No, rent control does not work — it actually benefits the rich and hurts the poor

uk.businessinsider.com | 

“Rent control actually drives up the price of most rents by restricting the supply of new units onto the market. While some renters may get a bargain, most people never get access to rent-controlled flats. Once people move into a rent-controlled place, they are incentivised to never move out, because it is so cheap.

That removes a huge chunk of available housing from the market. Demand for new housing remains the same, but now the supply of new housing is reduced. So prices everywhere else go up.

Under rent control, landlords and property owners know not to create any new housing units that fall under rent control, because they won’t be able to maximise their investment. So they build as few units as possible in that category.

None of this stops the luxury real-estate developers, however. A luxury real estate financier in London told me recently that his clients love London’s “social housing” rules because his developers are able to either fake the paperwork necessary to get around it or make one-off cash payments to the local council in lieu of building social units.

The result is that developers build only high-end units for the luxury market, because there is no money in creating affordable housing if landlords can never raise the rent. Developers get rich. And rich people get all the best new housing.

In turn, this magnifies an already bad situation for the not-rich: By definition, every luxury unit built is a more modest unit not being built.

The Financial Times has a nice theoretical chart illustrating how this happens:

rent control

The line P* represents the price where demand completely meets supply. P** is the price where demand completely meets supply at an artificially enforced lower level. Anyone who can get a house at P** is lucky. But the supply of available units there is now much lower. All the people who fall into the gap between P** and P* are those who would normally have been able to get place to live but now cannot. (Those willing to pay more can live wherever they want — because there is excess supply at high price points in the top-right section of the chart.)

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