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Saturday, August 30, 2008

Rent Control

Rent control is theft because the property owner is prevented from charging the fair free market rent for his property. *HOWEVER*, the rent control is already factored into the property price when the landlord bought the property. Repealing rent control would be a windfall profit for the property owner.

The primary victim of rent control is someone who is trying to rent an apartment. A would-be renter is forced to pay higher prices, due to the supply of apartments tied up in rent control.

In most rent control jurisdictions, new construction is exempt from the rent-control law. The rent control law benefits people who build new apartments, because the rent of non-rent-controlled apartments is artificially high.

In a *FREE* market, rent is not theft. If I invest in an apartment building, paying the fair free market price for capital, then I should be allowed to earn the fair free market rate of return. The problem is that the State distorts the capital market.

In the present, landlords receive a massive Federal Reserve interest rate subsidy. Suppose a landlord puts up $1M to buy an apartment building worth $10M, borrowing $9M from a bank. The interest rate on the loan will typically be around 6%, while inflation really is 15%-30%. The landlord's ownership claim to the property is not legitimate, because his property purchase was subsidized by the State.

In rent-control jurisdictions, the rate the landlord is allowed to increase his rent is still typically larger than the interest rate charged on his loan, yet still less than true inflation. For example, the landlord pays 6% on his mortgage, gets rent increases of 7%-8%, while inflation is 15%-30%. The apartment was still a sound investment.

For a rent-controlled apartment, *NEITHER* the landlord nor the tenant have a legitimate ownership claim. The landlord's ownership claim isn't valid, because he received a State subsidy to fund his purchase. The tenant's ownership claim isn't valid, because he's paying less than the fair free market rent. If I were the judge in a free market court, I would rule that a former rent-controlled apartment is *UNOWNED*!

I know someone who lives in a rent-controlled apartment. I pointed out that, if he could sell his lease to me and I could move in, that benefit would be worth something like $100k-$200k or more, depending on how much less his rent was than the fair free market rent. Living in a rent-controlled apartment, the incentive is for him to not move. If he moved, he would be giving up this massive State subsidy of his living arrangements. When he moved in, he had to pay a large broker fee (bribe) to get a rent-controlled apartment.

I heard a story of a hedge fund that purchased a rent-controlled apartment complex. The hedge fund sent frivolous eviction notices to a lot of people, claiming that wasn't their primary residence and they were ineligible for a rent-controlled apartment. For example, if someone else with the same name as a tenant owned a property, then the tenant would be accused of having a second residence. The tenants had to hire lawyers to defend their apartment; the hedge fund paid a lot less per eviction notice than the tenants paid defending themselves. Even if the tenants won in court, they didn't recover their legal expenses. Even if only 1%-5% of the tenants are evicted, this was a huge profit for the hedge fund; after eviction, the hedge fund can charge the fair free market rent.

When I was interviewing for college, I interviewed with a recent Princeton graduate. He was living in a rent-controlled apartment that he inherited from his grandmother. Most rent-control laws allow apartments to be passed from parents to children. A recent Princeton graduate probably had a very high-paying job; it was immoral for him to live in a rent-controlled apartment. However, if he moved out, then his landlord would receive an unearned windfall!

Rent control creates an adversarial relationship between landlord and tenant. The landlord isn't allowed to charge the fair free market rent, so the incentive is for him to do the minimum maintenance possible. In rent-controlled apartments, the furnace typically breaks on the coldest day of the year; by law, the landlord has 48-72 hours to fix it, and he takes the full 48-72 hours. By avoiding heating costs on the coldest days of the year, the landlord improves his profit margin.

*ANY* government action is theft. Rent control is a tricky issue, because neither the landlord nor the tenant are legitimate owners of the property. If you're paying the fair free market rent, then I do recognize the tenant as the legitimate owner; the landlord received a massive State subsidy for his purchase, but the tenant is the valid current occupier. When the State collapses, the current legitimate occupier of property becomes the owner.

Rent control laws didn't become popular until after the USA abandoned sound money. When the money supply started being inflated, rents started rising. However, workers' salaries typically rise less than the rate of money supply inflation. Rather than having a lot of people get evicted from their apartments, rent control laws were passed. The blame for rising rents is placed on greedy landlords or greedy tenants. An unfair monetary system is never blamed for price inflation.

In a free market with sound money, rents should be stable. As the population increases, rents would rise slightly. However, as there is new construction, rents would decline; rising rents would be an incentive to build. The net effect should be stable prices. State manipulation of the market, especially money supply inflation, prevents the natural equilibrium from occurring. There is legitimate hostility towards landlords; by using leverage and negative real interest rates, landlords receive a massive State subsidy.

1 comment:

barry b. said...

Hey FSK,

I read Thomas Sowell's 'A citizens guide to basic economics' and rent control is one of the first socialist fantasies he destroys. To sum it up; rent control is the best way to destroy the housing of any city or country...

Rent control can do more damage to a cities housing than war - and make the recontruction even more difficult.

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