Wednesday, October 9, 2019

California Governor Signs Law to Prevent Easing of Housing Crisis

California Governor Gavin Newsom 

Yes, that is exactly what he did.

California Governor Gavin Newsom signed a law that limits rent increases to 5% each year plus inflation until Jan. 1, 2030. It bans landlords from evicting people for no reason, meaning they could not kick people out so they can raise the rent for a new tenant. And while the law doesn’t take effect until Jan. 1, it would apply to rent increases on or after March 15, 2019, to prevent landlords from raising rents just before the caps go into place.

This will have serious impact whenever the limitation prevents the rental market from clearing. The state has 17 million renters.

As Dr. Walter Block explains in The Concise Encyclopedia of Economics:
Rent control, like all other government-mandated price controls, is a law placing a maximum price, or a "rent ceiling," on what landlords may charge tenants. If it is to have any effect, the rent level must be set at a rate below that which would otherwise have prevailed. (An enactment prohibiting apartment rents from exceeding, say, $100,000 per month, would have no effect since no one would pay that amount in any case.) But if rents are established at less than their equilibrium levels, demand will necessarily exceed supply, and rent control will lead to a shortage of dwelling spaces. Absent controls on prices, if the amount of a commodity or service demanded is larger than the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). But controls prevent rents from attaining market-clearing levels and shortages result...

Economists are virtually unanimous in the conclusion that rent controls are destructive. In a late-seventies poll of 211 economists published in the May 1979 issue of American Economic Review, slightly more than 98 percent of U.S. respondents agreed that "a ceiling on rents reduces the quantity and quality of housing available." Similarly, the June 1988 issue of Canadian Public Policy reported that over 95 percent of the Canadian economists polled agreed with the statement. The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the "right" to their fellow Nobel Laureate Gunnar Myrdal, an important architect of the Swedish Labor Party's welfare state, on the "left." Myrdal stated, "Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision." Fellow Swedish economist (and socialist) Assar Lindbeck, asserted, "In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing."
Economists have shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward other, greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, to fewer repairs and less maintenance. For example, Paul Niebanck reports that 29 percent of rent-controlled housing in the United States is deteriorated, but only 8 percent of the uncontrolled units are in such a state of disrepair. Joel Brenner and Herbert Franklin cite similar statistics for England and France.

The economic reasons are straightforward. One effect of government oversight is to retard investment in residential rental units. Imagine that you have $5 million to invest and can place the funds in any industry you wish. In most businesses governments will place only limited controls and taxes on your enterprise. But if you entrust your money to rental housing, you must pass one additional hurdle: the rent-control authority, with its hearings, red tape, and rent ceilings. Under these conditions is it any wonder that you are less likely to build or purchase rental housing?...
Rent control has destroyed entire sections of sound housing in New York's South Bronx. It has led to decay and abandonment throughout the entire five boroughs of the city. Although hard statistics on abandonments are not available, William Tucker reports estimates that about thirty thousand New York apartments were abandoned annually from 1972 to 1982, a loss of almost a third of a million units in this eleven-year period. 



  1. I believe that if there is one thing for certain, it is that progressives are impervious to economic logic. In Congress, AOC and Bernie Sanders have introduced legislation to essentially nationalize the entire U.S. housing stock through rent control, and one reads not one critical word in the mainstream media.

  2. Price controls make sense only when the thought process goes only one step. In the real world people need to use logic and history to anticipate the results of the first step. Politicians don’t live in the real world and enough voters are oblivious to the real world so the politicians are not voted out of their fantasy world.