L.A. Mayor Eric Garcetti has lent his support to an initiative that would rein in the 1995 Costa-Hawkins Rental Housing Act, which bans counties and cities from limiting rent increases on post-1995 apartments. He also said he would consider extending rent restrictions to newer buildings in Los Angeles if the state initiative passes, in the name of assisting renters.
However, while he claims to see injustice between tenants under rent control (which he called like winning the lottery) and those not under rent control, he fails to notice that his solution imposes a far greater injustice on renters, as well as property owners.
Rent control would not help Angelenos looking to rent. It would transfer a great deal of income to current tenants out of landlords pockets, but would harm the vast majority of prospective future tenants.
One of the most universally accepted propositions among economists is that rent control produces a host of averse social consequences. It takes a large portion of the value of residential properties from landlords by removing their rights to accept offers willingly made by potential tenants.
For example, when Toronto imposed rent control in 1975, affected building values fell by 40 percent over five years. A decade ago, such losses were estimated at $120 million annually under Santa Monicas strict rent control laws. Those stripped property values are given to current tenants, whose bonanzas are shown by the fact that those under such controls almost never leave.
By taking away much of the effective ownership of rental housing from owners, rent control leads to deterioration of the rental housing stock. It sharply cuts incentives for new construction that can be exposed to the same rip-off. Conversions to condos and non-housing uses to avoid rent control burdens, along with other evasion efforts, also reduce rental housing availability for those who are, or will be, looking to find rental housing once rent control is in place.
Why is rent control, which harms the vast majority of prospective tenants by eviscerating their rental options, popular with tenant advocacy groups? Because current renters, who capture the property value taken from landlords, form a political majority who approve of voting for themselves to win the lottery, rationalizing the piracy involved as a wonder of democracy.
In fact, imposing rent control offers current tenants greater economic gains than any other policy they could use their majority voting power to enact. Not only can they save what could easily be a thousand dollars a month below market prices, they get what amounts to life tenure. What other political act offers existing renters a way to vote themselves what could be hundreds of thousands of dollars?
Rent controls pro-renter rhetoric also allows a powerful form of misrepresentation. Rent control benefits current renters, but it does not benefit renters. It harms potential renters, a far larger group. As a result, it is truer to say rent control harms renters than to say it helps them.
The deterioration of the quantity and quantity of the rental housing stock harms all those who seek apartments after rent control is imposed, and find no vacancy signs rather than units. But voters commonly only notice the gains to the existing tenants they see, while overlooking the harms to property owners and the far larger number of prospective renters they cannot see. And the latter group doesnt get a vote, since they are not yet residents.
Rent control can extract massive windfalls for current tenants from owners where they have majority voting power. That also means politicians who cater to them can more easily acquire and maintain power. And the harms to future prospective tenants are masked by overlooking the massive disparity between how they are treated and how current tenants are treated.
That explains why, in majority renter areas, the truly bad economics of rent control frequently enables successful piracy politics. But it cannot accurately be said to help renters as a group.
|Gary M. Galles is a Research Fellow at the Independent Institute, Professor of Economics at Pepperdine University, and Adjunct Scholar at the Ludwig von Mises Institute.|