Why are economists against rent control?


If most landlords are individuals (there is no monopoly) and tenants have a lot of information thanks to real estate portals (there is no opacity), he reasons, there is no need to intervene. “It is impossible to play god by setting prices,” he says. Simplifying, the mantra is that price control reduces supply (many owners stop renting and sell their apartments) and consequently raises prices. It is the same warning that was given in April with the masks (and in the end there were enough and cheap masks for everyone).

“In any case, it refers to ads, not to apartments already rented,” assesses Jaime Palomera, doctor in economic anthropology and spokesman for the Sindicat de Llogaters, promoter of the Catalan law. “We will have to see if it is a coordinated action of the agencies waiting for the Constitutional Court to overturn the law”.

In California, three Stanford economists published a study in 2019 using data on where people lived between 1980 and 2016. They combined them with transaction data, buyers and sellers, to distinguish between homeowners and renters. The former they bought from Infutor, which sells addresses to businesses.

Open bar 49′ 16/4/21

This is not to mention the increased propensity for “side payments,” i.e., money in the black. “The need to pay bribes to gain access to housing or having to take on maintenance that in the absence of controls would have been provided by the landlord can offset the apparent gains of controlled housing occupants,” he details.

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However, despite all the adverse impacts, he points out that the effects of rent controls should not be assessed in a generic way, but rather on a measure-by-measure basis. “At the end of the day, freezing payments to landlords is not the same as allowing rent increases in line with inflation, increases in certain expenses, exempting newly built homes, or allowing price adjustments once the tenant vacates,” he says.

Under this model, rents are controlled during the tenancy, since the amount that the owner can increase the rent is limited, but he is then free to negotiate it with the new tenant, a “safety valve” that would avoid the adverse effects mentioned above. Thus, the expert argues that these controls represent “a reasonable compromise between those who reject regulations and those who advocate them”.

Advanced Filter with Many Criteria in Excel – Dostin Hurtado

However, although rent price controls can help renter households to reduce their costs and alleviate their financial situation, the effectiveness of this type of measures in facilitating access to housing is doubtful to say the least, and there is in fact a broad consensus among economists on the ineffectiveness of this practice (Alston, Kearl, Vaughan, 1992)[5].

In relation to the employment status of households, we find higher ratios of residence in rental housing for those whose reference person is an unemployed worker or who are in a temporary employment situation (27’8% and 37’3%, respectively, compared to almost 20% of permanent and self-employed workers in 2018) (López-Rodríguez and Matea, 2019).

While, as we have seen, the demand for housing rental has grown considerably, its supply has not done so in the same way, despite the increasing profitability of residential rental and its attractiveness as an investment vehicle, in a context of low yields in other assets; and despite the fact that new specialized operators have entered the market.

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Profit and Loss Statement (P&L) step by step

A few weeks ago, the Government of Pedro Sánchez reached an agreement with Podemos for the 2019 Budget. One of the star points was the decision to “put a ceiling on the abusive rise in rental prices in certain areas”: specifically, it was proposed to grant municipalities the power to impose price controls on the rental housing market in those areas considered “stressed”. Pedro Saura, Secretary of State for Infrastructure, Transport and Housing, reiterated a few days ago his intention to impose a price control system. Ada Colau, the mayor of Barcelona, was quick to celebrate the announcement of the measure and to get down to work; likewise, the mayor of Madrid, Manuela Carmena, on the same day of the announcement also set the bureaucratic machinery in motion to start working on the imposition of rent controls.

Why is there such a broad consensus that rent control is an aberration? Economists Tyler Cowen and Alex Tabarrok, for example, summarize the perverse effects of this policy in five broad points.