A Twisted Tale of Rent Control in the Maximum City

by on April 17, 2017 at 7:37 am in Economics, Law, Travel | Permalink

Walking around Mumbai it’s common to see some lovely, older buildings (circa 1920s perhaps) that are rentcontrol1in a great state of disrepair. A well maintained building can last for hundreds of years so why are these buildings falling apart? The answer is rent control. Bombay passed a rent control act in 1947 that froze rents at 1940 levels.

More than fifty years later, rents remained frozen at 1940 levels. It wasn’t until 1999 that the Act was modified slightly to lift controls on some new construction and to allow rent increases of 4% per year. After a fifty two year freeze, however, a 4% increase was a pittance. Thus, even today there are thousands of flats where tenants are paying rents of 400-500 rupees a month (that’s $6 to $8 a month!)–far, far below market rates.

The rent control law meant that there was virtually no construction of rental housing (WP) for decades and a slowly dilapidating housing stock. (Ironically, the only free market in rental housing is in the rentcontrol4slums.)

The nominal landlords have neither the incentive nor the funds to maintain the buildings so every year during monsoon season some of the buildings collapse and people die. As the World Bank put it, the monsoons are Natural Hazards but the collapses are Unnatural Disasters:

Rent controls in Mumbai may have initially benefited tenants at the expense of landlords, but over time everyone suffers. Rent controls cause landlords to forgo maintenance and neglect their properties, and tenants not only live in dilapidated buildings but die when they collapse in heavy rains. Even if tenants are willing to either pay higher rents or to maintain the building, each tries to not pay his share of the expense (free riding), especially if appropriate retrofitting involves structural changes to the entire residential structure and not to individual apartments. Tenants also may lack the legal authority to make changes to their building’s structure.

Consider the photo at top, it’s an elegant building on a nice plot in a highly desirable part of town but take a closer look and you can see that it is falling apart (second photo). Several businesses and flats operate in the building. Now read the sign on the wall.

rentcontrol3I don’t doubt that the sign is largely accurate but it also illustrates another aspect of rent control. Rent control transforms a mutually profitable exchange into a zero-sum war of misery. As I discovered in my investigations, a remarkable and sometimes hilarious example is illustrated by this very building.

The tenant, called the “victim lady”, in the Bombay High Court case that she initiated alleges that her landlord has vexed her with many frivolous lawsuits and harassed her in various and sundry ways:

It is alleged that the Respondent, on the pretext of reading books and doing meditation, continues to sit near the window of the victim lady reading law books and passing unwanted remarks stating that he will become a better lawyer by reading law books and will teach the victim lady a lesson. The Respondent is also alleged to have killed the kitten to whom the victim lady regularly used to feed. He is also alleged to have called three men to remove coconuts from the coconut tree and in the process broke number of flower pots belonging to the victim lady and destroyed the garden maintained by her.

In addition, and the judges of the High Court find this especially distasteful, the landlord “has also cast aspersions on the judiciary by making certain statements” about the “inefficiency of the judicial system”. Indeed, in his affidavit-in-reply, the respondent doubled down arguing:

…”the judiciary is perceived as inefficient by most citizens of India” as a justification for what he had stated.

Where could the respondent have gotten such absurd ideas? How dare he claim to know what most citizens think!

The Respondent may be free to express his views about the judiciary, but obviously had no right to project his views as of “most citizens in India”. What survey or research has been made by the Respondent to ascertain the views of “most citizens in India”, has not been disclosed, and considering the number of the citizens in India it is impossible to believe that the Respondent has made any survey or research on these aspects, so as to be able to make an authoritative statement of what “most citizens” feel. The impropriety is so obvious that we do not wish to comment upon the same any further…[to which, of course, the judges then proceed to comment further, AT]

The landlord does come off as a troublesome fellow but dig a little deeper and it’s not hard to see the source of his frustration. The judges, to give credit where credit is due, careful sift through the history of the case and they learn that the landlord has not actually filed many lawsuits against the plaintiff. Instead of many lawsuits, it turns out that there is only one very, very lengthy lawsuit.

Now, coming to the details given in part-B of the petition classified as “facts of the case”, there is reference of the suit bearing RAE No.537/4434/63, but this suit has, admittedly, not been filed by the Respondent and apparently the same has been filed by the grandfather [emphasis added, AT] of the Respondent….It is clear from the averments in the petition itself that the legal proceedings are pending between the parties since the year 1963.

Since landlord junior “came in picture in the year 1998 only”, and was only filling in the shoes of landlord father, who was only filling in the shoes of landlord grandfather, junior can’t be said to have initiated many lawsuits against the tenant. Thus, despite the landlord’s clearly outrageous comments about the inefficiency of the judiciary and whatever else junior may have done to the kitten, the judges throw out the tenant’s petition. The lawsuit that began in 1963 moves forward!  Perhaps to be taken up by the next generation.

Addendum: I talk rent control in Mumbai with Amit Varma on his excellent podcast, The Seen and the Unseen.

1 Steve Sailer April 17, 2017 at 7:40 am

“Nobody in Sicily hates anybody as much as a rent-controlled landlord hates his tenants.”

— Tom Wolfe, “The Bonfire of the Vanities”

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2 Steve Sailer April 17, 2017 at 7:44 am

There’s a whole book of short stories about the effects of rent control on people’s love lifes: “Slaves of New York” by Tama Janowitz:

“Stories abound about how difficult it is to find a decent apartment in New York. A recent best-selling book and movie, Slaves of New York by Tama Janowitz, is based on this theme. Its main character is described as a “slave” Of the city, since she lives with an abusive boyfriend because he has a lease for an apartment. If she were to end their relationship, she would have no place to live. According to the author, the ambition of “slaves” is to find an apartment of their own, which can take years, and in turn, to continue the process by acquiring their own “slaves.””

https://fee.org/articles/the-folly-of-rent-control/

Unfortunately, when they made it into a movie, they cut out all the parts about rent control.

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3 Ray Lopez April 17, 2017 at 8:23 am

https://en.wikipedia.org/wiki/Rent_(musical) – they also cut out the juicy parts about rent control in this musical, instead focusing on a boring incurable illness. Poetic license…

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4 colm April 18, 2017 at 12:06 pm

Actually, its original La Boheme was about the high rent in Paris and the lowlives who had to suffer thru it.

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5 Alain April 17, 2017 at 11:16 am

The idea That the writers of plays, the director, or the actors, all of whom are comically left wing, would even consider critizing dogma of the left is absurd.

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6 Thiago Ribeiro April 17, 2017 at 7:51 am

Pathetic. The tenants visit the iniquity of the fathers upon the children unto the third and fourth generation of them.

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7 Ray Lopez April 17, 2017 at 8:13 am

OT- Did you see how your new ‘no corruption’ president is accused of accepting bribes, amigo?

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8 Thiago Ribeiro April 17, 2017 at 9:13 am

He took no bribes whatsoever, they were campaign contributions from like-minded entrepreneurs. And the whole matter is under a strict, demanding, apolitical and thorough. No stone will be left unturned. No weed will left not uprooted. Former governors, Congressmen, top businessmen, the cream of our society, are jailed. More will follow them. All living former presidents are under investigation. Meanwhile, Americans still do not know if Trump is a corrupt tax-dodging Russian mole and if Clinton is a corrupt traitor.

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9 Anonymous April 17, 2017 at 3:03 pm

The sun is likelier to rise in the West than Thiago is likely to concede anything is wrong in Brazil.

On the positive side, Cohen is more optimistic about Brazil than Argentina.

https://www.nytimes.com/2017/04/14/opinion/the-inspiration-of-ample-india.html?_r=0

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10 Thiago Ribeiro April 17, 2017 at 3:30 pm

There are problems in Brazil and mistakes have been made, but our people and leadership march hand in hand on the road of progress, building a democratic, free, prosperous and happy nation. Brazil is the most peaceful nation mankind has ever seen, it has gifted mankind with the airplane, the radio, the typewriter, the pion and an advanced kind of X-ray. Brazil is biggest ezporter of meat there is and one of the biggest economies mankind has ever seen.

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11 ChrisA April 17, 2017 at 7:58 am

I guarantee there will soon be a parade of commentators defending remt control, it’s amazing to me how even the worst regulation will be supported.

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12 Ray Lopez April 17, 2017 at 8:16 am

@ChrisA- “The rent control law meant that there was virtually no construction of rental housing (WP) for decades and a slowly dilapidating housing stock.” — so if a building is renting for $4 a month, why would there be any new construction? Let me decode what is going on in India: there’s laws for everybody, then there’s different laws for the privileged few. I bet rent control only applies to those landlords who don’t have connections. Those that do (the top 0.1%) get the right to informally rent a new building at whatever price the market will rent, all the while using fake rental leases. Fake documentation is common in Greece, and I suspect in India as well. Only clueless foreigners making a Passage to India to see a Room with a View are surprised.

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13 MacroGuy April 17, 2017 at 9:45 am

No new rentals are done under the old rent control act. Nowadays everyone uses a leave and license system which does not come under rent control. There is no 0.1%, 1% or anything like that. So better ask before generalizing.

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14 Ray Lopez April 17, 2017 at 10:39 am

I did ask and you answered. So the followup question: if the leave-and-license system is a workaround to rent control, why is AlexT so concerned? If I understand correctly, new buildings are not covered by rent control?

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15 athEIst April 19, 2017 at 1:02 am

Gotta keep those remts under control.

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16 AlexFG April 17, 2017 at 8:42 am

Can anyone tell me, why those pictures remind one of Paris? Paris too has many beautiful buildings, expensive to rent/buy too but in a despicable state.

Has Paris the same kind of price controls?

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17 JWatts April 17, 2017 at 9:31 am

“Aug 3, 2016 — Rent control laws in the city of Paris are doing exactly what they were designed to do. That’s what France’s Minister for Housing, Emmanuelle Cosse, has been saying in recent celebratory interviews to the French media. It’s been roughly a year since France put in place strict restrictions on rent rises in Paris and other “strained zones” across the country. ”

http://www.citylab.com/housing/2016/08/paris-rent-control-laws-are-working/494282/

I don’t know if certain areas of Paris were under rent control previously, but apparently they’ve added new rent controls recently.

“Meanwhile warnings from pro-landlord groups that some owners would simply withdraw their properties from being rented out to avoid the new laws do not seem to have come true.”

Well, that is a shocking turn of events.

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18 Paul April 17, 2017 at 5:24 pm

I have been living in Paris for the past 15 years, and I have never seen any building in despicable state.
It is not the first time someone says something absolutely wrong on the Internet, but I am curious, where does this come from?

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19 alfanje April 17, 2017 at 8:54 am

A few weeks ago I finished “Last Man in Tower” by Aravind Adiga, which gives insight on the old-property market in Mumbai. Just a note in case someone prefers to approach the matter from fiction instead.

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20 Anonymous April 17, 2017 at 3:04 pm

+1.
A fantastic novel ; I preferred it to his Booker winning “White Tiger.”

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21 Axa April 17, 2017 at 9:06 am

Why are these buildings falling apart? Rebar corrosion. 1920s steel is a poor building solution in hot humid coastal environments =) The solution is to demolish that old structures and build new ones designed to endure the local environment, but…….rent controls.

From the article it’s evident that rent controls have a bad effect on housing offer, it’s almost zero: “Of all the residential units built in or before 1961, 49.7 per cent are currently self-occupied……….Table 2 shows that self-occupied and tenanted units were almost equal in 1961. (52) In stark contrast, 95 per cent of new residential construction between then and 2010 was for ownership while only 5 per cent has gone to rental housing.”

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22 A Definite Beta Guy April 17, 2017 at 9:37 am

Hmmm…I’m not an expert, but….
“Although steel’s natural tendency is to undergo corrosion reactions, the alkaline environment of concrete (pH of 12 to 13) provides steel with corrosion protection. At the high pH, a thin oxide layer forms on the steel and prevents metal atoms from dissolving. This passive film does not actually stop corrosion; it reduces the corrosion rate to an insignificant level. For steel in concrete, the passive corrosion rate is typically 0.1 µm per year. Without the passive film, the steel would corrode at rates at least 1,000 times higher (ACI222 2001).”
How do they make buildings last in, say, N’Awlins?

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23 corporate_serf April 17, 2017 at 10:24 am

Bombay/Mumbai proper also has restrictions on buildings (FSI, see here, for example: http://www.sdmarchitects.com/building-regulations-in-mumbai.html)

The result is that there is no way to actually build bigger apartments after tearing down existing buildings. This is the primary reason (on top of rent control) which drives prices sky high.

I seem to remember that Amit Verma, mentioned in the article, covered this in one of his very old blog articles/ mint articles.

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24 Ray Lopez April 17, 2017 at 10:43 am

What I noticed, living in the Philippines, is that hot humid weather makes things ‘age faster’. I saw a moldy concrete building (if you don’t paint or plaster concrete in the tropics, and they often don’t to save money, get collects mold in the pores real fast) and thought it was 100 years old, but it was only about 15 years old. You don’t get cracks in concrete like you do in Greece with ice expanding and contracting, but you do get buildings that look 100 years old. Also the earth often settles in PH for whatever reason (they build on swampland, or, due to high rain, everything is like swampland) and concrete always has 100s of little cracks in it, which collects mold.

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25 The Other Jim April 17, 2017 at 10:47 am

>1920s steel is a poor building solution in hot humid coastal environments

Interesting. Does that also explain why so much of Brazil is in ruins?

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26 Thiago Ribeiro April 17, 2017 at 11:08 am

Brazil is not in ruins. Brazil is home to many of the most beautiful cities in the world. Rio de Janeiro was basically rebuilt to host the greatest Olympic Games mankind has ever seen. São Paulo is the jewel of the Brazilian urban crown. Brazil has built there the most important temple mankind has ever seen, the Temple of Solomon, a replica of the temple Salomon built in Israel when he was king. Brasília is considered one of the Seven Wonders of modern world – its buildings, unprecedent urban planning and several palaces are feared and envied all aeound the world. My own home city is one of the few important island state capitals the world has ever seen. And Altamira, in the North, is more than a hundred times bigger than New York City. Not to mention the Northeastern and Southern and the Midwest cities. As president Temer pointed out, therw is nothing wrong with Brazil that can not be fixed by what is right with Brazil.

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27 Axa April 17, 2017 at 11:29 am

haha, no Jim. But it explains why some people invented composite rebars (plastic + glass fibers). I think they were developed in the 1980s.

The other alternative to prevent rebar corrosion is put an additive to concrete mix to reduce permeability thus salt transport, but this is also a relatively recent development. All concrete buildings in environments with high temperature and humidity (a.k.a. the Tropics) are exposed to corrosion http://www.cement.org/for-concrete-books-learning/concrete-technology/durability/corrosion-of-embedded-materials

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28 The Other Jim April 17, 2017 at 1:13 pm

Axa, this is great info, thanks again. One can learn a lot from the posters on this blog.

As for Brazil, it’s rapid decline is probably more due to social decay than construction-related decay. Brazil just doesn’t have its act together the way, say, Uruguay does.

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29 Thiago Ribeiro April 17, 2017 at 2:18 pm

It is a lie. The so-called Uruguay is a legitimate part of the Brazilian state, it is a rebel province (Cisplatine) of the former Empire of Brazil and will join the Fatherland soon or later. Also, as American right-wIng economist/ensaist Henry Hazlitt pointed out, the Uruguayan regime is sterile and out of control. Only by rejoining the Fatherland, the noble people of Cisplatine will be able to fulfill their historical mission.

30 Axa April 17, 2017 at 4:47 pm

What’s the translation of Lebensraum/vital space into Portuguese?

31 Thiago Ribeiro April 17, 2017 at 5:29 pm

Espaço Vital. Brazil, however, has never sought territorial aggrandizement. In fact, Brazil has lots of space and natural resources. Brazil is the only important country that never fought a war of conquest. Brazil could have annexed Paraguy after they attacked us and we crushed them, but our Emperor said we already have more land than we needed and we should help our Paraguayan friends.
As famous Brazilian senator Ruy Barbosa told famous French writer Anatole France (Nobel Prize laureate), “Brazil strives for world peace”. Brazil don’t want to rule anyone, Brazil has no territorial ambitions whatsoever, however the so-called Uruguay was a legimate part of the former Empire of Brazil, is a rebel province of it, and be rejoined to the Fatherland, peacefully if possible, but by the righteous might of the Brazilian people if necessary. However, we favor peaceful unificarion with our Cisplatine brothers and sisters – something like the German reunification. Brazil does not want war because all her ways are peace.

32 athEIst April 19, 2017 at 1:15 am

be rejoined to the Fatherland, peacefully if possible, but by the righteous might of the Brazilian people if necessary.
OR
Kill them all!

33 Benny Lava April 17, 2017 at 10:32 am

A caveat: I am against rent control.

That said this does not make a convincing argument. There are plenty of dilapidated buildings in cities without rent control like Gary Indiana and Youngstown Ohio. So this argument is spurious and anecdotal. Sloppy like a typical Alex post it chases its feelings rather than epirics. Sad!

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34 Jason Bayz April 17, 2017 at 10:42 am

If a city’s population declines, it becomes economical to leave buildings dilapidated. Both Youngstown and Gary have had their population nearly halve between 1970 and 2010. In contrast, Mumbai’s population has more than doubled during that period.

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35 Benny Lava April 17, 2017 at 12:27 pm

would have been nice for Alex to put that in his post.

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36 Bob from Ohio April 17, 2017 at 1:25 pm

“Mumbai is the financial, commercial[24] and entertainment capital of India. ” wiki

Gary and Youngstown are poor, declining cities.

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37 carlospln April 18, 2017 at 3:08 am

Which one do you live in?

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38 Jon April 17, 2017 at 11:12 am

I recall a saying that the after aerial bombardment, rent control is the second most effective way at destroying the housing stock of a city.

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39 A Definite Beta Guy April 17, 2017 at 5:44 pm

I dunno, we nuked Hiroshima and it still seems to be there.

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40 babar April 17, 2017 at 11:34 am

I’d be willing to bet that if you removed property taxes and other mandatory costs to property owners you would end up with a large number of dilapidated buildings in anything but the most booming of cities. a building is a financial option on a city’s economy. if the carry on this becomes very low people would buy buildings and let them stay vacant and wait (even for decades) for the economy to turn around.

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41 anon April 17, 2017 at 2:21 pm

“anything but the most booming of cities”

“wait (even for decades) for the economy to turn around”

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42 Jonny April 21, 2017 at 10:28 pm

This happens if, and only if, it is more profitable to let an apartment stay empty than to rent it out. There are many conditions in which this could happen, more likely in booming towns where future profit may be higher than the benefit minus cost of renting.

There is a more dangerous trick in boomtown, let an old, historical building dilapidate so much it will have to be torn down, and something bigger and more profitable built in its place.

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43 Troll Me April 17, 2017 at 12:12 pm

Interesting case study.

Don’t forget that a 70 year rental pricing freeze is not the same as CPI-range maximum annual increases. That is a “1 is 100” kind of thinking. Or maybe “5 is 100” kind of thinking. In this instance, you could literally calculate the magnitude of the false equivalence, were it presented in a manner of false equivalence.

Somehow the distinction seems likely to get lost along the way for the more hardcore anti-rent control people.

I pose the question: What is right about capital holders always enjoying 100% of the profit from unexpected property value increases, whereas renters always bear the full cost? (Not that interested in “it is because it is” situation, but perhaps “the way it is is just because …”?)

If I had a quarter million dollars 15 years ago (or at least the ability to obtain that amount of credit) I’d possibly be sitting on a million dollar property. Instead I pay double rent. CPI-range increases would have been just and fair (had I stayed in the same place – I cannot sustain any sense of injustice in paying market price at a new location unless there is some context requiring assistance). And, an appropriate regulatory structure can ensure that expected capital maintenance costs are required to be made even if the landlord only gets to enjoy CPI-range increases in cash flows originating from more highly valued properties.

I would consider this Mumbai case study as a strong example regarding the need to have rent control capped (i.e., max increases not lower than) somewhere in the range of CPI inflation, or even better some price indicator more related to the budget structure of those we are presumably most concerned about, i.e., the low-income elderly or otherwise vulnerable more so than the budget structure of the upper middle class. (Like, really, you can ask those people “why not just buy then” – this is not an option when your income level qualifies you for a mortgage for a property the size of a large tent.)

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44 ChrisA April 17, 2017 at 12:28 pm

Thank you Nathan, I was worried there for a while my prediction above would be wrong. Thank goodness you are always here to defend the indefensible.

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45 Troll Me April 17, 2017 at 2:48 pm

I forgot that econ 101 contains all truths in the world, which render my MA in economics worthless.

I should have just read Ann Rand and found some more practical field of study.

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46 The Other Jim April 17, 2017 at 9:56 pm

>I should have just read Ann Rand and found some more practical field of study.

The funny thing is, you think you are kidding… but you are not.

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47 Troll Me April 18, 2017 at 5:09 pm

Do you think Rand would have predicted that a) wealthy landowners or b) paycheck-to-paycheck renters, would be better represented in the political processes which significantly influence the market environment?

48 Slocum April 17, 2017 at 12:51 pm

“What is right about capital holders always enjoying 100% of the profit from unexpected property value increases, whereas renters always bear the full cost? ”

It is right for landlords to enjoy 100% of the profits from property value increases because they face 100% of any losses from declines in rent and property values (as well as costs from unexpected repairs and unexpected periods of units sitting empty). It’s also right because, as a society, we want people to continue to invest in building and maintaining rental property — which they won’t do if we make rental property a crappy investment by capping any gains with price controls.

“If I had a quarter million dollars 15 years ago (or at least the ability to obtain that amount of credit) I’d possibly be sitting on a million dollar property.”

Maybe. But if you’d invested in that imaginary property 10 years ago, you might have lost your shirt (as millions of Americans did who bought at the top of the market before the crash). By renting you were protected from that risk as well as the possibility of being stuck in a declining area with an underwater home that you couldn’t sell.

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49 Troll Me April 17, 2017 at 3:38 pm

first: I’d maybe buy the argument in a world where rent prices go down as often as they go up. We do not live in such a world, and probably will not in any timeframe that’s very relevant for present consideration.

second: the property market did not collapse in Canada during the 08/09 financial crisis.

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50 Slocum April 17, 2017 at 4:52 pm

“first: I’d maybe buy the argument in a world where rent prices go down as often as they go up”

But rent prices can go up even when the value of properties are not increasing and returns on investment properties are lousy. What do you think this did to rents in Chicago and how much of those increases went into landlord’s pockets?

http://www.chicagotribune.com/news/local/politics/ct-chicago-schools-budget-property-tax-hike-met-0825-20160824-story.html

But more to the point, the inflation rate is generally positive, and in a world with a growing economy, the average return on investment of all types is positive after inflation (if it weren’t nobody would invest). There’s nothing special about rental property increasing in value or any special justification for seizing owner’s profits for those investments vs other types. And if you do that, people will redirect their money away from investing in rental housing.

“second: the property market did not collapse in Canada during the 08/09 financial crisis.”

Yes, some real-estate markets were hit hard and others much less so, or not at all. But the ones that got through 2009 unscathed certainly aren’t immune forever. For example:

“Two big banks are waving red flags about Toronto housing prices, calling them “simply unsustainable” and a “bubble” in separate reports.”

And

“Housing prices are not just a problem for people in Toronto and its environs. The growing bubble could soon threaten Canada’s entire economy, TD Bank said in a report Thursday.”

http://www.cbc.ca/news/business/toronto-housing-bmo-td-1.4028032

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51 Troll Me April 18, 2017 at 2:11 am

How about if the interest rate on your mortgage went from 3% to 12% by winter and no one at the Fed cared?

52 kevin April 17, 2017 at 1:19 pm

Except they don’t enjoy 100% of the profit. Just like stocks they pay a capital gains tax for any increase in value when they sell (they also pay taxes on the yearly rent which is in part a function of the market value).

Sure, capital gains tax rates should be higher (and indexed with inflation) and the subsidizing of home ownership through the tax code should be done away with, but that’s a separate issue entirely

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53 Jason Bayz April 17, 2017 at 1:19 pm

“I pose the question: What is right about capital holders always enjoying 100% of the profit from unexpected property value increases, whereas renters always bear the full cost?”

What is right about capital holders always suffering 100% of the loss from unexpected property value decreases, whereas renters always enjoy the full benefit? Now, you may say that property values generally rise, but that is the result of a combination of population growth(which is mostly due to immigration) and restrictions on property development. Mostly the latter. That isn’t market failure, it’s a government policy failure.*

In a country with a stable population and a reasonable policy towards development, i.e. a functioning market, prices for housing shouldn’t be expected to be increasing faster than inflation**, when looking at the economy as a whole.(There will be individual boom towns and bust towns) And if the price of rent in a town did increase, while the renter would bear the “full cost” of an increase in rent, rent would increase for a reason, so the renter would enjoy a better quality city or a boom in employment or an increase in wages, ect.

*I realize this sounds like a libertardian argument, I’m no libertardian and have no objection to things like progressive taxation.

**This is of course a huge generalization which won’t be true in many circumstances, for example, there’s Baumol’s cost disease to consider, along with the effect of urbanization.

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54 Troll Me April 17, 2017 at 3:45 pm

When’s the last time you heard of a rent reduction in any place worth living in?

I would expect that under the conditions you describe, the upside and downside risks would be similar to the extent that generalized rent controls would on average not have a substantial impact on either renters or owners as a group. Under those conditions, then, there is basically no rationale to sustain having a rent control policy, and instead to allow the market to adjust at a more micro level.

Lack of rent controls absolutely would often mean working class people getting kicked out of apartments and having to commute 30 miles every day to get to work. So … landlords do not have that kind of risk.

In present conditions, I think the second situation is more pertinent than the first.

The matter of the 100% downside risk is one thing, so maybe it’s relevant to mention that the landlord will never face a daily 30 mile commute as a result of market rental prices falling by 10% (his downside risk).

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55 BC April 17, 2017 at 4:04 pm

“When’s the last time you heard of a rent reduction in any place worth living in?”

See Detroit, where property values have dropped so much that many owners abandon property rather than pay for maintenance, property taxes, etc. The owner assumes the risk that the neighborhood becomes not worth living in.

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56 Slocum April 17, 2017 at 4:57 pm

When’s the last time you heard of a rent reduction in any place worth living in?

“Manhattan Rents Fall for Every Apartment Size, Even Studios”

https://www.bloomberg.com/news/articles/2017-03-09/manhattan-rents-decline-for-every-apartment-size-even-studios

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57 Arbor Landon April 17, 2017 at 1:28 pm

“I pose the question: What is right about capital holders always enjoying 100% of the profit from unexpected property value increases, whereas renters always bear the full cost? (Not that interested in “it is because it is” situation, but perhaps “the way it is is just because …”?)”

For capital (that is, man-made goods, including the construction of buildings), the answer is utilitarian: if you allow capital holders to enjoy the profits, you’ll end up with more of this capital, which is a positive outcome.

For land (or any other natural resources), this argument does not hold: rewarding land speculation does not result in more land, but rather a more inefficient use of land.

…We’ve got in a terrible situation where “landlord” is a combination of two people: the useful person who develops and administers buildings, and the person who achieves a return on the merely holdings of land.

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58 Jason Bayz April 17, 2017 at 1:47 pm

“For land (or any other natural resources), this argument does not hold: rewarding land speculation does not result in more land, but rather a more inefficient use of land.”

If the price of one parcel of undeveloped land is high, the landowner has the incentive to build a taller(more efficient) building in one part of the land and sell off the remaining land at a higher price.

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59 Arbor Landon April 17, 2017 at 2:39 pm

1) Municipalities rarely accommodate subdivision of parcels
2) Restrictive zoning laws are likely to prevent the building of a taller building
3) Low holding costs will increase the time window for people to hold onto land with low development, hoping for higher return in future
4) Low holding costs increase the likelihood that current landowners will *embrace* restricting zoning laws.

In a place like Japan (with more sane zoning), we see better outcomes―despite low holding costs, we get enough construction to drive prices low. Not the case in America (or much of the world).

Anyway, there are very few downsides with increasing the holding costs to land.

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60 BC April 17, 2017 at 3:59 pm

In buying property or a building, a landlord has effectively pre-paid the property’s lifetime rent at the rental stream’s then market value. When you rent from him, you have only bought the rent for that lease term, e.g., one year. Since you have not committed to buy any subsequent years, you of course do not share in any gains (nor losses) in the market value of those future rental streams. It’s like asking, “Why does only the owner of a share of stock benefit from its appreciation? Why doesn’t anyone that doesn’t own that stock also benefit?”

If you want to completely own those gains, then sign a longer-term lease. If those future rental streams increase in value, then you will gain by continuing to pay the lower rent.

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61 Anon7 April 17, 2017 at 5:31 pm

Why are people who are mere renters entitled to continue to live where they are (if they want relative price stability, then they should be prepared to pay for it)? And one bad effect of rent control is to promote more immobility, or as Prof Cowen would put it, complacency. Retired old geezers living in a locale with more economic growth ought to pay up or move to a cheaper retirement area.

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62 Arbor Landon April 18, 2017 at 12:06 am

But if you own a deed to land, you deserve to play the Dog in the Manger forever.

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63 Bob from Ohio April 17, 2017 at 1:27 pm

Another episode in “India is a really s**tty country” series.

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64 Ray Lopez April 17, 2017 at 1:50 pm

Says Bob from flyover country, LOL.

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65 Anon April 17, 2017 at 3:19 pm
66 Thiago Ribeiro April 17, 2017 at 3:31 pm

A desperate populace seeks refuge in drugs.

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67 Troll Me April 17, 2017 at 3:59 pm

He could have linked to videos of five white American police officers chasing an unarmed black man down the road.

And being nice and not shooting him.

Just until the guy stops running, lays down on his stomach, all limbs obviously prostrate and not of any risk … for those five officers to start kicking and punching him intensively, all five at a time, for a period of time.

Some people would say I’m anti-American to even mention such things. But the reason to mention such things is that it’s a problem that needs to be resolved.

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68 Pshrnk April 17, 2017 at 2:04 pm

THE RENT IS TOO DAMN LOW!

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69 Anonymous April 17, 2017 at 3:33 pm

In Mumbai (Bombay) it is quite common for tenancy rights to go from father to son , and if they give up the rights , they can geta lumpsum payment from the landlord (“pagri”).
And civil court cases can drag on , the wheels of justice grinding exceeding slow…..
http://indiatoday.intoday.in/story/ias-officer-finds-the-guinness-entry-fallacious/1/319546.html

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70 Quite Likely April 17, 2017 at 5:56 pm

Pretty messed up. How about a law mandating a certain level of maintenance, with the penalty for non-compliance of handing the building over to the tenants or to the city as public housing?

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71 Anon7 April 17, 2017 at 9:06 pm

The landlord will justifiably do as little as possible and delay, delay, delay. By the time the slow wheels of bureaucracy get around to taking over the building it will be all but worthless and the renters (or whenever the government gets around to it, which will be about 100 years later if ever) can pay for whatever repairs they’d like, which is what would happen if the renters were paying the market rate in the first place.

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72 Troll Me April 18, 2017 at 2:14 am

You make it so all required repairs can be deducted from rent if the landlord does not follow through on mandatory repairs within the prescribed period.

Very convenient.

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73 Benjamin Cole April 18, 2017 at 12:13 am

Yet in reading Alex Tabarrok, one might conclude that property zoning is okay, or not worth mentioning,

Should not the argument be for an elimination of rent controls and property zoning?

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74 Peter April 18, 2017 at 12:58 pm

Amsterdam. Not long ago, even having bought the whole building (trading separate appartments was made impossible), the owner would still need to qualify for formal permission to live in even a vacant part of it.
Things have improved somewhat – for a while. But rent control and distribution are still there and waiting lists have lengthened – 5 to 7 years now. I would expect some of the old rules back.

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75 Oliver April 21, 2017 at 8:43 am

The story of a bleak house

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