Why Rent Control Doesn’t Work (Ep. 373 Rebroadcast)

(Photo: Frampton)

As cities become ever-more expensive, politicians and housing advocates keep calling for rent control. Economists think that’s a terrible idea. They say it helps a small (albeit noisy) group of renters, but keeps overall rents artificially high by disincentivizing new construction. So what happens next?

Listen and subscribe to our podcast at Apple Podcasts, Stitcher, or elsewhere. Below is a transcript of the episode, edited for readability. For more information on the people and ideas in the episode, see the links at the bottom of this post.

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Hey there, podcast listeners — and a special welcome to all the new listeners who heard me on Joe Rogan Experience and on The Bill Simmons Podcast — and thanks to Joe and Bill for having me on. This week’s Freakonomics Radio episode is one from the archive, and it gets more and more current every day. It’s called “Why Rent Control Doesn’t Work.” Where appropriate, facts and figures have been updated. Also, in honor of all you new listeners, we’ve added a bunch of older episodes to our feed, to make it easy to catch up. If you want to hear every episode we’ve ever made in our 10 year history, go to Freakonomics.com, where we also publish show notes and transcripts; you can also sign up for our newsletter. Thanks for listening.

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I’m sure you know this already, but let me say it anyway: cities have become really popular, all over the world. An ever-larger share of the U.S. and global population lives in cities, and that large share is expected to get even larger. As demand for city living grows, the supply of housing often can’t keep up. Which results in — and you know this too — a rise in prices. In the U.S., median rent has doubled since the 1990’s, outpacing inflation by quite a bit. In many cities, this makes it hard for people who already live there to stay, and hard for people who’d like to move there. I’m sure you’ve heard the horror stories about rents in cities like London and Hong Kong; Seattle and San Francisco, where the median one-bedroom apartment costs about $3,700 a month. The problem is so bad in New York City that it inspired a new political party.

Jimmy McMILLAN: I represent the Rent Is Too Damn High Party. People are working eight hours a day and forty hours a week and some a third job.

New York, like many cities, has over time put in place various affordable-housing policies. One time-honored tradition is some form of rent control. That might mean setting a price cap on what a landlord can charge or limiting the amount the rent can be raised. Here’s the Stanford economist Rebecca Diamond.

Rebecca DIAMOND: From an economics point of view, it provides insurance against getting priced out of your neighborhood.

And rent control seems to be having a moment. It already exists in a number of places.

DIAMOND: The most expensive cities in the U.S., they almost all have rent control.

And the appetite is spreading.

DIAMOND: You see rent control popping up politically when housing prices and rents are going up. 

Among the cities currently considering some form of rent control are Chicago, Philadelphia, Providence, and Denver. Oregon recently became the first state to pass a rent-control bill. A statewide proposition in California failed, but some cities there are moving ahead on their own. A recent report by a consortium of affordable-housing advocates says that if all the proposed rent-control legislation were to pass, nearly one in three American tenants would have some kind of rent protection.

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Most economists say that rent control is a bad idea, as is just about any form of price control. They believe that markets work best when supply and demand are allowed to find a natural equilibrium, with price acting as the referee. Here’s one such economist.

GLAESER: My name is Ed Glaeser and I am the Fred and Eleanor Glimp professor of economics at Harvard, where I teach both microeconomic theory and the economics of cities.

DUBNER: Ed, you have one minute to convince someone that rent control is a terrible idea. Go.

GLAESER: All right. So, I’ve already squandered five of my seconds. It’s not particularly fair. It’s not a good way of allocating scarce space. It’s not a good way of helping the downtrodden. It’s a way that freezes a city and stops it from adjusting to changes, a way that freezes people in apartments and stops the motion that is inherent in cities.

So that’s a baseline economic take, at least. Let’s try to unravel this issue, starting with a brief history of rent control.

GLAESER: Rent controls really became ubiquitous in World War II, and the idea here was, the nation was laying down its life to try and bring freedom to the world, and it seemed wrong that some people who were well-placed should earn some form of extra bonuses by being able to raise up rents on people, maybe whose sons and daughters were off fighting for the U.S. elsewhere. And rent control was seen as being a way of, somehow or other, trying to keep America being a bit fairer during World War II. Now, lots of places introduced rent control during this period. After the war, most of them got rid of it because that cause seemed to be a little bit less pressing. But, some cities kept it, and New York, of course, is the most famous place that still has it.

Glaeser himself grew up in New York.

GLAESER: I lived in a rent-stabilized unit for the first ten years of my life. I mean something like 72, 74 percent of New York City’s households were renters in those days. And indeed, the mid-1970s was an era in which New York’s housing didn’t seem that expensive, affordability just wasn’t the same issue that it was today. Now, flash forward 30 years, the cities have been enormously successful they haven’t built enough to accommodate the new demand. They risk becoming boutique towns affordable only to the wealthy, and people are desperate to see that those cities don’t push out every poor resident, that they don’t become monocultures built around the privileged and the rich, and rent control appears to be at least one avenue for doing it. But it’s a very blunt instrument.

Just how blunt? There are decades’ worth of economic research describing the downsides of rent control. The first major paper was written in 1946 by Milton Friedman and George Stigler; here’s Friedman:

Milton FRIEDMAN: Rent control is a law that supposedly is passed to help the people who are in housing. And it does help those who are in current housing. But the effect of rent control is to create scarcity, and to make it difficult for other people to get housing.

Where did this scarcity come from? For one, developers had less incentive to build new housing if there was a ceiling placed on what they could charge. Friedman also argued that rent control created a “haphazard and arbitrary allocation of space.” This was echoed in a 1972 paper by Edgar Olsen, which found that rent control led to what economists call an “overconsumption” of housing.

GLAESER: Let’s say you rented an apartment in New York in 1955, you had three small kids, you rented a three-bedroom. It was perfectly matched for the needs of you with your kids growing up. They moved out of the house in the early 70’s. By the late 80’s, maybe your husband or wife actually died and you’re living on your own in a three-bedroom apartment in New York. But, my goodness, would you ever move out? Your rent is a fraction of what the market rent is. One of my favorite stories about this — and this is quoted by Ken Auletta’s The Streets Were Paved with Gold, he cites Nat Sherman, the famous tobacconist to the world, who had this big shop on Fifth Avenue, who said that he pays, I forget what it was.

DUBNER: $355 a month for a six-room apartment, it says here.

GLAESER: Isn’t that amazing? Keep in mind, it’s a few decades ago. But it’s an unbelievable deal. Now, what’s outrageous about this is, he then says, “I think it’s fair because I use it so rarely,” right? Which means that he’s not getting very much value out of it, but the crazy thing about this is, there were lots of New Yorkers who would love to have that apartment and it would get a lot more value out of it.

In 1997, Ed Glaeser did his own analysis of rent control in New York City, trying to determine just how economically inefficient it was. He and his co-author, Erzo Luttmer, found that “this misallocation of bedrooms leads to a loss in welfare which could be well over $500 million annually to the consumers of New York, before we even consider the social losses due to undersupply of housing.” Glaeser’s work has also inspired a new generation of economists to further the literature on rent control.

DIAMOND: Historically, people relied much more on theory in making their arguments about rent control.

That’s Rebecca Diamond again. She’s a former student of Ed Glaeser’s.

DIAMOND: Because even without a lot of data you can make some pretty simple theoretical predictions about what rent control might do to a housing market.

But there are some things that theory alone cannot tell you.

DIAMOND: One of the biggest open questions in the literature of rent control is: what happens to those tenants that get rent control? Really, how much are the renters benefiting, because they’re the potential big winners of rent control. And to measure that, you really need to have data on where everybody lives, and who gets access to rent control, and whether they decide to stay in that rent-controlled apartment or go somewhere else. And traditional data sources that economists work with very rarely track migration of an individual.

DUBNER: So you recently co-authored with Tim McQuade and Franklin Qian a paper called “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco.” First, if you would, talk about the data.

DIAMOND: Yeah, we have some really cool data. So, traditional data sets, you can get things on the distribution of earnings and income, things like that. But you won’t also see their migration. So, we have this, you could call, administrative data, which tracks people’s address histories.

DUBNER: And where did these migratory data come from?

DIAMOND: We bought them from a company called Infutor. They are a company that works in “identity management,” So they have this history of addresses for everyone which they collect from a number of different sources and stitch them together, which is very useful for the private sector and firms that need to keep track of up-to-date addresses. But from a research perspective, it’s super-exciting data because it’s so big and so detailed.

Armed with this super-exciting data on individual tenants, Diamond and her fellow researchers set out to measure some of the long-term effects of rent control in San Francisco. They made particular use of a change in the city’s rent laws. San Francisco had rent control, but it didn’t apply many of the city’s smaller apartment buildings.

DIAMOND: And the exemption was basically thought of as, “Well, these are mom-and-pop landlords. They don’t have market power. They’re not corporations. So we don’t need to regulate their rents.” And then newspapers reported that those smaller multi-family buildings were increasingly purchased by corporate entities, because that’s really where you could make your money in the housing market. And that led to a vote in 1994 where everyone in the city got to vote about whether we could remove this small multi-family exemption, and that would then expand rent control, not just to the large multi-family housing stock, but also the small multi-family housing stock. And that, indeed, passed.

DUBNER: So, you’ve got this awesome new law — awesome for you guys, at least, as researchers — that lets you mark before and after. It’s a perfect little natural experiment with a control group. And then you’ve got these wonderful data sets. And then you mash up all of these data together and analyze it and you find the following: your paper concludes that among many things “rent control limits renters’ mobility by 20 percent and lowers displacement from San Francisco, especially for minorities.” So let’s start with this: what does it mean exactly that renters’ mobility is lowered by 20 percent, and why is that important?

DIAMOND: So, we look at whether the renters who get access to rent control choose to remain in their newly rent-controlled apartment. So, we find that they are 20 percent more likely to remain there, relative to our control-group renters who don’t get access to rent control.

DUBNER: So, that seems totally unsurprising, yes?

DIAMOND: Yes, I more see that result as a validation that our data is good and high-quality and we have some something to work with here.

DUBNER: Okay. Further, you write that “rent control lowers displacement from San Francisco.” What does that mean, exactly?

DIAMOND: So, we can look at not just whether you remain in the actual apartment you lived in when you got access to rent control, but whether you remain in San Francisco as a whole. We find rent control has a dramatic impact on whether you actually live in San Francisco or not. So, it prevents those renters from leaving the city as a whole, which I think from a policy perspective of rent-control advocates, that’s one of the goals they talk about as preventing displacement from the city.

DUBNER: And then you write that, especially for minorities, that displacement is lowered.

DIAMOND: Right. So, when you look at that first cohort of renters that already lived in the city at the time of rent control, it is definitely helping minorities more. It’s preventing displacement of them especially.

DUBNER: Furthermore, you write that landlords who are susceptible to rent control “reduce rental housing supplies by 15 percent either by converting to condos, selling to owner-occupants, or redeveloping buildings.” So, now it starts to get a little more complicated. Can you talk about who’s now starting to win here and who’s starting to lose here?

DIAMOND: So, obviously, when the landlord is first notified about rent control, he or she can quickly deduce that his or her rental stream is going to be lower than previously expected. And just like any other business owner, they might think about changing their business strategy. So, if renting out their apartments is no longer very profitable, now they may decide, “Oh, maybe it’s worthwhile to convert to condos and sell off the apartments to owner-occupants” and that would be a way to recover some of this lost income. Or, another thing they could do is, say, knock down their old building and build some new construction and either sell those as condos or rent them out as apartments.

Both of those options would avoid them having to pay this tax of rent control, help recoup some of their losses — which is good for the landlords, but is going to undermine the goals of rent control because now we’re going to have less rental housing out there available for rent control.

So you can start to see how rent control may be accomplishing a narrow, short-term goal — making existing housing more affordable for a select group of people — at the expense of the long-term goal of making a city more affordable generally.

DIAMOND: When you pass rent control, the landlords of the property suddenly getting covered by rent control are losing so much money, they no longer really want to rent their apartments out at the prevailing new prices, so they decrease their supply of rental housing to the market. And if there’s less supply, that’s going to drive up prices.  

DUBNER: Okay, so, let me just make sure I have it pretty straight. You find evidence that rent control increases gentrification, one component of which is the displacement of low-income tenants. On the other hand, you also find evidence that low-income people, including minorities — at least those who are in rent-controlled units already — they’re likely to disproportionately benefit from rent control.

So, if I’m an affordable-housing advocate, I might say, “Oh, fine, fancy Stanford professor — who I’m sure has some kind of great income and/or housing subsidy and/or situation — I don’t care that some landlords are suffering. I don’t care that the policy is having some downstream effects that you don’t like. I need to make sure that low-income people aren’t going to get a rent increase of 50 percent overnight.” So, how do you respond to that argument?

DIAMOND: So, when you think about those initial tenants, that’s the best bet you’re going to get for the benefits of rent control to low-income tenants: the people that are already in the housing. But even though we find that those tenants are much more likely to stay in their apartment, when we look 10, 15 years later, the share of those 1994 residents that are still there is down to 10 percent or so. So 90 percent of them no longer live in that initial apartment.

And it’s that next low-income tenant that wants to live in the city, that low-income tenant is going to have a very hard time finding an affordable option, because now there’s going to be less rental housing, the prices that that low-income tenant are going to face when they want to initially move in are going to be higher than they would have been absent rent control.

DUBNER: I’m curious how generalizable you think your findings from San Francisco are for other cities.

DIAMOND: I would suspect that the actual quantitative loss of rental supply or benefits to the tenant will depend a little bit city to city, but I think the qualitative takeaway that landlords are savvy and are going to work hard to not lose money on their investments, I think is a very general point.  

For economists who already felt confident in the theoretical arguments against rent control, research like Diamond’s provides empirical evidence that essentially tells the same story. Yes, there are some winners in rent control; but the losing is more widespread, and longer term. But how about empirical evidence from a reverse angle — that is, not when a city adds or expands rent control, like San Francisco did, but when it gets rid of it?

DIAMOND: So, there’s other work by David Autor and coauthors that looks at the removal of rent control in Cambridge, Massachusetts, in 1994.

By the early 1990s, Cambridge was one of the few remaining rent-control strongholds in Massachusetts. Landlords had been trying to get rid of it for years. But there are a lot fewer landlords than there are tenants, so any attempt to change the local law was voted down. Finally, the rent control opponents had a winning idea: put the issue up on a statewide referendum, where there might be less empathy for all those city dwellers with below-market rents. When the referendum was held, nearly 60 percent of the voters in Cambridge were opposed — but, statewide, it passed, and so Cambridge began to deregulate its rents. Years later, a trio of M.I.T. economists examined the effects of removing rent control.

GLAESER: Okay, so, the classic paper on this has been written by David Autor, Parag Pathak, and Chris Palmer.

Ed Glaeser again.

GLAESER: It showed that when units were brought out of rent control, their owners invested in them. So, they upped the quality of the units; there was more of a supply of higher-end housing.  

DIAMOND: They find that the rent-controlled apartments experience a lot of renovation. Landlords renovate a lot, and that drives up the desirability of living in those apartments. Also, they find that that creates spillovers onto the nearby apartment buildings that they themselves weren’t rent-controlled.

GLAESER: So neighboring apartments became more valued as a result of the end of rent control. And the most recent paper has shown that crime has gone down — particularly, street crime has gone down right after the elimination of rent control in Cambridge.

DIAMOND: So it looked like rent control had negative externalities on the neighborhood.

So what does economic research tell us about rent control? There are at least two conclusions — which, if I’m reading it right, sort of work against each other. The first conclusion is that rent control doesn’t help many people for very long, in part because it constrains the supply of affordable housing. The second conclusion is that just getting rid of rent control does not, in and of itself, lead to more affordable housing; in fact a deregulated housing market can easily lead to less affordable housing. The Boston-Cambridge area is one of many places experiencing a steep shortage in not just affordable housing but housing overall.

So even if you accept that rent control is a big contributor to the affordable-housing problem, getting rid of it isn’t necessarily a solution. You can see why politicians and policy-makers are confused. In Massachusetts, in fact, there’s currently a movement to bring back statewide rent control. And as we mentioned earlier, Massachusetts is not alone. California recently capped the amount rent could be raised across the state at 5 percent plus inflation.

DIAMOND: It was interesting to see how our results were used by policy makers and media on both sides of the fight. Because indeed, some of our results are, like, rent control are good, others make them look bad. You’ve got to read the whole paper and take it all into account to make a decision, but it was a very policy-relevant paper for that discussion.

DUBNER: I’m curious what you can tell us about the political dimensions of rent control. I may be wrong, but I believe that rent control is generally supported by Democrats and generally opposed by Republicans.

DIAMOND: I think it’s a simplification to say all Democrats support rent control. But I think in the short run, you can see the benefits of rent control — the tenants right away benefit. What’s much harder to see are these indirect effects that take a long time, and it’s harder to put your finger on that. The losses are spread everywhere a little bit, and harder to see walking down the street or talking to your constituents.

GLAESER: There certainly are some poor people who can benefit. And, it’s a very tangible benefit, right? It’s not some complicated thing which requires you to trust in the market. It’s just sort of very clear, and if you think that people on the left, many of them just don’t trust markets to begin with, then saying there’s going to be some negative market effect to them, that sounds like capitalist hocus-pocus, whereas, what they can see right now is that Mrs. Reyes’s rents won’t go up because of their regulation.

Vicki BEEN: Economists tend to believe their models and say, “End of story,” and, “Believe me,” right?

That’s Vicki Been.

BEEN: But communities don’t necessarily have to believe economists, and so economists need to do a better job of responding to the very real fears that communities have.

Been used to be commissioner of the New York City Department of Housing Preservation and Development. Now she’s a law professor at New York University, and she directs the Furman Center for Real Estate and Urban Policy.

BEEN: The Furman Center has embarked on a project that we call “Not Your Grandmother’s Rent Control” to try to figure out, if you were starting from scratch, and you were designing the most efficient rent-regulation system, what would that look like?

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As we’ve been hearing, economists are generally opposed to rent control. It rewards some people, but fairly arbitrarily; it punishes many others, and generally doesn’t do much to improve overall access to housing. That said, most people don’t think like economists, or even believe them. Which is why many politicians and members of the public think rent control is a great idea.

David EISENBACH: Well, I’m in favor of residential rent control and rent regulations. 

That’s David Eisenbach; he teaches history at Columbia University and he recently ran for a citywide office in New York called public advocate. There are in New York City about 3.4 million apartment units, nearly 1 million of which are rent-stabilized. And New York’s rental market is incredibly expensive — as it is in many other cities with regulated rents, like San Francisco. Economists argue that overall high prices are a direct consequence of rent regulation; what does Eisenbach think?

EISENBACH: I disagree. I mean, there are a lot of reasons why real estate in San Francisco and real estate in New York are high. Blaming it on rent stabilization is definitely not it. The consequences of getting rid of either rent control and/or rent stabilization would be the immediate displacement, of a big portion of the population, and that would just be cruel at this point. I don’t know how anybody could justify — even somebody looking at it purely in economic terms — how anybody could justify that, just in human terms. You’re going to blame the high rents on rent control? Come on.

Okay, so Eisenbach does not believe the economic research on rent control. What does he believe in?

EISENBACH: Well, first and foremost, I’m an angry New Yorker who walks around the streets of New York and sees empty storefront after empty storefront, and just feels like my city is dying.

New York’s commercial rents have spiked along with its residential rents. And in some parts of Manhattan, as much as 20 percent of the retail space is either vacant or soon to be vacant.

EISENBACH: And I found out that there is this bill called the Small Business Jobs Survival Act. It was initially submitted back in the 1980’s and I figured, why don’t I run for office pushing this bill? And so I ran for public advocate on the platform, “We’re going to pass this bill; it’s going to save small business in New York City.”

We should say that Eisenbach did not win the election. He came in 13th in a field of 17. But he did get a fair amount of attention for talking about all those empty storefronts, which have upset a lot of people.

EISENBACH: There are two major provisions of the Small Business Jobs Survival Act. One: it guarantees a 10-year lease renewal offer from the landlord to the tenant for any tenant with a commercial lease in New York City. Number two: if the landlord and tenant cannot come to an agreement, they go to legally binding arbitration, and that arbitrator then will pick a fair market rent, which will then be charged in the next 10-year lease renewal.

Opponents of this proposal call it commercial rent control.

EISENBACH: But this bill, the Small Business Jobs Survival Act, is absolutely not rent control. It doesn’t put a limit on how much rent can be charged, which is the very definition of rent control. It’s legally binding arbitration. Much different.

DUBNER: Are there other cities that have this kind of small-business jobs protection on the real-estate front that works well?

EISENBACH: It’s going to be unique.  

Eisenbach lost his election, but the city council has continued to debate legislation that would rein in commercial rents. I was interested to know what the economists we’ve been speaking with — Rebecca Diamond of Stanford and Ed Glaeser of Harvard — what they thought about commercial rent regulation.

DIAMOND: So, I’m also very interested in that, and I also know almost nothing about it. I have never seen any work on it.  

GLAESER: You can easily tell a story where the threat of some form of rent control makes a vacancy problem worse in the short run. So, for example, I don’t want to rent right now to a lower-end tenant who could fill my space, because I’ll be locked in by the rent-control law and I’ve got that tenant forever. So, that means, I’m going to really hold out for a blue-chip tenant because I have this threat of this law over my shoulder.

So, do I think vacant empty storefronts are a problem? Sure. I mean, we can talk about it from a perspective merely as an urbanist, where we think it’s unattractive to have these things, but I’m also disturbed by it as an economist, because someone’s got space to sell, there are people who want to buy that space. Why isn’t the transaction happening, right? It’s sort of — the market is going awry. And the answer to that — of why the market is going awry — is not immediately obvious.

There are of course plenty of theories as to why so many storefronts in New York are vacant. Here again is Vicki Been, the former housing official who studies the real-estate market at NYU.

BEEN: I think there are a lot of questions about how commercial rent regulation would work and how it might interfere with an efficient market. One concern that I would have right now is, we seem to be in the middle of an upset, of a transition in retail in general, because of the availability of Internet retail. A lot is in flux.

GLAESER: But there are two points of evidence against that. One of which is that many of these storefronts formerly held services, and I don’t think a nail salon has been made obsolete by Amazon just yet. And secondly, the rents, the asking rents, at least according to the most recent Real Estate Board of New York report, in many of these areas are still sky-high. It’s not like there’s no demand for areas where you’re charging $300, $400 per square foot to rent these areas.

In the long term, all the economic push for both the landlords and the tenants is to get those units occupied and get the rent payments again flowing to the landlord.

Landlords, whether small or large, are often left out of public discussions about property markets. And if they’re not left out, they’re usually drawn as villains. Vicki Been, in thinking about the project she calls “Not Your Grandmother’s Rent Control,” is trying to change that.

BEEN: I think the thing that you really need to focus on is: how can I ensure that the landlord is getting a reasonable return, right? Because otherwise, people will take their money and put it elsewhere and you won’t get building. And how can we at the same time try to close some of these avenues that landlords could use to try to escape rent regulation without it becoming a system that’s so weighed down with so many different enforcement challenges that it kind of collapses of its own weight, right?

You need to pay attention to the different ways in which property owners are making money on the property, so you really need to have a holistic look. At the same time, you need to have very open-eyes view of the kinds of costs that we’re imposing on them.

There’s one huge cost that drives real-estate prices, whether we’re talking about rentals or sales, for both commercial and residential buildings.

BEEN: In New York City, for example, a very high percentage of rent goes for property taxes. So we can’t be saying to landlords, “Hey, keep prices down — but by the way, your property tax just went up by 10 percent. So we have to recognize that, okay, we as a taxpaying body have an obligation to understand the effect that those increases may have on rents, and we can’t just turn around and say to the landlord, “You absorb them,” right? “Don’t pass them onto the tenant.” Because that’s an unsustainable system.  

GLAESER: It’s certainly true that renters implicitly have to pay for property taxes. And it’s not obvious that’s wrong, because the idea of property taxes is they’re paying for city services and renters use city services, too. That’s obviously not wrong.

DUBNER: So, here’s a big question that I really hope you can answer, because I’ve wondered this for a long time. Some of the biggest property owners in a city like New York — and some of the wealthiest property holders generally — are universities, religious institutions, hospitals, and other not-for-profit institutions, which makes them either partially or wholly exempt from paying property taxes. So, I’m curious, how does that exemption affect a) the taxes paid by everyone else, and how does that b) ultimately affect housing prices for everyone.  

GLAESER: First of all: clearly, you’re right. The government has decided to subsidize certain institutions by enabling them not to pay property taxes. And from a purely accounting point of view, those taxes need to come from somewhere else.

On the other hand, it is also true that at least some of the institutions that you’re talking about have proven to be extraordinarily important for the economic health of the area, right? We’re subsidizing the university student, right? We’re making it cheaper for them to rent than it would be otherwise. Is that fair? Well, we thought that, somehow or other, it was a good idea to subsidize educational institutions at one point in time. We thought there might be some spillovers from that, some benefits from encouraging people to become educated. But, we should be open to re-investigating that, and anyway, you shouldn’t take my word for it, because after all, I’m the employee of an educational institution.

We can ask whether or not the blanket property-tax exemption that we’ve given to religious institutions and educational institutions is appropriate. I mean, that seems like a reasonable question to ask. In the case of religious institutions it in some sense goes back to fundamental issues about separation of church and state in the U.S., but we can still ask this question.

I would be surprised if we think that changing those tax rates is the number-one step to take to promote affordability in New York City though, relative to bringing more space on market that you can actually build on, changing the regulations. I mean, it seems like that’s not likely to be the case, but it is true that you move stuff to a religious or educational use, in many cases you’re moving away from an owner who would actually build on it. And that’s also correct.

So what have we learned about housing, especially affordable housing, especially in the most desirable cities? For starters, we’ve learned that it’s complicated. Property taxes play a large, underappreciated role in driving up costs, and the tax burden isn’t necessarily spread so equitably. Rent regulations, meanwhile, appeal to the public and politicians, but they also create perverse incentives that in the long run work against affordable housing. How about housing vouchers: aren’t they a more flexible way to subsidize housing?

BEEN: The advantage of a voucher is, you can go through all of those eligibility requirements and really target the voucher to the families that you think are most in need. And we in New York, and in many other major cities, we have prohibitions against a landlord refusing a tenant because they’re using a voucher rather than earned income.

But we’re still getting enormous resistance from landlords, because if you have a federal government that shuts down and isn’t paying its voucher payments, and there, the landlord is stuck with that, right? Or if you have a city, like New York City did, that issued vouchers and then changed its mind, and said, “Oops, that program is over,” then the landlord has a tenant in place who no longer can pay the rent and the landlord has to take them to court and bear the costs of that.

Meanwhile, the market price of housing in a place like Manhattan lies somewhere between punitive and prohibitive. So if rent control isn’t a viable tool in the fight for affordable housing, what is?

GLAESER: The most natural tool towards affordability is supply, and to make sure that we are making it easy enough to build moderate-cost rental-apartment buildings in these cities. 

Ed Glaeser again. 

GLAESER: We’ve used regulations to so restrict our ability to provide affordable housing units that now we’re at this restricted frozen-in-amber form. In the case of New York — gosh, New York is New York. It’s hard to imagine how much housing you’d really need to sate demand for New York.

DUBNER: What about Boston, where you live? Boston is facing what it calls a historic housing shortage. The city’s growing, not enough housing to match. What do you suggest Boston do to accommodate that surge, other than let the market work its famous magic?

 GLAESER: Look, drive around Boston. It doesn’t look overcrowded to me, and I don’t think it should look overcrowded to anyone else. There’s a lot of vacant industrial space that could easily house tens of thousands of units. If you made it easy enough to build, I’ve got to think that this is a doable problem, at least from an engineering and economics point of view. The politics, of course, are more difficult.  

DUBNER: What, specifically, would need to be done to change it?  

GLAESER: So, the big answer is, you need, as-of-right zoning that enables fairly high-density levels over a fair amount of space. So, currently Boston’s zoning plan is highly antiquated. Every project is handled on an ad-hoc basis. Usually, it involves variances that are quite high from the original plan, which means that they are highly subject to judicial challenge. All of that is a recipe for uncertainty and delay and endless community meetings.

The thing that works best is when you have something where you’ve decided in advance, “This is how much we’re going to allow to build; there are a couple of simple rules that you’ve got to follow. Come here, bring your units and make it happen.” And that’s what’s needed. That’s what actually works. It’s not something that involves a 10-year negotiation process, but something that says, “Here are the rules upfront. Go to it.”

It should be noted that not all U.S. cities impose the same level of red tape you see in Boston and New York and San Francisco.

GLAESER: If you want to look for affordability, the American Sunbelt is pretty great. The Atlantas, the Houstons, the Dallases, the places that just have made it very easy to build over the last 40 years — you want to ask why Atlanta, Dallas, Houston, Phoenix each added a million people between 2000 and 2010 as metro areas, it’s because they make it astonishingly easy to build. And you can go and you can buy a great-looking house for a fraction of what you’d pay in New York in these places.

We don’t have an affordable housing crisis in the U.S. nationally. We have lots of affordable housing in places with names like Atlanta, but just not in New York City.

Many European cities, meanwhile, are more like New York — in fact, exaggerated versions of New York.

GLAESER: Much of Europe is quite restrictive in your cities, but I’m much more comfortable about the idea that much of central Paris is patrimony of the world that needs to be protected.

While policies vary from city to city and country to country, almost all major European cities have rent control.

GLAESER: Sweden, of course, is the place where Assar Lindbeck, the famous economist — and although he was market-oriented, he certainly skewed to the left — Assar famously said that, “short of bombing, I know of no way to destroy a city that was more effective than rent control,” and he certainly had Stockholm in mind.

Tommy ANDERSSON: Right now, there are around 10 million people living in Sweden. Around 550,000 of these people were standing in a queue waiting for an apartment in Stockholm. That is 5 percent of the Swedish population.

That’s the economist Tommy Andersson.

ANDERSSON: I am a professor at Lund University, which is located in the south of Sweden. I focus on an area called market design.

Sweden has nationwide rent control.

ANDERSSON: The rental system in Sweden is based on collective bargaining. So according to the Swedish law, there is a union called the Swedish Union of Tenants and their job is essentially to negotiate the rents for tenants. And it’s based on something which is called the utility value, which essentially means that if you have two comparable apartments, they should have the same rents. Another objective that they have is that they should keep the rents low. The rents cannot be increased by too much.

If you’ve been listening closely, it may not surprise you to learn that this system has led to a housing shortage. 

ANDERSSON: Because people will not invest in new buildings unless they can get good returns. So if you look at this report written by the National Board of Housing, Building, and Planning from 2016, they estimated that Sweden needs around 440,000 new homes before 2020.

And that’s not going to happen. This shortage is what can lead to long lines to get an apartment, especially in the more desirable places. How long do you have to wait in Stockholm?

ANDERSSON: You have to wait for 10 or 20 or even 30 years to get an apartment right now, if you would sign up today.

What if you don’t want to wait 10 or 20 or 30 years for an apartment?

ANDERSSON: So, there are no official figures because it’s a black market. But it’s clear that there exists a black market. You can get an apartment in several different ways. So one of them is essentially to buy contract with black money. You can also bribe someone in charge of allocating available apartments to get the better position in the queue. And another thing which is popular is these fake swaps. So, you’re allowed by law to swap apartments with other persons. So you’re just pretending that you are swapping apartments, but essentially you’re not.

In the old days what I had heard — and I must stress that I don’t have any scientific evidence of this — but apparently, black contracts used to cost around 10 percent of the market value. But in recent years it has actually grown to say 20 percent of the market value of the apartment. So it’s expensive to buy a black contract. You know, it’s always a risk to be involved in this business because even if you paid the money, it’s not clear that you will get the apartment simply because, I mean, there are criminal gangs involved in this as well.

That doesn’t sound like what the designers of the Swedish rental system were going for. But the housing market in Stockholm is so bad that even business leaders there have risen up in protest.

ANDERSSON: The C.E.O. and the founder of Spotify, in 2016, he wrote an open letter to the people of Sweden saying that unless you solve this housing situation in Stockholm, Spotify may consider moving its headquarters out of Stockholm simply because we cannot find housing for our future employees.

If policy makers can’t figure out smarter ways to encourage more affordable housing, you can expect to see this kind of scenario playing out in cities all over the world.

*      *      *

Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski. Our staff also includes Alison Craiglow, Greg Rippin, Harry Huggins, Matt Hickey, Daphne Chen and Corinne Wallace; our intern is Isabel O’Brien.Our intern is  Our theme song is “Mr. Fortune,” by the Hitchhikers; all the other music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts.

Here’s where you can learn more about the people and ideas in this episode:

SOURCES

• Rebecca Diamond, Associate Professor of Economics at Stanford Graduate School of Business.
• David Eisenbach, history lecturer at Columbia University.
• Vicki Been, former commissioner of the New York City Department of Housing Preservation and Development and law professor at the New York University School of Law.
• Ed Glaeser, Fred and Eleanor Glimp Professor of Economics at Harvard University.
• Tommy Andersson, economics professor at Lund University.

RESOURCES

• “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” by Rebecca Diamond, Tim McQuade, and Franklin Qian (National Bureau of Economic Research, 2019).
• “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts,” by David H. Autor, Christopher J. Palmer, and Parang A. Pathak (Journal of Political Economy, 2014).
• “An Econometric Analysis of Rent Control,” by Edgar O. Olsen (Journal of Political Economy, 1972).
• “Roofs or Ceilings?: The Current Housing Problem,” by Milton Friedman and George J. Stigler (Foundation for Economic Education, Inc., 1946).

The post Why Rent Control Doesn’t Work (Ep. 373 Rebroadcast) appeared first on Freakonomics.

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