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Want to see a dramatic increase in homelessness? Just add rent control

nick cowen, 27 September 2011

A Guest post by Peter Morgan over at LeftFootForward offers a real blast from the past. He suggests introducing price controls on rental properties. His theory is that this will act as a simple transfer of wealth from property owners to renters (who spend more of their income), thus stimulating the economy far better than quantitative easing. Well-intentioned as this idea is, few other measures would be more likely to punish low-income renters.

Morgan begins with the somewhat odd claim that ‘many economists do not believe an increase in money supply will increase the level of output’ (presumably higher real GDP). In fact, this is one of the few ideas that seem to command a consensus amongst economists from the left and the (neo-liberal) right. The UK may have done as much as can be done with the money supply (the rest of our problems are structural) but a lot of economists seems to the think that both the US and the Eurozone should be doing a lot more to increase their money supplies even now. Increasing the money supply is meant to combat the demand for money holdings, thereby stimulating spending (and hopefully some investment!).

Instead, Morgan suggests reducing rents through a Government price control that caps the rental price at some percentage of the renter’s income. The idea here is that you stimulate spending by allowing those with a greater tendency to spend (renters) to keep more of their money than the property owners they are renting from. This may or may not be true, but his suggested policy won’t achieve this transfer of spending power. This is because it will encourage property owners to do the following:

1.    Find high-income renters and avoid low-income renters like the plague, since they will be prohibited from charging the market rate for their property to low-income renters.

2.    If that activity is prohibited (on anti-discrimination grounds, for example), they will begin renting their property informally to friends and family rather than on an open market basis, with the real market rent provided unofficially or through in-kind exchanges.

3.    Avoid investing in low-income property areas and fail to refurbish old properties since owners won’t be able to compete for higher rents on quality if the price is already set.

4.    Forget about renting altogether and just treat any additional property as a second-home for their own occasional use.

5.    Abandon housing that isn’t worth renting at the price level set by the Government, and unsaleable for the same reason.

Worst of all, with no market price signal in the affected areas, property developers will not respond to low-income demands for housing. Even fewer affordable houses will be built, compounding the supply problems we have right now. If recent housing benefit reforms may force a few families to move home, this policy would ensure that they had nowhere to move to.

This isn’t theory. Last year, I was lucky enough to visit the city of Porto. As beautiful a city as it is, there were a number of strange aspects to it. This included a massive surplus of high-street bank branches (almost at every street corner) and a number of large residential construction developments just outside the city centre (two sides of Portugal’s housing and credit bubble). But most strangely of all, along the banks of the river Douro was a series of small but once-attractive riverfront flats and houses, now either dilapidated or completely abandoned. Some looked like they could just do with some retiling; others looked like they had been burned out in a civil war. This was in the centre of a still fairly productive city.

The reason for this scene is rent control. The owners of these houses can’t rent these properties at their market price and they can’t sell them to others for the same reason. So if the owners don’t have a use for them (as holiday homes, for example), they lie abandoned and unusable.

So how do you really help renters and the economy? At this stage, the problem of housing is so acute that even some social housing construction would be better than nothing. But the best solution would be to de-regulate the planning system (as the Government is doing, falteringly but partially, at the moment) and allow competing property developers to supply enough houses until rents and house prices become affordable to those on lower incomes. If you want to capture the rents off property owners and stimulate the economy, then that is achieved easiest by introducing a property tax and using money gained from that to cut taxes for those on lower incomes. But rent control is the absolute last thing you need if you want to help those on lower incomes.

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