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Economics of rent control don’t add up

Living costs have increased rapidly recently, with housing affordability taking center stage. Higher interest rates have made purchasing a home less affordable, leading many to rent instead, and subsequently, increase rental rates. Activists and policymakers are rightly looking for a solution to this problem. Unfortunately, many have identified rent control as a solution. This proposed “quick fix” has consistently failed in the past, and if enacted, we should expect it to fail in Nevada.

While the intent is admirable, rent control proposals are based upon flawed economic thinking. The prevailing thought is that landlords can charge their tenants whatever they want. While it is true that property owners want to receive higher rents, just as renters want to pay less, the economic reality requires a landlord to compete with other landlords to attract a tenant. A landlord cannot raise the rent and attract a tenant if other landlords are offering equivalent housing at a lower price. In simple economic terms, rents, like all prices, are determined by supply and demand.

If higher rents are erroneously attributed to landlord greed, as rent control advocates often profess, it seems logical to support rent control as a fair way to reduce tenant costs without economic repercussions. However, applying standard supply-and-demand principles shows that legally capping rents produces rental shortages and increased demands — the opposite of the desired outcome. While some tenants may initially benefit from lower rents, making rent control politically appealing and expedient, historical evidence shows that such policies yield negative long-term outcomes.

One such outcome is the inevitable decline in quality housing. Due to forced controlled prices, landlords have little incentive to maintain rental homes. When a tenant asks the landlord to fix something, the landlord not only does not need to act to keep the unit rented, but as revenues decrease, it becomes financially implausible as well. Thus, tenants must pay to fix the problem themselves, effectively increasing the rent, or as is more commonplace, live in disrepair.

Secondly, underground economic transactions predictably occur. When forced to move whether due to a new job, expanded family, illness or the like, instead of forfeiting one’s rent-controlled apartment, some renters choose to “keep” their place and sublet to family or friends at an increased amount, pocketing the difference. These handshake deals further exacerbate the imbalance between supply and demand, and further shrink rental availability.

Thirdly, rent control disincentivizes that which is needed for long-term resolution. The cost of building a new rental unit must be offset by the amount of rent the owner may charge. If unable to recoup costs, there is no incentive to build new rentals, and some rentals are converted to market-rate condominium units and upscale apartments, resulting in yet again, increasing shortages and demands.

We have a wonderful federalist system, where states and localities can experiment with policies. When a state, county or city tries something and it works, others can imitate it. When a trial fails, others can learn. Previous rent control trials have failed so convincingly that more than 30 states prohibit or restrict the ability of localities to implement rent controls. We in Nevada should not join the few states and localities that have not yet learned. We should reject rent control proposals. The key to providing more affordable housing is not rent control, but identifying what can be done to reduce the cost of new construction.

Source:https://lasvegassun.com/news/2024/oct/30/economics-of-rent-control-dont-add-up/