5.2 Rent Controls: A Case Study of Price Ceilings

Question 1

Why does a shortage of rental housing occur when rent control is implemented?

Answer 1

There will be a shortage of rental housing because quantity demanded will exceed quantity supplied. Since rents are held below their free-market levels, the available quantity of rental housing will be less than if free-market rents had been charged.

Question 2

What does a shortage in rental accommodations lead to?

Answer 2

The shortage will lead to alternative allocation schemes. Landlords may allocate by sellers’ preferences, which may include (illegally) allocating the rental units on the basis of gender, religion, or race. Alternatively, government may intervene by using security-of-tenure laws, which protect tenants from eviction and thereby give them priority over prospective new tenants.

Question 3

What are some ways a Black Market in rental accommodations may manifest in the face of rent control?

Answer 3

Black markets will appear. For example, landlords may (illegally) require tenants to pay “key money” reflecting the difference in value between the free-market and the controlled rents. In the absence of security-of-tenure laws, landlords may force tenants out when their leases expire in order to extract a large entrance fee from new tenants.

Question 4

What kinds of products are price controls generally applied to?

Answer 4

The unique feature of rent controls, however, as compared with price controls in general, is that they are applied to a highly durable product that provides services to consumers for long periods.

Question 5

What is the short run supply response to rent control?

Answer 5

The short-run supply response to the imposition of rent controls is usually quite limited. Some conversions of apartment units to condominiums (that are not covered by the rent-control legislation) may occur, but the quantity of apartments does not change much.

Question 6

Is the short run supply curve for rent control elastic or inelastic?

Answer 6

The short-run supply curve for rental housing is quite inelastic.

Question 7

What is the supply response to rent control in the long run?

Answer 7

In the long run, however, the supply response to rent controls can be quite dramatic. If the expected rate of return from building new rental housing falls significantly below what can be earned on other investments, funds will go elsewhere. New construction will be halted, and old buildings will be converted to other uses or will simply be left to deteriorate.

Question 8

Is the long run supply curve elastic or inelastic?

Answer 8

The long-run supply curve of rental accommodations is highly elastic.

Question 9

What is the source of the supply shortage in the short term of rent control?

Answer 9

Indeed, most of the shortage comes from an increase in the quantity demanded rather than from a reduction in quantity supplied.

Question 10

Why is the source of the rental shortage in the long run of rent control?

Answer 10

As time passes, however, fewer new apartments are built, more conversions take place, and older buildings are not replaced (and not repaired) as they wear out. As a result, the quantity supplied shrinks steadily and the extent of the housing shortage worsens.

Question 11

Along with the growing housing shortage comes an increasingly inefficient use of rental accommodations. Describe this inefficiency

Answer 11

Existing tenants will have an incentive to stay where they are even though their family size, location of employment, or economic circumstances may change. Since they cannot move without giving up their low-rent accommodation, some may accept lower-paying jobs nearby simply to avoid the necessity of moving. Thus, a situation will arise in which existing tenants will hang on to accommodation even if it is poorly suited to their needs, while individuals and families who are newly entering the housing market will be unable to find any rental accommodation except at black-market prices.

Question 12

This growing housing shortage led the Ontario government to loosen rent controls in two ways. What were they?

Answer 12

First, housing units built after 1991 were exempted from rent controls. Second, landlords were permitted to increase the rent as much as they saw fit but only as tenants vacated the apartment.

Question 13

What did supporters argue in the face of Ontario loosening rent control?

Answer 13

Supporters argued that a loosening of controls would encourage the construction of new apartments and thus help to reduce the housing shortage.

Question 14

What did Critics argue in the face of Ontario loosening rent control?

Answer 14

Critics argued that landlords would harass existing tenants, forcing them to move out so that rents could be increased for incoming tenants.

Question 15

Who benefits the most from rent-controlled accommodations?

Answer 15

Existing tenants in rent-controlled accommodations are the principal gainers from a policy of rent control. As the gap between the controlled and the free-market rents grows, as it would if housing demand were growing relative to supply, those who are still lucky enough to live in rent-controlled housing gain more and more.

Question 16

Why do landlords suffer when it comes to renting control?

Answer 16

Landlords suffer because they do not get the rate of return they expected on their investments. Some landlords are large companies, and others are wealthy individuals. Neither of these groups attracts great public sympathy, even though the rental companies’ shareholders are not all rich.

Question 17

Why do future renters suffer when it comes to rent control?

Answer 17

The other important group of people who suffer from rent controls are potential future tenants. The housing shortage will hurt some of them because the rental housing they will require will not exist in the future. These people, who wind up living farther from their places of employment or in apartments otherwise inappropriate to their situations, are invisible in debates over rent control because they cannot obtain housing in the rent-controlled jurisdiction.

Question 18

Why is rent control often stable politically even when it causes a long-run housing shortage?

Answer 18

Thus, rent control is often stable politically even when it causes a long-run housing shortage. The current tenants benefit, and they outnumber the current landlords, while the potential tenants, who are harmed, are nowhere to be seen or heard.

Question 19

How is rent control meant to protect lower-income tenants?

Answer 19

Most rent controls today are meant to protect lower-income tenants, not only against “profiteering” by landlords in the face of severe local shortages but also against the steadily rising cost of housing.

Question 20

What is the market solution to rent control? What are the consequences of this solution?

Answer 20

The market solution is to let rents rise sufficiently to cover the rising costs. The higher rents, however, will force some people to make agonizing choices, both to economize on housing and to spend a higher proportion of total income on it, which mean consuming less housing and less of other things as well.

Question 21

What are the consequences of binding rentcontol?

Answer 21

Binding rent controls create housing shortages. The shortages can be removed only if the government, at taxpayer expense, either subsidizes housing production or produces public housing directly.

Question 22

What is an alternative solution the government could make instead of rent control?

Answer 22

Alternatively, the government can make housing more affordable to lower-income households by providing income assistance directly to these households, thereby giving them access to higher-quality housing than they could otherwise afford.

Question 23

What is it important to recognize regardless of what policy the government decides to adopt to deal with housing?

Answer 23

Whatever policy is adopted, it is important to recognize that providing greater access to rental accommodations has a resource cost. The costs of providing additional housing cannot be voted out of existence; all that can be done is to transfer the costs from one set of persons to another.