Rent Control Causes Housing Problems

On Tuesday, June 3, 2008, I voted in the California Statewide Election. The results are online now at the Secretary of State’s website. For the U.S. Congress, District 26 voted for Russell Warner over Cynthia Matthews on the Democratic side, and David Dreier over Sonny Sardo on the Republican side. Walnut is in the 26th Congressional District, along with Arcadia, Claremont, and La Canada Flintridge. For the State Assembly, voters selected Curt Hagman over Larry Dick for the Republicans.

I am most disappointed that Prop 98 failed. Propositions 98 and 99 were voted on in this election. Prop 98 failed, with 38.8% Yes and 61.2% No votes. Prop 99 passed, with 62.3% Yes and 37.7% No (source). These results are very discouraging to me; it seems like voters really preferred Prop 99. If I’d had time and some encouragement to do so, I’d have promoted Prop 98.

However, in Los Angeles County— my county– we had a % Turnout of 17.5% in this election. That’s pitiful. The only county in California with a lower turnout is San Bernadino at 16.5%. I don’t care if you’re apathetic. You must vote. If you don’t vote, I have absolutely no respect for you.

In this case, my guess is that people wanted to vote for the status quo. They might claim otherwise, but they’re actually happy with the way things are.

A 2005 U.S. Supreme Court ruling held that the power of eminent domain can sometimes be used to transfer property from one private owner to another private owner. Props 98 and 99 were party designed to address this issue, but they each did it differently.

Prop 98 was, in my opinion, by far the better proposition. It would have prohibited the government from damaging private proerty for private uses. We can agree with that, can’t we? It would have changed litigation rules to be more friendly to property owners.

I strongly believe that people should own their own property. Every experience I have of renting, and of seeing housing in L.A. (especially around USC) tells me that people renting from an owner do not respect the property. They can say so in words, but in actions they do not. They cannot. They don’t have the incentive because they don’t own it.

Prop 98 would also have required the government to allow the original owner to repurchase what used to be their property at the original price– if it ended up being put to a different use than originally stated. Again, common sense tells me that this is a good idea and represents a good protection of property rights.

Furthermore, the proposition would have prohibted rent control. This is likely a problem for many people. Yet their support of rent control is extremely damaging to the economy and to the housing market.

I can certainly understand the reasons for rent control. They are all good. They have good intentions. Unfortunately, the downsides far outweigh the positives. As I learned in my microeconomics course at USC (I admit it was just one class, but this is not a complicated concept), rent control is a price ceiling. Nobody can argue against that. It’s a fact, and if you study the issue, it becomes obvious. It forces down the price of housing, increasing demand and reducing supply, causing a shortage.

Shortages are bad. I once read a story about someone who came to the U.S. from a foreign nation where economic policies caused food shortages. Their grocery markets would often run out of food. What they had one day, they wouldn’t have the next. It wasn’t a matter of prices being too high, like people are concerned about in the U.S. today. No, it was regulations and price ceilings that caused the dire despair and hunger of their citizens.

So when this person saw that the market here in the U.S. had food, she was shocked and urged her American friends to quickly buy up as much as they could and store it away.

“Why?” her friend asked, surprised at the foreigner’s extreme rush and strong urging to quickly get a variety of common foods from the market.

“Because it might not be here tomorrow!” the foreigner stated in desperation.

Thanks to our free market economy: the food will be here tomorrow. It may be more expensive (if supply goes down or demand goes up)– but it will be here.

The oppressive governments in third world nations are most often responsible for the poor condition of their citizens.

Of course, they don’t usually realize they are doing it. They have good intentions and reasons for the economic policies. But the policies fail anyway. It’s because they’re bad policies and do not work.

Rent control is one of those policies, though this time it’s in the housing industry rather than food.

In 1989, Vietnam’s Foreign Minister Nguyen Co Thach said: “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.”

That’s rent control in action.

In 1946, Milton Friedman and George Stigler said: “Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building.”

From the Los Angeles Times (although the overall article seems slanted toward Prop 99):

“Of all the land-use regulations, rent control is the most draconian,” Coupal declares. “People are coming to realize that it’s a failed economic policy. It dries up capital. Makes cheap housing available to rich people.”

He quotes one economist as saying, “Next to carpet-bombing, rent control is the best way to destroy a city.”

I don’t see anyone refuting this. Based on my studies of economics, it’s simply true.

Just as bad, in my opinion, is the fact that price ceilings reduce quality. This is very obvious in Los Angeles, where there are 626,600 rent-controlled residential units.

Rent control in LA should absolutely be phased out.

If you think otherwise, I honestly would like to hear your argument.

(Unless it’s the fact that rent control allows you to keep your low rent, i.e. below fair market rent prices. That’s just selfish, and I understand people are selfish. Though I could say more about that, if you’re interested.)