Rent control is not the answer

by Zain Jaffer

An August 2024 Newsweek article [https://www.newsweek.com/javier-milei-rent-control-argentina-us-election-kamala-harris-housing-affordability-1938127] reported that when incumbent Argentina President Javier Milei removed rent control, the available housing supply skyrocketed. Milei basically allowed landlords to freely negotiate with potential renters and allowed the market to dictate the rental rate.

This is the right way to do it. Populist politicians seeking votes love to make campaign promises to enact rent control laws that actually make things worse. In addition, except for real estate development loan rates which are indirectly set by the Fed, real estate issues like these are really more local than national.

The cost of debt is also expensive these days, which also contributes to the problem. Most real estate projects, such as rental properties, are financed by debt. Interest rates these days are still high, and very few developers are able to get the debt capital they need to proceed on their planned projects.

City land is also expensive, especially in downtown areas. Plus there are often too many restrictions. If a property is zoned as a commercial or retail site, it will have to be rezoned by the City or Town Councils to become a mixed use or residential property before it can even host a rental housing property. Or areas in the outskirts of town can be released for housing development.

The problem is if you enact rent control laws, a large segment of the potential rental properties get taken off the market. Property owners feel that for the stress, risk, and property wear and tear they incur, it may not be worth it to sign a tenant for a wrong low price. It is an answer that is too easy to announce but often does not work except in abusive situations.

Hence what results is a shortage of rental properties. This results in a situation where too many potential renters chase after too few available rental properties with a rent control law in place. So the situation just gets worse.

The real fix is to have a healthy ratio of rental property supply to demand from prospective property renters. If there is an oversupply of rental properties, it is also bad as many properties will remain vacant. So the key is to monitor the demand and supply situation and address any huge gaps.

The pandemic, the movement of jobs and industries, and some social issues caused some migration patterns across the US such as the movement of people from California to Texas. For example, the recent move by the California legislature to pass a law that prevents parents from being informed if their minor children want to avail of gender reassignment surgery has already caused high profile companies such as Elon Musk’s Space X and Twitter/X to move to Texas [https://www.bbc.com/news/articles/c1vd097z7rvo].

Migration patterns like these can cause imbalances, sometimes huge, in rental housing supply and demand ratios. If huge numbers of people move out of state, then the rental property owners in that state could see a loss of renters and more vacancies. Rental property owners in states where large numbers of people move will see increased demand.

The problem is that city councils are too slow because of outdated laws that prevent the speedy construction of rental properties when needed.

If these laws can be relaxed for cities experiencing a shortage of rental housing, and debt interest rates come down, then the supply situation can be remedied faster. Market dynamics take over and rental rates should come down - not because of an artificial ceiling, but because a lower rental rate prevails due to increased supply.

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