How bad is rent control when housing supply is artificially restricted by law?
Many of you have been asking me about this NYT article on the pressures for rent control in Silicon Valley. If no (or few) new apartment blocks will be built anyway, what is wrong with rent control in that setting?
One effect is that rent control will limit the incentive for prospective builders to fight to overturn current building restrictions.
A second effect of rent control is that it will lower the quality of the apartment stock. This outcome has some second best properties, since a lower-quality, lower-price selection of apartments is probably what the market would have delivered under freer conditions. Still, quality will fall in inefficient ways. For instance sizes of apartments already are given, so landlords will cut back on maintenance. Rather than well-maintained but smaller apartments, we will see overly large but run-down abodes.
At rent-controlled prices there will be excess demand for apartments. The “plums” will go to those who bribe, those who are well-connected, those who are skilled at breaking the law, and, to some extent, those who have low search costs. The latter category may include well-off people who hire others to search for them.
So overall I still don’t think this is a good idea. Even if the current housing stock is fixed, rent control probably will create costs in excess of its benefits, and without significantly desirable distributional consequences.
Addendum: In the comments, Kommenterlein adds: “The rental housing stock isn’t fixed – it will decline rapidly with rent control as rental apartments are converted into Condos and sold at market prices.”