Wednesday, December 3, 2008

Easy Win: Curb Rent Ceilings

For the US economy to start growing again, many believe the housing market must reach a bottom. Overbuilding coupled with a drop in demand has resulted in an oversupply in the housing market, causing a huge drop in construction. As we saw here, historically this type of construction boom and bust is nothing new to the housing market.

One easy way for certain cities to increase construction in the private sector is to abolish rent controls. Many US cities including New York, Los Angeles, and San Francisco currently have some form of rent control. While these controls are meant to protect tenants against rising housing costs, in the long-term they actually have the opposite effect, as housing supply is left artificially low since there is no incentive to build, and thus new tenants are forced to overpay for scarce supply.

While abolishing rent controls at the present time would cause certain tenants to have to move to more affordable housing, it would only do so where price ceilings are lower than rent market values. In such areas, the overall economy stands to benefit from an increased incentive for builders, resulting in a growing construction industry. The controls don't have to be abolished immediately, but instead implemented to phase out over time, which offers builders incentives to break ground now, while tenants are afforded time to adjust.

1 comment:

lottopol said...

Whatever the merits of rent control are or decontrol are, what is clear is that rent control stimulates building (or overbuilding) since all new builings are able to be leased at market rents.

Rent control causes the market rents on new buildings to be above what otherwise would be the case, since it causes tennents in rent controlled apartments to occupy more space than they would otherwise. Thus, rent control increase the total housing stock.

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