Bombs away

Dr David Law
Insights Newsletter
7 May, 2021

Last week, The New Zealand Initiative released a paper outlining the perils of rent controls. It was fun to reminisce about our first year of economics study.

Subsequently, we learnt that the Housing Minister had requested advice from officials on rent controls. The Green Party has released a discussion document on “Reasonable Rents”, extolling their virtues. And, I debated a representative from Renters United on Radio NZ on the merits of rent controls.

Bypassing countless peer-reviewed studies highlighting the failures of rent controls, the Greens and Renters United both found the same blog that says they are not so bad after all. Unfortunately, the blog’s author, J. W. Mason, is clearly confused.

Mason says the standard economic model of rent control fails in the real world.

First, some studies show rent controls were effective at holding down rents on rent-controlled accommodation. But this is predicted by the model and is news to no one. Rent controls set a maximum rental price below the market clearing price – prices must fall for affected rental accommodation.

Second, Mason points to studies which find limited effects on the overall supply of housing. But what Mason forgets is that the model is about the rental market. It predicts the supply of rental accommodation will fall, not that total housing supply will fall, although it may well do. The papers Mason cites himself do an excellent job of showing rent controls reduce the supply of rental accommodation and that the standard economic model of rent controls stacks up.

Rent controls are a brilliant lesson in policy failure. The intent of rent controls is to lower rents, but the outcome is to reduce the supply of rental accommodation leading to shortages and queues. Quality drops, mobility falls, and a mismatch between tenants and rental accommodation ensues. Rent controls can even make inequality worse and push rents up on uncontrolled accommodation.

Unfortunately, even if sense prevails on rent controls, there are plenty more terrible policy interventions to choose from. The Treasury has recommended advice be provided to ministers on both stamp duties and a deemed rate of return for investment properties.

Stamp duties are a tax on the sale of houses. Among their worst effects, they reduce mobility of homeowners – disincentivising people to move for better jobs or when their housing needs change. With the tax on tenants package, announced in March, it is clear another important lesson from first-year economics has been missed. You tax things you do not want, not things you do want – unless of course the real objective is to raise tax.  

As for deemed rate of return on investment property - to the extent this keeps rents below market rates, as intended, we can expect similar outcomes as more conventional rent controls, albeit with higher administrative costs.

I had better end things here. I have an appointment with some flat-Earthers.

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