| by Kenneth Chase | 21 comments

Price Ceilings: Rent Controls


[Alex] Today, we’ll be looking
at rent controls, an application
of what we’ve done already, because rent controls
are simply a type of price ceiling. Let’s get going. Here’s the list of the effect
of price ceilings, which you’ve now seen many times. I’m going to talk about each one of these
in the context of rent controls, except for a loss in gains from trade that doesn’t really introduce
any new issues, so I won’t talk about that. Let’s talk about the other items, however. Okay. Rent controls create shortages. Let’s do our usual diagram,
except this time on the horizontal axis we have the quantity
of rental apartments. On the vertical axis, we have price. Here’s our demand
and here’s our supply. The main thing we want to add here is that the supply of apartments
in the short-run is going to be very inelastic. Why? Well, in the short-run,
the apartments are simply there. They’re already built, there’s not
much you can do to change the supply of apartments. Now, this is not quite true. You can take an apartment
which is about to come on to the market and turn it instead into a condo. You might switch some uses. You might tear down an apartment early,
things like that. But, basically, the supply
is going to be fairly inelastic in the short-run. So, we have a controlled rent. This means that they’ll be a shortage
in the short-run and it’s given by this amount
on the diagram. Note that most of the shortage
comes from an increase in the quantity demanded
when you push the rent below the market equilibrium right,
when you lower the rent. Only a little bit of the shortage
comes from a decrease in the quantity supplied. In the long-run, however, the long-run supply is going to be
much more elastic than the short-run supply. So, in the long-run, the shortage
will get much worse. In the long-run, what will happen
is that fewer apartments will be built, more apartments
will be allowed to run down to become dilapidated,
to slowly go off the market. Apartments will be turned
into condominiums. Instead of building apartments,
people will build car garages, people will build other types of housing,
and so forth. So in the long-run, the shortage
from a rent-control gets much worse than in the short-run. Here’s an interesting graph
from Ontario, Canada, showing how rent controls can reduce
the number of new units being built. So, prior to rent control
even being debated, there are about 30 to 40 thousand
new units being built every year in Ontario, Canada. After rent control was put into place
in 1975, there were fewer than 10,000 new units
being built every year. Also note, that the number
of new apartments being built, which might be rent-controlled, declined even before rent control
was put into place, and that makes perfect sense. An apartment has got to pay
for itself over 30 or 40 years. They are very durable, long-lived assets. So if you hear today that in the next year
or two, rents may be controlled, you’re going to say, “Well, I don’t want to build
this apartment unit. It’s not going to be profitable
anymore. I was expecting so many rents for the next 30 or 40 years – that’s now being cut. This unit is not going to be profitable,
I don’t want to build it anymore.” And that’s exactly what we saw. A discussion in rent controls
reduced the number of apartments being constructed. We’ve also put, by the way,
the number in red, the number of non-rental-
controlled housing that was being built at the time. And you can see,
it didn’t change very much. So this illustrates
that it was the rent control itself and not other factors in the market,
such as the state of the economy, which reduced the number
of rent-controlled apartments being built every year. So this illustrates
how rent controls can create a shortage by reducing the supply. As with other types of price controls, rent controls create reductions
in product quality. So the rent controls reduce the return
to landlords from renting apartments, and owners are going to respond
to that price control by trying to cut costs. So, they’re going to reduce maintenance. They’re going to slow down
the repairs to elevators, they’re not going to mow the lawns
as often. After all, you can still sell
just as many units as they did before. They can keep all of their units rented
at the rent-controlled price. even when they cut maintenance
and repair costs and amenities, and they don’t put in the new pool or they don’t put in the playground
and so forth. They’re no longer in a competitive market. They have lots and lots of people
who want to rent their apartments at the below-market price,
so they don’t need to spend so much on maintenance and repairs,
and other benefits. And, since their profits are falling, they want to try and cut costs as
much as possible. Indeed, when rent controls
are very strong, serviceable apartment buildings
quickly turn into slums, and slums turn into abandoned
and hollowed-out buildings. This happened in New York City,
this happened in Paris, this happened in many cities
around the world, which instituted strong rent controls. Rent controls create wasteful lines
and other search costs. So, finding an apartment in New York City
often takes a long time and you have to spend a lot of money
to get a rent-controlled apartment. In one famous example,
episode of Seinfeld, George looks for apartments
by consulting the obituaries and rushing to the landlord
anytime he sees someone who died who had a nice apartment. And that’s in fact one of the techniques,
which New Yorkers use to try and get
a rent-controlled apartment. Another effect of rent controls
is to increase discrimination because rent controls reduce the price
of discrimination. In a free market,
landlords might discriminate. But then, they pay a price because it’s going to take them longer
to rent out the apartment. But, precisely because the rent control
makes the quantity demanded exceed the quantity supplied, there are more people lining up
to get apartments than there are apartments. So, landlords can more easily,
or at lower cost, pick and choose whom they rent to. Therefore, for minorities
or for people with children, or for people whom landlords
are perhaps slightly don’t want in their apartment, the cost to them of obtaining apartment
is going to be even higher than for the average person. Another effect of rent controls,
which is very common is paying bribes
to get a rent-controlled apartment. Bribes, of course, are illegal. This is illegal, but there are ways
of disguising the bribe. One way, for example,
would be to charge extra for a furnished apartment. What does a furnished apartment look like
in New York City for rent-controlled
apartment? It looks like this. That’s a furnished apartment. You get the idea – it’s a way
of paying a bribe under the table. As with other types of price ceilings, rent controls create
a misallocation of resources. That is the apartments
are not allocated to the renters who value them the most. If you ever get control
of a rent-controlled apartment in New York City, for example,
you never, ever, ever give it up. So, I’ve known some people
who keep an apartment in New York City just as a vacation home,
just for the summer, they go there occasionally. It doesn’t have a lot of value to them, but the price is so low
that it makes sense to keep the apartment. If they had to pay the market price, then the high-value bidders,
the ones who really valued the apartment, would bid the price up
and the goods would be allocated to them. Instead, what we have is people
who only use the apartment occasionally, keeping the apartment, while other people with large families
are scrunched into apartments which are much too small for them. Another classic example: the older couple who stay in their large
rent-controlled apartment even when their kids have moved out. It doesn’t make sense for them
to move out because they’re not paying
the full price, they’re not paying the actual value. So you get apartments
who are allocated to older couples who actually have a low value
for the apartment, even when there are people
who have a much higher value for that same apartment
and they cannot find an apartment. One study of this found, for example,
that 21% of renters in New York City live in an apartment
that has more or fewer rooms than they would choose if they lived in a city
without rent controls. So the apartments become misallocated. Okay. That’s it for price ceilings. Next time, we’re going
to be looking at price floors – a price below which it is illegal to go. [Announcer] If you want to test yourself,
click “Practice Questions.” Or, if you’re ready to move on,
just click “Next Video.”

21 Comments

diego beltran

Apr 4, 2015, 5:40 am Reply

this is awesome!

GaskellleoCinema

Feb 2, 2016, 11:16 pm Reply

How does introducing a ceiling increase demand in this context? There's a finite number of people, presumably they're not going to go out and rent multiple units just because it's a little cheaper. The main reason for high rents in urban areas is high demand and limited supply, the actual cost of operating the rental property (maintenance, taxes, etc.) is largely irrelevant.

Chris Rhodes

Jul 7, 2016, 7:40 pm Reply

So the price of apartments determines the amount of people in need of housing? Doesn't the population determine how many people need housing and not how much apts cost? Regardless of how much an apt costs…I still need a place to live. My need of housing doesn't go away depending on the price of the apt.

John Lair

Jan 1, 2017, 6:56 pm Reply

you guys have taught me more economics within in an hour than I have ever learned in school within a semester. thank you so much for making these vids. keep up the great work!

Simran Sinha

Mar 3, 2017, 10:29 am Reply

What are the examples of the most optimistic and the most pessimistic case of a price ceiling?

Jakevic

Mar 3, 2017, 4:30 pm Reply

Why do we have rent controls if they are so bad?

IAN THESEIRA

Apr 4, 2017, 9:28 am Reply

all true, but there's no right price to put on pressure cooker situations that feed on itself, and the heart burn and disease that result, pace and ruthlessness only increases in mass and velocity, So supressive forces are needed no? That's where hard nosed city slicker card sharps pool sharks come in is it?

L St

Apr 4, 2017, 3:05 pm Reply

Hey there, I'm writing a paper on The economical Effects of Rent Controls in Theory and in Practice. I would really appreciate it if you could send me the sources you've used for this video, since little can be found on the Internet. Thanks 🙂

Jojay

May 5, 2017, 3:59 am Reply

In Toronto, buildings before 1991 were rent control while those built after were exempted. There has been no effect on the number of purpose build rentals. Instead most buildings have been cheaply built condos that that investors use to speculate on. The investor doesn't do repairs mostly and renter are left to fend for themselves despite the absolutely ridiculous rent. The pre-1991 ones are surprisingly in a much better condition. Most landlords are renovating lobbies and focusing on general upkeep.

Alex Monaghan

Jun 6, 2017, 5:27 am Reply

are you a freedman ecomist?

Ambassador Mr Kim Darroch shits on Drumpf

Sep 9, 2017, 6:59 pm Reply

tremendous effort> ive learnt so much that my head spinning, believe me.
price ceiling/floor is a yuge topic.

Klaudia Wójtowicz

Oct 10, 2017, 9:36 pm Reply

could anyone please tell me where this graph with rent-controlled and non-rent-controlled comes from?

James Edwards2

Jan 1, 2018, 6:25 pm Reply

there are deffenatley ways in which rent controlls can be effective using other measures to tackle some of the issue. a subsidy combined with a rent controll can mean the entire subsidy or vast majority of it going into building development, not to the firm, as they have to sell the housing at the price ceiling… whilst also having no shortage of supply of housing. If you simultaniously also put a ceiling on the price landlords can sell housing, then developers still build /offer rented accomadation as its still the best opportunity, with sale price being so low that low rent is better. You could also say new developments can only be rented, or limit the number that can be none rented, elimenating the opportunity to sell new housing instead of rent. Also, it can be effective in pushing people to sell housing instead of renting itt, which could be your goal. Also, many of the floors stated are down to weak oversight, meaning effective governments will be more successful with rent controls.

Harendra Singh

Feb 2, 2018, 8:02 am Reply

5:00 hmm

W Ghost

Mar 3, 2018, 1:05 pm Reply

In the case of the united states and it's social structure that is absolutely correct and there are many indifference and also many similarities in other parts of the world which i find truly ironic 😀

Twinkie

Jul 7, 2018, 6:24 pm Reply

My husband gave up his rent control apartment on the Upper East Side for me. It wasn’t legal to keep the apartment for occasional use, though we did get a buyout when they realized we were gone.

He got a rent control apartment (1 bedroom, $600/month, upper east side) as a Sr.-VP with zero dependents because his father was a developer. That has always been my issue with rent control- it doesn’t go to the ones who need it. There are better programs for that.

Nyarlathotehp

Oct 10, 2018, 6:03 am Reply

Lots of scary words, but no why's

Mike will

Oct 10, 2018, 1:52 am Reply

Just for FACTS! the" Chart" cited in this post, is BS, it doesn't take the changes in the Tax code, such as the Trump tax changes allow Real estate investors to make money, by deducting a portion of the cost of their buildings from their taxable income each year, generating paper losses, the depreciation deduction—which assumes buildings decline in value when in fact they often gain— basically let the owner decide what his tax bill should be, even Zero. This allows owners to make money, even if the building is vacant. The FACT! that the poster fails to take the tax code and the Greed of Developers and wrong information, proves they are attempting to lie and at least, shows a lack of real facts

Jane Yue

Oct 10, 2018, 9:47 pm Reply

This should encourage everyone from California to vote no on Prop 10!

Don’t Hate Economics

Dec 12, 2018, 1:57 am Reply

Nice

SmileyFaceTony

Apr 4, 2019, 7:29 pm Reply

There is one more variable that keeps rents very high. Easy credit. If credit is too easy to get it essentially creates a subsidy indirectly to that asset. In this case housing. People should not try to vote for rent control but rather instill rules for getting money for a mortgage hard. Increase mortgage interest rates and by law require every person to put 20 percent down. The price of housing would go down dramatically and become affordable again.

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