Bomb Bay Doors Open

Dr David Law
Insights Newsletter
30 April, 2021

The government’s new housing package, announced in March, will increase rents, and reduce the supply of rental accommodation to the detriment of many.

Pressure to intervene in the rental market is already mounting. Green Party MP Chloe Swarbrick recently suggested that rent controls should be considered. Having previously been an advocate the Finance Minister is not ruling them out.

This is one of those rare instances where economists agree – rent controls are a terrible idea. In a 2012 survey of top economists, 95% either disagreed or strongly disagreed with the assertion that rent controls have had a positive impact on the amount and quality of rental housing.

A new report from The New Zealand Initiative surveys the evidence and outlines the reasons why rent controls must be avoided. Theory and empirics overwhelmingly agree.

Rent controls reduce the supply of rental accommodation, create shortages and queues. Rental accommodation is sold off or converted to alternative uses.

The problem is exacerbated if new supply of rental accommodation is also reduced. Developers may be less inclined to build new housing, even when new buildings are not subject to existing regulation, as the possibility of future profit-curbing legislation makes building new residences less appealing.

Rent controls can also lead to a decline in the quality of rental accommodation.  If landlords cannot recoup their costs by raising rents, they may not invest in maintenance.

Mobility is reduced and a mismatch between tenants and rental accommodation ensues. Once a tenant has been able to secure rent-controlled accommodation, they may not want to move in the future, even if their housing needs change, since they would need to give up their rent control and pay more. Families end up in small apartments while empty-nesters live in large homes they do not need, and people do not move to take up better employment opportunities.

Also, they destroy the value of properties that are rent-controlled and that of neighbouring housing. Affected neighbourhoods become less desirable places to live.

On top of that, rent controls do not even help those who need it the most. Evidence suggests that it is older and higher income tenants who benefit the most from rent controls.

Economist Assar Lindbeck famously said “In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing." Let us make sure we do not prove him right – again.

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