Rental Price Ceilings: All in Favor Say "I"

What's your position: impose on the free market with price ceilings and floors or let the invisible hand guide the market without governmental impositions? The article "The Housing Bust Shakes up Rentals" from Business Week (02-12-2008) is a good discussion of a rental market without price ceilings.

Those in favor of rental price ceilings claim that rent control keeps housing affordable for lower income individuals. However, the article from Business Week illustrates that the market can and will return to an equilibrium price on its own without the imposition of a price ceiling. The article discussed how the rental market became flooded with properties during the housing boom in 2005 and 2006. By 2007 there was an overabundance of properties without sufficient demand to occupy them. This alone was enough to start driving the market towards an equilibrium without the influence of a price ceiling.

A negative consequence of price ceilings is that property maintenance becomes less of a priority for landlords. With rent control in place, landlords start to realize less profit and start to cut back on expenses that are impacting the bottom line. There are some expenses they have control over (i.e. maintenance, property improvements, etc.) and there are other expenses that are fixed (utilities, property taxes, property management, etc.) When rent controls are imposed, landlords are forced to cut back on those variable expenses, thus properties become neglected and the landlord evolves into a "slumlord."

Some worry that without rent controls, rents will skyrocket beyond anyone's affordability level. Now where is the logic in that? If rents become too high, the number of vacancies will increase. In a free market where there are no rent controls, the landlords will respond to the increase in vacancies by lowering rents and offering incentives to renters. I suggest this is a much better way to run a market than imposing controls that create a false market run by a bunch of "slumlords."


Dr. Tufte said...

Hmmm. I'm not sure how relevant this is - rental price ceilings make a great textbook story, but it isn't like they are pervasive in the U.S. Chalk this up as interesting but uncommon.

Anyway, a lot of what passes for argument about economic issues is asymmetric: people will often complain about one side of the issue, and then ignore it when the situation is reversed. In this case, people in favor of price ceilings only seem to notice the increases. Now that prices are declining they are silent. That isn't good, but it is understandable. What isn't understandable is that more people don't point this out.

Gavin said...

Extra Credit - Dr. Tufte
This is a case where the textbook example does not reflect what is common in the economy. The common government intervention is subsidized housing not price ceilings.

TheFindlay said...

Dr. Tufte
I think you make a valid point that 1) price ceiling on rent aren’t pervasive in the US and 2) people, at least consumers, don’t complain when things are going in their favor. I think it is understandable why people don’t point this out more because we are all consumers of something. If we made clear the idea of objectivity, regardless of how we are personally affected, people would have less to complain about and we couldn’t have that now could we.