Why Rent Control Doesn’t Work

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

"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...

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...

GLAESER: 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... 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.”...

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...

DUBNER: 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...

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...

GLAESER: 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... 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...

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."