Letting fees are curbed but Twyford has ruled out rent controls

After Parliament voted to ban agents and landlords imposing letting fees on tenants, Housing and Urban Development Minister Phil Twyford said the change will make a real difference to struggling families.

The ban was a good first step in improving the life of renters while the Government continues its broader review of the Residential Tenancies Act, he said.

Twyford foreshadowed tenancy reforms earlier this year, when he said New Zealand tenants had fewer rights than any in the Western world – really? – and said he wanted to modernise the law to improve their lot and to encourage longer, more settled tenancies.

The reforms he discussed then were likely to include restricting rent increases to once a year, banning letting fees and abolishing no-cause terminations, but …

…Twyford has also confirmed that rent controls will not be part of the reform package.

That’s because he thinks rent controls are bad policy which drive landlords out of the market, discourage landlords from upgrading and maintaining their rental stock, and only protect tenants in properties under rent control.

Ultimately, the only lasting solution to addressing the current rental market squeeze is to increase the supply of housing on the market, Twyford says.

NZ Property Investors Federation executive officer Andrew King agreed, saying rent controls would only make the situation worse.

But stiffer rent controls are in the offing in California under Proposition 10, which is on the ballot at the US elections this month.  It “Expands Local Governments’ Authority to Enact Rent Control on Residential Property.”

Advocates of Proposition 10 say it will help put a fair limit on rent hikes.

Opponents claim it would hurt the affordable housing crisis by discouraging new housing development.

Timothy Taylor, managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association, has been analysing the issue of rent controls and concludes (here):

You can make an argument that those who support higher minimum wages are seeking to help low-wage workers, and then quarrel over the evidence. But it is much harder to argue that comprehensive rent control is actually about helping low-income people find affordable housing.

In his article he sets out these observations:

1) Rent control is typically justified by pointing to low-income people who have difficulty paying the market rents. I’m sympathetic to this groups, and favor various policies like income support and rent vouchers to help them. But as I have argued in other contexts, invoking poverty and necessity as the basis for rent control is a ruse. The poor are not helped in any direct way by controlling rental prices for all income groups, including the rich and the the middle-class.

One response I have heard to this argument is that if rent control only applied to those with low-incomes, there would be an incentive to avoid renting to those with low incomes and not to build any more low-income housing. Of course, this argument is of course an admission that rent control discourages the growth and maintenance of rental properties. Expanding rent control to cover all income groups will expand those negative incentives to the entire rental housing stock, rather than just part of it.

2) Many of those who favor rent control also favor higher minimum wages. Thus, it is useful to remember that rent control is fundamentally different from minimum wage rules, because prices for physical objects like buildings are fundamentally different from wages paid to workers. When the price of an hour of work changes, workers can have higher or lower incentives, or higher or lower morale, or can search more or less for jobs, or consider different kinds of jobs, or look for jobs in other jurisdictions or in the underground economy, or even withdraw from the labor market. Buildings are not flexible in these ways, and so the implications of rent control are easier to predict with confidence than the implications of minimum wage laws.

3) Before you own a house, there can be a tendency (which I certainly had) to think of the housing stock as immutable, rather like the pyramids. When you own a house, you instead come to think of it as a large machine that requires continual maintenance on all its separate parts. Many arguments in favor of rent control implicitly view the housing stock like the pyramids, and underestimate both the short-run costs of maintenance and repair and the longer-run costs of property upgrades and new construction.

4) Rent control offers a tradeoff between present benefits for one group and future costs for another. The present benefits go to those already living in apartments that are rent-controlled–whether they are low-income or not. Rent control benefits the well-settled. The future costs are imposed on those who are unable to find a place. In addition, rent control discourages building additional rental housing, which means that the possibility of mutual gains for future builders and future renters are foreclosed.

5) In any local housing market, the price of owned housing and rental housing is going to be closely linked, because one can be converted with relative ease into the other. If the price of housing is high, the price of rentals is also going to be high. The notion that a local housing market can make all the existing homeowners happy, with high and rising resale prices, but also make all the renters happy, with low and stable rents, is a delusion.

With rent control, as with so many other subjects, it can be tricky to sort out cause and effect. For example, say that we observe that cities which have rent control are more likely to have high housing prices. This of course would not prove whether rent control leads to high housing prices, or high housing prices make rent control more likely to be enacted, or whether some additional factors are influencing both housing prices and the political prospects for rent control.  Thus, researchers often try to seek out a “natural experiment,” meaning a situation in which some change in law or circumstance affects part of a market at a certain time and place, but not another part. Then one can compare the more-affected and less-affected parts of the market.

Taylor references a study on the unexpected end of rent control in Cambridge, Massachusetts, which found that rent-controlled properties had lower rents and were also lower quality with less maintenance. When a substantial number of properties in a neighborhood are poorly maintained, property values also fall for the building that are not rent-controlled.

A more recent study  analysed the effects of rent controls imposed in 1979 on all standing buildings with five or more apartments in San Francisco.

The findings:

“We find that rent-controlled buildings were 8 percentage points more likely to convert to a condo or a Tenancy in Common (TIC) than buildings in the control group.

“Consistent with these findings, we find that rent control led to a 15 percentage point decline in the number of renters living in treated buildings and a 25 percentage point reduction in the number of renters living in rent-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by both converting existing structures to owner-occupied condominium housing and by replacing existing structures with new construction.

“This 15 percentage point reduction in the rental supply of small multi-family housing likely led to rent increases in the long-run, consistent with standard economic theory. In this sense, rent control operated as a transfer between the future renters of San Francisco (who would pay these higher rents due to lower supply) to the renters living in San Francisco in 1994 (who benefited directly from lower rents).

“Furthermore, since many of the existing rental properties were converted to higher-end, owner-occupied condominium housing and new construction rentals, the passage of rent control ultimately led to a housing stock which caters to higher income individuals.”

An article published by the Cato Institute says it’s true that many California localities, the Bay Area especially, are experiencing skyrocketing housing costs.

That has a lot to do with intense demand to live and work in places like Silicon Valley and San Francisco, and even more to do with the tight regulatory lid on new residential construction that artificially suppresses the supply of dwellings in the state generally and especially in desirable communities and near the coast. By shifting the blame for the resulting situation to owners of existing rental units, rent control would make it even less likely that Bay Area and coastal governments will take the one measure that would be effective against spiraling housing costs, namely legalising much more new construction.

Rent control is described as a classic instance of an infringement on economic liberty that often results in dire practical consequences over the long term.

Twyford apparently has some sympathy with this argument.

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