Rent Control Doesn’t Work Either

I’ve been falling behind in my blogging – work commitments, travelling, time with the family etc have really eaten into my writing. One of my new year resolutions is to become more active again. Nevertheless, blogging is still likely to take a little bit of a back seat, though I’ll try to keep up to at least once a week, if not more. Just don’t expect long rants.

First up, a paper on the effectiveness of rent controls on housing (abstract):

The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco
Rebecca Diamond, Tim McQuade, & Franklin Qian

In this paper, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants, landlords, and the rental market as a whole. Leveraging new micro data which tracks an individual’s migration over time, we find that rent control increased the probability a renter stayed at their address by close to 20 percent. At the same time, we find that landlords whose properties were exogenously covered by rent control reduced their supply of available rental housing by 15%, by either converting to condos/TICs, selling to owner occupied, or redeveloping buildings. This led to a city-wide rent increase of 7% and caused $5 billion of welfare losses to all renters. We develop a dynamic, structural model of neighborhood choice to evaluate the welfare impacts of our reduced form effects. We find that rent control offered large benefits to impacted tenants during the 1995-2012 period, averaging between $2300 and $6600 per person each year, with aggregate benefits totaling over $390 million annually. The substantial welfare losses due to decreased housing supply could be mitigated if insurance against large rent increases was provided as a form of government social insurance, instead of a regulated mandate on landlords.

Frisco (I lived there for a few years, so feel entitled to use the short form) is an interesting case. Silicon Valley is next door, and the agglomeration of high tech companies in the area have both increased demand for housing (from internal and external immigrants) as well as boosted house prices substantially. Couple that with Californian zoning regulations, and Frisco has a housing market that is one of the most unaffordable in the world. Rent control is one solution, but the paper estimates that the costs far outweigh the benefits.

This isn’t to say that rent controls don’t work at all, but the specific circumstances in Malaysia are similar – inadequate supply, internal migration to economic centres of activity, increased compliance costs. So I’m comfortable extrapolating the results to our domestic housing problem. The solution is still to reduce barriers to contruction and increase supply in the right market segments.

Notes

Rebecca Diamond, Tim McQuade, & Franklin Qian , "The Effects of Rent Control Expansion on Tenants,Landlords, and Inequality: Evidence from San Francisco", paper presented at the NBER Conference on Public Economics, October 26-27 2017