Thoughts on rent control and better alternatives
June 08, 2021
Rent control is a recurring idea in politics. And for good reasons: In some cities, housing prices increase to untenable levels for most. Berlin was one of those cities. For decades, it was known in part for its affordable cost of living. But its rise in popularity led rents to sharply. Until last year, when a strict rent control law enacted.
Earlier this year, the law was struck down as unconstitutional but not after having been in effect for months. The results weren’t good: Although rents were by definition decreased, it became almost impossible to find an apartment as supply shrank more than ever. The value of apartments affected by the law sharply decreased. Meanwhile, unregulated rentals saw their prices increase even faster.
The Wikipedia page for rent control shows this wasn’t an isolated case. That rent control doesn’t work seems to be one of the rare topics where economists agree.
But this doesn’t change the fact renting is increasingly too expensive. So what should regulations tackle to help?
Regulations should focus on increasing supply
Rents increase when supply can’t keep up with demand (surprising, I know). Rent control tries to fix the problem late down the road when the supply is already lacking. To find a permanent solution, we need to look upstream.
Countries and cities have regulations establishing what building can be built. Those regulations form a diverse spectrum. They could be non-existent or include one or more of:
- Efficiency: Minimal thickness of walls, insulation, multi-layer windows, etc.
- Maximum height
- Units composition: Is there a minimum number of studios? What ratio of bathrooms per bedroom? Should units have parking spaces?
An interesting example is Tokyo, that has successfully prevented the increase of home prices by limiting regulations: If it is safe, it can be built. Tokyo also rebuilds a lot which is an opportunity to increase the density of housing.
The downside, when compared to European cities, is the aesthetics: Uniform styles are maintained with strict rules.
Something I often notice when walking in Paris or Berlin is building height: New constructions are small. Rarely above six floors. We should be more conscious of this tradeoff between height and uniformity.
The point of diminishing return for building height varies based on the city. I struggled to find good numbers, but it seems to be around 20 to 25 floors in European capitals. Building lower means we are sacrificing housing supply in favour of an arbitrary aesthetic decision.
Debating regulations and increasing building height would do a lot to improve the supply side of the equation.
Improving stability is a double-edged sword
A common argument I notice is that rent control help renters keep leases for longer period of times. This stability is good for the individual as regularly changing homes is stressful. It’s also good for the community as renters know they will be around for the long term.
This stability has a downside when you consider that in practice, it is often forced.
Viewers of Sex and the City might remember when Carrie tries to move out of her rent-controlled: She discovers she can’t afford to move out! Rent controlled apartments are impossibly to get, while everything else would vastly increase how much she paid on rent. Funnily enough, later on in the show, she moves out of the apartment to live with her spouse but continues to pay the rent so she can continue taking advantage of it. This isn’t only in fiction. Often, rent controlled apartments have so much value, it makes sense to keep the lease forever.
But there’s a substantial downside: This forced stability prevents renters from changing jobs or making life adjustments as they cannot find another rent control apartment elsewhere.
A partial solution I’m surprised we don’t see mentioned more often is to increase the minimum duration of leases. In France, the minimum lease duration for an unfurnished apartment is three years. If stability for the individual or the community is a goal, increasing the minimum duration from 3 to 10 years makes sense.
Regulating rent increases quickly becomes ridiculous
Rent prices change over time: Apartments get refurnished, the area becomes more attractive due to new public transports or simply because renters taste change.
A regulation forbidding price increase based on refurbishment would disincentivize any home improvement.
The Berlin regulation approached this problem by precisely defining the potential rent increase allowed depending on the improvement. For example, adding to a 1948 apartment high-quality sanitary appliances, high-quality flooring, and a build-in kitchen allows for an increase of 8,27€/sqm. This approach has obvious downsides: “high-quality” doesn’t mean a lot. And because the rent increase is capped, owners will always use the least expensive, lowest quality appliance to get the rent increase. And there’s no reason to make minor improvements. Repainting the walls is expensive but can’t be incorporated into the rent, so it doesn’t make to do it.
And what if there’s a disagreement regarding what a high-quality sanitary appliance is? Are judges supposed to decide if a toilet looks good enough?
Determining the right price is a complex problem. One that only the market can solve. A successful regulation might try to nudge the market but won’t replace it.
Feel free to share your thoughts below. Housing is a complex and important topic. Having more rational discussions is essential for the right decisions to be made.