Useful Fools

Rent control is a way to steal from productive people - landlords - for the intended benefit of the renters. It is remarkably perverse in its side effects and in most cases ineffective in its original goals. The perversity is due to human nature, which seeks to defeat the rent control. From a human rights standpoint, there is no excuse for preventing a potential renter from reaching a consensual agreement with a landlord - this is merely a reduction in freedom. Enforcement requires the use of government coercion (ultimately the threatened use of deadly violence).

As people in New York City know, rent control causes a dramatic drop in available housing, and causes economic dislocations and rank injustice of all sorts.

The most common side effect is the halt in building new rental units. Why invest in property where government, rather than the market, decides how much income you make, which may be negative, costing you your entire investment.

Another side effect is landlords abandoning property from which they can no longer profit, leading to entire neighborhoods being destroyed (in New York CIty, this obliterated huge amounts of housing space, as buildings deteriorated due to lack of maintenance and the replacement of renters with squatters). This results in a major decline in available space and the conversion of healthy neighborhoods into war zones.

Yet another effect is corruption, as landlords seek to raise rates by bribing the bureaucracy responsible for enforcing what ultimately become complex rules.

Building condominiums, instead of apartments, is another effect. Condominiums don’t have rent, so they avoid the regulation. But they also don’t satisfy the needs of the typically more mobile and more cash strapped renters, instead creating housing for those with enough capital to purchase them, and life circumstances allowing them to be locked into their location for longer periods of times. Rules are then made, and bureacracies appear to stop this practice and a related one, which is conversion of apartments to condos, and bribery or other corruption goes up.

A bizarre and perverse effect is that your rent is determined more by how long you have been in an apartment than by the value of it. This leads to rich people paying peanuts for a nice place, while much less well off people pay much more. A consequence of this is illegal subletting, where the first renter sublets the property to another renter, for a reasonable market price, and pockets the difference between that and the controlled rent - without ever investing money or taking any risk. Naturally, this leads to additional rules and more bureaucracy and bribes.

Landlords buy or build property in order to make a profit. Many are small business people, who own a few units. Landlordship is one of the best ways to trade labor and risk for a long term improvement in financial status. I knew a person who went from virtually no money to multimillionaire by doing this. Landlords risk their money, and spend a lot of their time, to provide space that they hope to rent for more than it costs. If they cannot rent enough units, or the market price drops, they can easily lose their entire investment. Thus the social function, even of an absentee landlord, is to take risks and allocate capital for the benefit of the renters and the landlord, although both sides are operating out of their own selfish interest. Smaller landlords, of which there are a large number, often also do the maintenance themselves, taking calls in the middle of the night to fix toilets, etc. They also have to put up with obnoxious tenants, and tenant disputes.

A landlord typically wants to eventually sell the property for a profit, and to do so must increase the cash flow. Normally this happens through inflation, increases in rent justified by either landlord made improvements or an increase in the overall market , or increases in occupancy, perhaps because of actions taken by the landlord. This is the flip side of the risk the landlord takes of rental rates or occupancy dropping - it is how the landlord builds equity.

I had my own experience with bad landlords in Santa Monica (actually, a landlord run city council) and I chuckled a bit when Jane Fonda et al. turned it into the People’s Republic