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23-04-2007

Rent control doesn't help the poor

As an answer to a question to her column, Mary Holm writes the following on the subject of controling rents.

If the price of bread did rise, I'm sure new bakers would enter the market promptly, offering a cheaper product.

In the same way, we must let market forces set rents. Rent control is another one of those nice ideas that does more harm than good.

'Economists are virtually unanimous in the conclusion that rent controls are destructive,' says US economist Walter Block.

And it's not just right-wing economists. Block quotes Nobel laureate Gunnar Myrdal, a Swedish left-winger, as saying: 'Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by Governments lacking courage and vision.'

Another Swedish economist and socialist, Assar Lindbeck, goes even further. 'In many cases, rent control appears to be the most efficient technique presently known to destroy a city - except for bombing.'

How come? If we limit the rent landlords can charge, fewer people will invest in rental property and there won't be enough rental housing to go around.

What's more, those who stay as landlords will feel less obliged - and less able - to maintain their properties.

In one study, 29 per cent of rent-controlled housing in the United States had deteriorated compared with 8 per cent of uncontrolled housing. The numbers are similar in England and France.

'Rent control has destroyed entire sections of sound housing in New York's South Bronx,' says Block. 'It has led to decay and abandonment throughout the entire five boroughs of the city.'

Another point: in a typical rent control scheme, landlords can raise their rents when tenants leave.

They've got to cover their rising costs somehow. This leads to tenants staying in housing that no longer suits them.

Block writes of the 'old lady effect'. A large family may rent a house, then all the children grow up and leave and the husband dies. But the wife stays on, because the rent is cheap. What a waste, especially given the shortage of housing under rent control.

Other results include the politically connected benefiting, while others queue up for accommodation. Block said former New York Mayor Ed Koch at one point paid US$441 a week for an apartment worth about US$1200.

Ironically, the economist adds, if a Government wanted to help the poor and it insisted on using rent controls, it would do better to control only luxury units.

Builders would then concentrate on cheaper units, which would be more in demand from landlords because they were not controlled. This would boost the supply of cheaper units which, in turn, would lower rents.

Block concludes: 'It may seem paradoxical to many people that the best way to help tenants is to grant economic freedom to landlords. But it's true.'

If you want further evidence that trying to control prices doesn't work, look no further than our own history of wage-and-price controls under Sir Robert Muldoon's Government.

While there's no doubt the free market can be too harsh on some people, intervening generally doesn't work.

New Zealanders who can't afford to pay for their accommodation now get Government support. That may not always work as it should. But let's concentrate on fixing that and leave the market alone.

NZHERALD

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