Rent Control and Limiting Tenant Security Deposits: Still a Bad Idea

April 20, 2020 Updated: April 20, 2020

Commentary

Profits tend to equalize over all industries, setting aside differential risk.

If profits are 50 percent in industry A, 10 percent in B, and minus 20 percent in C, then money will be diverted heavily from C to A. This will drive returns in A down, and boost them in C. This is only a tendency. Perfect equalization is a will ‘o the wisp, but these are strong, indeed, irresistible tendencies.

Unless, that is, government steps in and slows down or even stops this otherwise inexorable process.

Something of the sort seems now to be occurring in residential rental housing. Prices are rising, there are vast shortages in numerous cities, homelessness is on the upsurge, and all too many people who could afford low rentals have been reduced to sleeping in their cars.

Is this all due to some sort of market failure? Not a bit of it. Real estate in other sectors suffers from no such ailment. Hotel space is plentiful. There is no analogy to this crisis as regards retail establishments, office buildings, or factories. Indeed, there is a bit of a surplus in shopping mall square footage as electronic sales have done to supermarkets what the latter did to mom-and-pop groceries a few decades ago.

Why the stark, sharp, indeed, gigantic difference? Isn’t real estate all the same? No. Rent controls have been imposed upon only one type of building, the residential, not other varieties. Imagine if matters were reversed; that is, posit that rent controls were placed on commercial and industrial real estate but not on personal domiciles. Then, the exact opposite would ensue.

Virtually all people would be safely ensconced in affordable rental units, while businesses would be set up in what? Empty lots? Old buses? Campers? Tents? Who knows for sure. We can only deduce from economic principles that this sector of the economy would be in dire straights.

Why is this? Because not only do profits tend to equalize in all types of commercial endeavor, but also this process diverts funds away from property subject to price ceilings. That’s why investors build luxury apartments (which are rarely controlled since rich people are thought not to need the “protection” of rent control), and not those for the impecunious and the middle class.

Builders do no such thing in uncontrolled commercial arenas. There are automobiles for the upper, middle, and lower classes; there are restaurants to fit pretty much everyone’s pocketbook. Ditto for clothes, shoes, groceries, you name it. Thank goodness for the economic freedom that prevails there.

Economic illiterates now want to preclude landlords from asking for two or three months’ worth of security deposits, in order to “help” tenants. Ask yourself if this will encourage more or fewer people to invest in and maintain residential real estate.

Of course, even less money will flow into apartment dwellings when these new initiatives are implemented. More and more of them will be converted into condominiums, office space, anything to escape additional encroachments on the property rights of landlords.

Wide Agreement

Economists often disagree on many issues. We’re a contentious lot. But not on rent controls and other impediments to landlords such as prohibiting them from demanding stiff apartment deposits. This agreement stretches all the way from Nobel Prize-winning economists on the right, such as Milton Friedman and Friedrich Hayek, to those on the left.

For example, in the view of socialist Gunner Myrdal, “Rent control has in certain western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision.”

According to Assar Lindbeck, a Swedish economist on the committee that chooses Nobel Laureates, “In many cases, rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

In support, Vietnamese Foreign Minister Nguyen Co Thach opined: “The Americans couldn’t destroy Hanoi, but we have destroyed our city by the very low rents.”

Sen. Bernie Sanders (I-Vt.) now wants to extend rent control laws all throughout the country. This will only make matters worse. His heart is undoubtedly in the right place, but his understanding of the dismal science is woefully inadequate. He rejects Venezuela as a failed state, but it’s due precisely to the sort of price controls he favors for housing that it’s difficult to obtain toilet paper and beer in that country.

Why is it that people swallow this economic nonsense for rental housing but would see through it were price controls set up for beer or toilet paper? Perhaps this is due to the thought that there’s something unique about “home and hearth.” No. Economic law works the same in all realms of the economy.

Walter Block is the chair in economics at Loyola University in New Orleans. He is also an adjunct scholar at the Mises Institute and the Hoover Institute.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.