Economics is Like Sex by Jonathan M. Lamb

Author:Jonathan M. Lamb [Jonathan M. Lamb]
Language: eng
Format: epub
Publisher: Morgan James Publishing
Published: 2018-04-09T04:00:00+00:00

Making Rent Prices Fair

One of the most visible areas of government price controls is in rents. When apartment prices get “too high,” consumers beg the government to do something to make them fair. Consumers don’t understand that the high prices are a reflection of the many people competing for limited housing. Instead, they see it as landlords taking advantage of tenants.

If the government passes a rent-control law, it puts a limit on the amount apartment owners can charge per month. For example, a landlord may be able to rent an apartment for $1,000 per month, but the government may say he can only charge tenants $600.

Now think about the newly created incentives to tenants and landlords. Tenants are buyers, and the Law of Demand says that more people will buy when prices are low. Well, that’s exactly what happens. More people move to the city to take advantage of the lower prices. Other people, who may not even need an apartment, could decide to rent one just because they can. Why not have an extra place for the weekend if the price is right? The lower prices create a big wave of people who weren’t there before, all looking for apartments. But the supply of apartments hasn’t changed.

Landlords respond too. At lower prices, entrepreneurs aren’t inclined to build apartments. Why would anyone want to invest his hard-earned money on an investment that doesn’t pay? Might as well take your money elsewhere. If instead rents could float when more people move to the city, prices would rise and more apartments would be built in response to the higher prices. But when the prices are low, nobody has the incentive to put their money into an apartment and rent it out for next to nothing.

You must always remember the reason we have goods and services; it’s because people are responding to incentives. Just as we found that McDonald’s and Walmart don’t exist because they owe people jobs, apartments don’t exist because landlords owe people places to live. They’re businesses. If you wouldn’t use hundreds of thousands of dollars of your own money to buy a rental property because you’d get nothing in return except constant headaches and repairs, don’t expect anybody else to do it either.

With rent control, landlords and builders will respond in one of three ways. First, those currently in the market will pack up and take their money somewhere else. Second, no new landlords or builders will enter the market and build new apartments. Third, the few remaining landlords will recognize that if the market wants $600 worth of apartment, then that’s what they’ll provide. In other words, don’t expect a whole lot for your money. Landlords will cut corners. Tenants will find broken windows, shoddy air conditioning, leaky pipes, and lengthy delays when repairs are needed.

This is exactly why you’ll find the worst housing conditions wherever there are rent controls. It’s also exactly why you’ll see more homeless people on the streets. Low housing prices attracts lots of people, but it doesn’t give investors/landlords the incentive to provide.

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