Monday, April 19, 2010

Rent controls in Australia - would they really help the housing affordability crisis?

An Onymous Lefty thinks rent controls are a good idea and would help with the shortage of affordable housing in Australia's major cities. If we are going to have to go down this path, I think tax-payer funded subsidies might be the better way to go.

The further evidence is apparently that 'Andrew Bolt and his readers strongly dislike rent controls.' Generally, a tongue-in-cheek argument that makes for a good rule of thumb. But in this case, I prefer the earlier post about the media laying the blame for expensive housing on migrants.

I'm far from convinced that rent controls are a good answer to housing affordability issues. After all, they're the ECON101 textbook case study for a bad type of market intervention and serious misallocations of resources. Ben Bernanke's didn't like them in his Principles of Microeconomics. The relevant pages are in limited preview in Google Books if you search for rent control. Bernanke and Frank do a pretty good job of pointing out the numerous failings that rent controls have. Here's their classic supply and demand curve for good measure:

 













While there's at least some economic argument that can be made for rent controls, it seems most economists agree that the market inefficiencies of rent controls are unlikely to outweigh the problems. Paul Krugman certainly had his doubts. So I'm a little surprised that this argument is coming from Terry Burke, an academic who holds a B Ec (Hons) and Masters of Economics from Monash University.

We should recall that rent controls have actually been tried in Australia (in both Sydney and Canberra) and don't have a particularly flashy record. They were abandoned first in Sydney and then in Canberra. Robert Albon from the faculty of economics at the ANU carried out an analysis of the effects in Canberra at the time and concluded the following:

Redistribution by rent control was both haphazard and costly. Costs were in the form of foregone surplus and administration. Tenants in Canberra received. a benefit while those in Queanbeyan suffered losses. From an efficiency viewpoint, a subsidy is always preferable to a price restriction as it does not create a discincentive to supply. Such a subsidy would, of course, create an administrative cost and would have to be financed from taxation. It is easier to identify and benefit the most needy with a subsidy, rather than with blanket rent control. The most needy probably ended up paying higher rents in Queanbeyan. Distorted signals in the past are now imposing a cost on Queanbeyan landlords. In a very real sense, Queanbeyan has borne, and is bearing, the costs of Canberra’s rent control. Canberra’s rent control also imposed other costs. Tenants and potential tenants endured search costs. ‘Groups’ and young families were discriminated against by risk-averse, maximizing landlords. All in all, Canberra’s experience with rent control has verified the expectations suggested by simple neoclassical andysis. Further, it could not be said that the stated objectives of the legislation were realized.
 Or, as the RBA puts it in this discussion paper:

These policies can have unintended consequences, both in the housing market directly and in terms of macroeconomic outcomes. Rent controls and other measures designed to support tenants can sometimes work to their disadvantage, as they raise required rental returns to investors and restrict supply. For example, the focus on ‘conforming’ rental property in Canada seems to have resulted in relatively high costs of renting compared with owning and very low rental vacancy rates (Traclet 2005), but very little new supply of apartments (Crook 1998).

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