What Would Happen If We Lifted Rent Controls?

Commentary, Housing Affordability, Frontier Centre

Of all the lessons we can draw from the dreary subject of economics, the clearest of all is that price controls cause shortages. Remember stagflation, and OPEC’s hey day a generation ago? As soon as the American government decontrolled the price of petroleum, in the early 1980s, line-ups at gas pumps disappeared and the cartel’s power to gouge consumers lost most of its sting.

That phenomenon was easy to measure, but micro-economies – the interactions of goods and services at a neighbourhood level – are not. Every local market is different, and comparisons across boundaries fraught with anomalies. One of the commodities that resists coercive proof is the housing market. We know that cities that control rents usually experience shortages, for instance, but Winnipeg scraped along until recently thanks to a large existing stock, and its static population. In the mid-nineties the vacancy rate was 6% but today it’s only 1%. The price is social pain and lost economic growth, for example, no places for the immigrants or refugees that are eager to work here. Meanwhile, rent control blocks the biggest opportunity to capitalize on the city’s stunningly unique downtown – as a place to live.

The Manhattan Institute, an independent New York-based think tank, has released a study that measures the effects of lifting price controls on rental units. Its conclusion, that this single policy reform would increase investment in multiple housing – both the construction of new units and the renovation and repair of existing ones – on the order of 20%, has important implications for Winnipeg.

The city studied was Cambridge, Massachusetts, population 100,000, just north of Boston. Its experience with rent controls has striking parallels with Winnipeg’s. Demographically similar, with a broad mix of rich, middle-class and poor neighbourhoods, and likewise abundantly supplied with previously constructed rental units, Cambridge imposed controls in 1971, around the same time Winnipeg did.

They were also politically popular creating more winners than losers. A lot more votes can be swayed by arguments against repeal, with protection of the poor and elderly providing the demagogic trump card. Our “free enterprise” party, the Progressive Conservatives, had eleven long years to repeal them, but lacked the nerve. Cambridge would have kept rent controls, too, but in 1994 was forced to repeal them by a state-wide referendum.

The Manhattan Institute’s analysis of the consequences is concise but ground-breaking. The author, Henry Pollakowski, an MIT-based scholar, and the founding editor of the Journal of Housing Economics, shares the caution common to his profession and takes extraordinary steps to protect the integrity of his conclusions. He tries to answer a simple question: did rent deregulation by itself lead to significant new investment in rental housing?

To get the answer, he applied an econometric model containing the most complete information on building data ever assembled for this purpose, with detailed descriptions of locations and characteristics of individual buildings. Into this mix, he fed records of building permits issued in Cambridge between 1993 and 1998, of the City’s detailed history of previously controlled units and of property value assessments from 2002. Where discrepancies occurred, the accuracy of the data was verified by on-the-ground visits.

All this information provided the expected conclusion: post-control investment in housing went way up. But the Boston area was in the midst of a general economic boom during that period. How much of the new activity could be attributed just to deregulation?

Pollakowski’s method of solving that problem is technical and inaccessible to non-economists, but he was able to exclude other factors by applying mathematical regressions to four different variables that accounted for income and employment levels. He also feared that large, new construction projects would skew his results, so he tossed them out. The result is a very conservative estimate of the benefits of removing rent control.

He summarizes it in these words:

“Examining investment in previously rent-controlled buildings, we find that [it] increased by approximately 20 percent over what would have been the case in the absence of decontrol. Furthermore, we find significant investment increases were not confined to existing high-income neighborhoods, [but] increased in a large variety of settings¯neighborhoods varying in income level, by structure type, and by concentrations of previously rent-controlled buildings. . . . These investment gains could also lead to neighborhood “spillover” effects as owners of property proximate to buildings experiencing a new investment feel comfortable making additional investments themselves.”

These are useful findings for Winnipeg, whose inner city housing continues to decline precipitously despite patchwork subsidies and where not one new unit of traditional apartment housing has been built for many years. We need not blindly accept this downward spiral and a steady collapse in the quality and value of multiple housing.

Cambridge was allowed a special threshold for low-income tenants like the elderly and disabled, to protect them from rent spikes with one- or two-year extensions. The option of using need-tested vouchers to top up rent budgets for the poor also provides protection without destroying the housing market.

These are better options for protecting the vulnerable than rent control. That an explosion in new investment would follow repeal is a proven fact, thanks to the Manhattan Institute.