Officials and activists in cities around the United States are lamenting the lack of affordable housing in their communities. Even the federal government is getting involved, as the Secretary of Housing and Urban Development Julian Castro was recently in Minneapolis to discuss the issue.
Most Americans know about the sky-high housing prices in places like San Francisco and New York. But fewer are aware that a similar outcry over housing prices exists in places such as Houston, Denver, Minneapolis-St. Paul, Seattle and Wilmington, N.C., areas not typically known for their high housing prices. Thankfully, these cities have yet to copy New York and San Francisco's biggest affordable-housing blunder — rent control. Yet, despite the repeated failure of rent control to restrain housing prices in New York or the Bay Area, it remains a popular policy proposal among affordable-housing advocates. This is unfortunate since rent control is not only an ineffective policy; it is also an unjust one.
Rent control's inability to restrain housing prices is not surprising given that it doesn't address the ultimate problem, which is a lack of housing. Instead, it further reduces the quantity of available housing by diminishing the profit incentive to build more. Developers who know that the city won't allow them to increase rents as demand rises will be hesitant to build rental housing and more likely to build commercial buildings or single family homes that aren't subject to rent control — if they even build at all.
Alternative solutions proposed in many cities — such as inclusionary zoning, which requires builders to include a specified number of affordable units in any development, or direct subsidies to developers in the form of government owned land or tax credits — have the appealing characteristic of actually attempting to address the core problem of too little housing, which is an improvement over rent control.
Unfortunately, new research by my colleagues at the Mercatus Center shows that these other methods often fail to increase the supply of housing as well. The authors specify some policies that government could implement to encourage more housing — such as tax transfers to residents to encourage them to allow more building — and governments should try these rather than continuing the failed policies that have been in place for years.
In addition to the perverse economic incentives created by rent control, there is also a legal and moral issue. As New York University law professor Richard Epstein has repeatedly pointed out, rent control conflicts with the "takings clause" of the 5th Amendment. This clause guarantees that Americans receive just compensation if their property is taken by the government. Rent control is in effect a taking of property, even though the government never actually takes possession of the housing units subjected to it.
To see how this works, suppose you owned an apartment building in Seattle with five units that could each be rented for $1,000 per month. Now suppose that Seattle's city council implemented rent control — which it's pursuing — in order to provide more affordable housing, and under the new law you could charge only $800 per month. Your monthly revenue would decline from $5,000 per month to $4,000, which is the economic equivalent of Seattle simply taking possession of one of your units. In effect, rent control allows a government to take one of your apartments without compensation.
Unfortunately, the courts have yet to officially recognize this obvious fact. In the court case of Guggenheim v. City of Goleta, which concerned rent control in a California trailer park, the court stated that municipalities cannot be forced by the courts to implement sound economic policies, even if economics 101 shows that the policy is equivalent to a taking. Thus the regulation of property without compensation remains permissible in the U.S. even if it has the same economic effect as an actual taking of property.
Many people are justifiably upset when a government abuses the power of eminent domain to seize a small business for private redevelopment, but they regrettably fail to see the economic similarity when a government imposes rent control on property owners. In both cases the economic livelihood of the property owner has been damaged, but in the rent control case the owner is also denied compensation. Rent control is not only a bad economic policy that doesn't achieve its goal of restraining housing prices. It is also an unjust policy that causes real economic harm to property owners.