The Case for Ending Rent Control

In classical -- and even socialist -- economic theory, in an unregulated market, a drastic increase in demand, combined with only a small increase in housing supply, inevitably produces an upward spike in rental prices that benefits landlords, and disadvantages renters, especially those of limited means.

San Francisco's rent control ordinances, of course, were meant to address just such a situation, keeping landlords from increasing rents during times of high inflation or high demand and protecting low- and fixed-income renters from the predations of market economics.

But a wide array of housing studies show that San Francisco's version of rent control has not only failed to limit or soften the effects of the current housing crisis, but has actually worsened San Francisco's housing problem, and hurt the poor people it was designed to protect.

In utterly predictable ways.

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In the late 1970s and early 1980s, rent control took hold in 200 communities. It remains strong only in San Francisco, Berkeley, and New York City; weaker versions exist in Los Angeles, San Jose, Washington, D.C., and many cities in New Jersey.

Most state legislatures have, by now, outlawed rent control. There is a reason for this: Rent control is a price control, and history has shown, and shown again, that price controls do not keep prices down, except for short periods. In fact, price controls usually have the opposite effect of what was intended, raising prices in the long term above reasonable market levels by creating shortages in supply.

The effect of price controls on supply and demand has been understood for centuries, and, except perhaps in San Francisco's tenant activism circles, is not really a matter of dispute.

The theory on price controls goes something like this: When the supply of a product exceeds the demand to purchase it, the market price of the product falls. Because of the price reduction, suppliers have less motivation to make the product, so the supply eventually falls, too.

When the demand exceeds the supply, the market price rises, and there is more motivation to make the product, so the supply increases, until there is too much supply, and then the price falls again.

The market is a seesaw in constant search of balance. The optimal market price is reached when demand calls forth the highest price possible before the supply inevitably increases and prices fall.

But if extra weight is added to either end of the supply-demand seesaw, permanent imbalance can occur. Price controls are analogous to that extra weight.

Price controls can be useful in times of economic emergency -- during war, for example -- when demand far exceeds the supply that can possibly be produced. Governments can limit the price, and dole out the supply as equitably as possible -- for a while.

The fatal problem with price controls, however, is that when an artificially reduced price is imposed, the market will naturally move to adjust the actual amount of supply to reflect the reduced price. In other words, over the long run, setting an artificially low price on a product (in this case, apartments) guarantees that the supply of that product will diminish. (Among other things, when people are unable to move -- due to excessively high rents -- they tend to stay in one place, that is, to hoard their apartments, effectively removing these units from the market. The apartments that hoarding takes off the market tend to be units traditionally rented by those of low or moderate income. Rent control, in other words, discourages turnover of low-cost housing; when low-income renters must find new housing, they face a market that offers them almost nothing to rent. Although it is impossible to say exactly how many rent-controlled dwellings are being hoarded, statistics generated by private rental agencies and analysis by tenant activists and landlord lobbies paint a picture of tens of thousands of hoarded units in San Francisco.) And a reduced supply of any salable product, when combined with steady or increasing demand, inevitably brings higher prices, and, often, the creation of what is alternately called a shadow or black market, where the product is quite available, but only at extraordinarily high prices.

That rent control has the counterproductive qualities of other price controls has been established by experience. Recent studies of Berkeley, Santa Monica, New York City, Boston, Washington, D.C., Toronto, and other cities in which rent controls set artificially low prices on the supply of housing show that stringent rent controls -- of the type that now exist in San Francisco -- do, indeed, cause rents to rise over the long term for tenants who are not lucky enough to be living in rent-controlled units. Rents zoom up for the lucky ones, too, the moment they stop being lucky and have to move.