How far can rent control recede before it’s completely pointless?
After a string of humiliating defeats, the old joke had it that the French army’s tanks had one forward gear and five reverse. A similar thought comes to mind when reading Professor Hugh Grant’s “Analysis of Manitoba’s Rent Regulation Program,” a short paper commissioned by the provincial government. In it, he defends provincial rent regulations by arguing that they don’t actually lower the long term price of rental housing. He even claims that the current policy encourages land lords to charge more rent and invest it in property construction and maintenance.
Confused? I quote: “…there is no evidence that rent regulations have restricted rents below what would prevail in a perfectly competitive market.” “[R]ent regulations in Manitoba are unlikely to have a measurable impact on new construction.” And “To the extent that rent regulations have a bearing on the quality of rental housing, the contribution has been positive rather than negative.” Because “rehabilitation programs extend exemptions from regulations ranging from 2 to 5 years…” and “When a landlord undertakes capital expenditures on a rental unit, the rent is allowed to increase.” Adding to the confusion, Manitoba’s policy does not apply to buildings under 20 years old, or units renting over $1,120 per month. Rent can increase any amount between tenants. This is not conventional rent control.
Absolute rent control certainly would result in all the usual complaints that have made it so unpopular: Insufficient returns for landlords, scarce new building of rental property, shortages of rental accommodation, crowding, poor maintenance, and ultimately abandonment of dilapidated buildings. At least that’s the view of 93 per cent of respondents to a survey of 464 professional economists who agreed with the proposition: “A ceiling on rents reduces the quantity and quality of housing available.” Swedish Economist Assar Lindbeck was more direct: “…rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” However, Manitoba’s policy doesn’t really control rent in the way that most people think it does.
All of which leads to quite the puzzle. Rent control can’t and never has worked, and Manitoba cities don’t really have it. Why, then, is the provincial government commissioning studies whose author is nonetheless determined to defend it? Grant answers that changes in market demand for rental accommodation can happen relatively quickly, whereas building new rental housing takes years. Sudden rent rises while demand temporarily outstrips supply. And so, Professor Grant concludes, “Rent regulations…primary role is to increase the security of tenure while maintaining market incentives governing supply. Manitoba’s rent regulation program is well designed to accomplish this goal.”
In other words, Manitoba’s rent regulations have maintained rents at rates high enough to ensure adequate supply in the long run, but smooth out nasty jolts in rental rates in the short run. All of which would be well and good, except in 39 pages, Professor Grant doesn’t quite manage to show that provinces without rent control have more volatile rents than Manitoba. He comes close, showing the level of variation in Manitoba’s rents, but fails to actually put up a comparison.
Even if Manitoba’s current policy has achieved the stabilisation Grant claims for it, there is a logical problem with the claim. Grant is correct in saying that rents can rise faster than new units can be built, but stimulating more housing development is only one of the market responses to rent rises. There is also a shorter term response (in non-rent controlled markets) in which people with under-occupied housing tend to economise by moving to smaller accommodation or taking in boarders. Such responses act in the short term to ease housing shortages, but Grant celebrates that Manitoba’s policy protects incumbent renters from these price signals. Paul the incumbent renter’s payoff is merely Peter the apartment hunter’s robbery.
Altogether Professor Grant’s paper is a retreat from rent control with which even the mythical French tanks would struggle to keep up. He concedes that rent control doesn’t work and that we don’t have it in any meaningful sense anyway. He claims that rent control brings stability to existing tenants without proving it really does so, or considering how that protection for incumbents means exclusion for apartment hunters.
If this is the best justification that a government staunchly in favour of rent control can commission, one wonders why we should have the policy at all.
ERRATUM: This article states that rent can increase by any amount between tenants. This is correct for units in buildings with less than three units, however for buildings with four or more units the increase cannot raise rent beyond the prevailing rate for comparable units in the building.