

When rents are going up, but queues for flats remain long, it’s not a pleasant time to be a renter.

And at the moment, a lot of students and other would-be tenants in Wellington are pretty miserable. Prospective tenants are adding cover letters to their applications, getting into bidding wars and racing against each other to secure a place to live at greater and greater cost.

Why this has happened is open to debate.

Some people say that free tertiary education is creating a surge in demand, some point to the steady imposition of new costs on owners, while others say landlords are just trying to gobble up increases in student allowances and borrowing limits.

But what everyone seems to agree on is the fact there are just are not enough flats to let in Wellington right now.

I don’t think there is much debate at all. It is simple economics. Various governments have slowly but surely over the years maligned landlords, removed financial incentives to provide rental accommodation, and added huge compliance cost with regulation for warmth and new warrants of fitness for rental properties. It should be no surprise to anyone that the supply has dropped at the same time the government has increased demand by throwing free money at students. It is simple economics.

However it appears to be too complex for our Finance Minister to understand.

Finance Minister Grant Robertson, a veteran student politician, is quite concerned about rent increases.

According to Radio New Zealand, he recently wrote “there are rules in the Residential Tenancies Act about not putting rent up above the market rate, and we are looking very closely at some of the examples that have been put to us today to see if they would breach that act”.

But if people are still desperate to sign up for flats at these higher rents, then the rents are hardly above “market value”. One would hope Robertson understands that when supply is low and demand is strong, prices go up. The subjective theory of value has been with us for a long time, after all.

In fact, the still-fierce competition for flats in Wellington suggests that, if anything, landlords could charge even more if they wanted to.

More evidence of his lack of economic skills. Worse still is his propensity to bully which we have busted over the past few days.

There are all sorts of reasons why they might still be holding back. Dr Eric Crampton, a think-tanker for the New Zealand Initiative, outlined a number of possibilities on his personal blog last week. For example, it may be that landlords are looking at things other than a willingness to pay a higher price.

They might demand a lesser rent, for instance, in the hopes of attracting applicants they perceive as being reliable payers.

In our response to all this, there are two words that should terrify us. They are “rent control” – proposed laws to cap rents to a certain amount or restrict increases to a certain percentage.

Forcing landlords to charge below-market rents may fill a psychological need to exert control over a situation, but, in terms of their actual effect, such laws are a terrible idea.

Indeed they are. They don’t work for a start…and create an even worse situation for people looking for housing.

Those worried about climate change often point out that 97 per cent of climate scientists believe that the world is warming due to greenhouse gasses emitted through human activity. It’s a compelling argument because the consensus is so strong. It doesn’t really make a lot of sense for those of us without their expertise to assume they are wrong.

So, what is the consensus on rent control laws among those who study them?

Well, as Paul Krugman, a Nobel prize winner and left-wing media darling has said: “The analysis of rent control is among the best-understood issues in all of economics, and – among economists, anyway – one of the least controversial.”

When you interfere with the market by dictating maximum rents, the effect is to drive more landlords out of the market. It also discourages landlords from investing in improving the housing they provide by limiting the potential return on that investment.

This is why, as Krugman noted, a survey of professional economists once found that 92 per cent agreed with the statement that “a ceiling on rents reduces the quality and quantity of housing”.

And it’s not just centre-right and centre-left economists who recognise how damaging rent control laws are.

The science is settled!

In 1989, Nguyen Co Thach, foreign minister of the Socialist Republic of Vietnam, gave a speech in which he spoke frankly of the harm caused by rent control in his country’s capital city. “The Americans couldn’t destroy Hanoi”, he said, “but we have destroyed our city by very low rents”.

Until matters stabilise, we should refrain from doing anything else that makes investment in housing less attractive.

Those who want to heap more costs on landlords while decrying rising rents remind me of Agnes Skinner from The Simpsons. “I want everything in one bag,” she berated her supermarket packer, “but I don’t want the bag to be heavy”.

It is safe to say that this will not be music to the ears of the new government, which is comprised of parties that had an aggressive stance towards landlords when in opposition.

However, being in government involves some obligation to deal with the world as it really is. And in this case, “first, do no harm” would be a sensible approach.

With the economic credentials of Grant Robertson now well established, I think we can safely assume that he will, in fact, do considerable damage.

 

-Fairfax


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As much at home writing editorials as being the subject of them, Cam has won awards, including the Canon Media Award for his work on the Len Brown/Bevan Chuang story.  And when he’s not creating the news, he tends to be in it, with protagonists using the courts, media and social media to deliver financial as well as death threats.

They say that news is something that someone, somewhere, wants kept quiet.   Cam Slater doesn’t do quiet, and as a result he is a polarising, controversial but highly effective journalist that takes no prisoners.

He is fearless in his pursuit of a story.

Love him or loathe him.  But you can’t ignore him.

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