William Watson: Ontario’s politicians flunk Econ 101 (again) with rent control

Maybe you saw the short article in the National Post the other day about the New York artist ordered evicted from her rent-controlled apartment for having let it out on Airbnb. Eileen Hickey has been in the apartment, which is in Tribeca, on the lower west side of Manhattan, for 43 years and was paying US$1,500 a month for an entire floor. She was renting it out on Airbnb for the equivalent of US$4,500 a month. According to one real estate website, that’s the median rent for a one-bedroom apartment in Tribeca. 

“Econ 101,” thinks an economist when reading that. Control prices and craziness happens. Rent control is the classic example. As the Swedish economist Assar Lindbeck once put it, “Next to bombing, rent control is the most effective technique so far known for destroying cities.” 

If the control price is the price the market would have produced anyway, no problem. Well, almost no problem: Even if prices don’t get out of whack, rent control introduces rules and regulations that add to the cost of being in the apartment business. 

But of course rent control’s goal is precisely to put prices out of whack — to keep them below where the market would set them. Once you do that you create shortages and “shadow prices.” Shortages are simple: Sell something for less than its true market price and you get more would-be buyers wanting to buy than sellers wanting to sell. That’s almost definitional: The true market price is the one that equalizes the number of would-be buyers and sellers. Any other price doesn’t. 

The “shadow price” is the true value of the apartment, which over time diverges more and more from the official, legally sanctioned, controlled price. The controlled price in the New York example was US$1,500 a month, what the tenant was paying. The true market price was at least three times higher. How come? A lot has changed in 43 years. People’s incomes have risen and Tribeca is no longer a dry-goods-and-textiles commercial district but a trendy corner for artists and celebrities just a 15-minute walk from Wall Street. 

Rent control usually lets landlords capture at least part of the costs of any renovations and upkeep they do on their properties. But changes in the value of their property all go to the renters. Normally renters have trouble monetizing them. They’ll have the satisfaction of knowing they’re paying $1,500 a month for something worth $4,500 or more, and the saved money to spend on other things. But apartment-sharing apps like Airbnb create the possibility of easily monetizing the regulated privilege they’ve won via long tenure under rent control. 

At least some rent control regimes, like New York’s, don’t allow you to monetize your rent privilege. That’s actually a little strange: Enjoy the benefits in kind and you’re OK. But try to monetize exactly the same benefit and that’s not OK. Logical or not, it’s one of the few aspects of rent control that favours landlords. Even so, the court case to get Hickey evicted took four years, so you still have to be a little crazy to want to be a landlord in New York (which may help explain Donald Trump). 

As I say, this is all Econ 101. Control rents and you’ll get apartment shortages and strange redistributions from landlords to people who don’t obviously deserve big handouts courtesy of government regulation. All of this is covered the first two weeks of an intro economics course. 

How many politicians do you suppose will admit to understanding this basic part of economics? There’s an election on in Ontario, so count that province out. The governing Liberals are running an ad in which Progressive Conservative leader Doug Ford says he’d prefer to let the market dictate what rents should be. On the other hand, Ford’s a populist so good economic sense is more likely to lose out to angry tenants who see prices going up (a couple of his candidates already issued a press release this week promising that Ford won’t touch rent control).

The text accompanying the Liberal ad reads: “Doug Ford wants renters to fend for themselves, saying he believes ‘the market’ is better than rent control laws designed to protect tenants from higher rents and unfair rent increases.”

The Liberal premier of Ontario probably doesn’t copy-edit her YouTube ads personally but if a party puts air-quotes around “the market” you probably don’t want it running a modern economy. What protection do renters have against unscrupulous landlords? Other landlords — and lots of them. 

As Adam Smith taught, all competitors want to stifle competition and raise prices. It is human nature. The defence against it is to have lots and lots of competitors so that, however much they want to collude, they can’t. Government’s role is to encourage as much entry as possible into the housing market. Controlling rents and regulating the market to death do exactly the opposite. 

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