Justice Everywhere

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Supply, investment, and the allocation of scarce goods: How not to argue against rent control

Access to affordable housing is widely recognized as a basic right or, at the very least, an important moral interest. At the same time, residents of many major cities are faced with spiralling housing costs. London provides a particularly striking example. During the last year alone, average rents in London rose by more than 10 percent. Since this figure describes an aggregate trend, rent increases faced by individual tenants are often significantly higher. (When the last flat that I lived in changed its owner, the rent went up by 30 percent, notably without any changes to the condition of the property.) In light of this situation, it is no surprise that calls to address the problem of rising rents have become louder

One straightforward way of addressing the problem would consist of policies that place legal limits on the extent to which rents may be increased. Yet, the idea of rent control faces outspoken opposition. Opponents often defend their view by pointing out that rising rents have an underlying cause in the shortage of supply of housing in a given area. Constraining rents, they argue, does nothing to alter the shortage of supply or, worse, exacerbates it by reducing the returns on investment for property developers, thus undermining the economic incentives for an increase in supply. This line of argument, however, appears unconvincing. 

Shortages of supply in housing cannot easily be solved in the short term and are partly determined by geographical factors that cannot be altered at all. To the extent to which rent control policies fail to address the underlying problem of supply without worsening it, why should they not be considered as an interim measure? It is, of course, easy to conceive of policies that would further exacerbate the problem, for example if they took the shape of absolute rent ceilings that would make it impossible for developers to recoup their investment. There are, however, obvious policy alternatives that would place limits on rents and rent increases while being flexible enough to ensure a sufficient return on investment. In fact, if policies were structured such that returns on investment in new developments are higher than returns on investment in existing properties, they could create additional incentives for the construction of new homes, rather than undermining them. The very lack of rent controls, in turn, can be seen as compounding the imbalance between supply and demand in that it creates demand for existing properties on the part of speculative investors that would not exist if rent controls limited the returns on speculative investment. 

A further prominent argument against rent controls, even if understood as second-best or interim measures, relies on the appeal of free markets as a mechanism for the allocation of scarce goods. If a good is in short supply and prices are left to move freely, they will rise up to the point at which an equilibrium is reached between the amount of goods available and the amount demanded at the price in question. From the point of view of economic theory, this process is often considered to be attractive on the basis that it ensures that scarce goods are allocated to those who value the good most highly. If the price was artificially kept low, in contrast, the allocation of goods would be determined by factors that may be less normatively appealing or left to pure chance. Applied to the present context, if there is a shortage of housing in a given location, would it not be a morally attractive outcome if tenants with the strongest preference for the location would get to live there? 

Maybe it would. As an objection to the regulation of real-world housing markets, however, the argument is fundamentally flawed. The claim that equilibrium prices allocate goods to those who value the good most highly is plausible only in conjunction with the idealised assumption that the bidding parties are roughly equal in their ability to pay. In a real-world context in which potential tenants differ significantly in their wealth and thus their ability to pay, differences in willingness to pay rent cannot be taken as a direct reflection of the subjective value that a give property has to them. Since the absence of rent control measures does nothing to ensure that housing is allocated according to strength of preference, the appeal to this allocative ideal cannot serve as an objection against rent controls. 

In the absence of other arguments, the controversy about rent controls appears to boil down to a conflict between the interest in affordable housing on the one hand, and the interest of property investors on the other. It seems clear to me that the interest in affordable housing is the morally weightier one. This is not meant to deny that investments made under existing rules may give rise to legitimate expectations. Honouring such expectations, however, should not prevent us from changing rules that apply to future investments.

Florian Ostmann

Florian Ostmann is a PhD candidate in political philosophy at University College London. His research focuses on issues of fairness in international trade and theories of exploitation. Florian’s wider interests include moral theory, bioethics and public health, business ethics, and questions at the intersection between philosophy and economics.

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11 Comments

  1. Florian, thanks for raising this important issue. Let me start the debate with a basic point, which can maybe be easily deflected by empirical evidence, but which seems to be an assumption in your argument. You seem to assume that rent controls can really work in creating a housing market in which affordable housing is available. The article you link towards cites the German example with its rather strong protection of existing tenant relationships. I wonder, though, whether it has been successful in addressing the problem; we have had similar debates about housing prices in cities such as Munich or Frankfurt. The dynamics are a bit different, I think: markets are much less „liquid“ because once you have an appartment our house, it’s unlikely that you’ll leave it. London is far worse in terms of prices, but there seems to be more supply (and it is worth noting that the way in which British economic life is concentrated in London is not comparable to what happens in Germany; the position of Paris in France might be a better comparison). So my question basically is: do we have good reasons to think that such a regime would in fact achieve the things it’s supposed to achieve? If it doesn’t, or not very well, one might still argue that the kinds of ills it would cause are preferable to the ills of an unregulated housing markets, but that would require much more argumentation.
    I know that answering my question might require a lot of empirical evidence, so feel free to ignore it; in that case, my comment can be read as pointing out an assumption that seems to underlie your argument.

  2. Thanks for your comments, Lisa. I absolutely agree that the issue raises intricate empirical questions which I did not mean to downplay. I gladly accept your invitation to abstain from making any bold empirical claims, but my assumption was indeed that a model like Germany's achieves a higher degree of rent stability than is presently the case in London, for example. It may be that the German approach to rent control is still sub-optimal, or it may be that a higher degree of rent stability would come at too high an economic costs. I would argue, however, that even if all we can achieve is to somewhat slow down the rise in rents, this would still be preferable to an unregulated market.
    The point about liquidity is well taken, and it seems that a comprehensive approach to addressing the problem is likely to include making the terms and duration of contracts more reliable for tenants. I would be interested to hear more about the way in which you think differences in supply may affect the choice of policy. Is your suggestion that supply in London is higher in absolute terms, or relative to demand?

  3. Thanks for the post, Florian. Could I ask you about another possible argument that links to the second case you discuss – on the merits of the market – but has a somewhat different focus. The case would be a Hayekian case, of sorts: that markets are important for signalling information. So, here, we might say that one reason to let the market determine prices would be that high competition for housing pushes prices upwards (as seems to be the case here), thus sending a signal to potential property developers that there is value to be had in building more property in the location. There are some obvious responses here – that suppliers do not need price signals to know that there is high demand for property in London and that we could structure the system to allow this information to flow alongside rent control (like your first reply). But there could also be a case (indeed, one that has been thought to have much mileage in the last 30yrs) that nothing sends these signals quite like the market. It also seems to be a version of the market case that avoids the objection you pose to the equilibrium argument (i.e., because the signalling effect works even when there are inequalities). At any rate, it seemed another option and would be interested to hear your thoughts.

  4. Thanks for your reply, Florian. I move on thin ice here, as I really have no idea about the empirical data. My impression is that there are two facts about London that are somewhat special (although maybe typical for capital cities), and that a regulatory approach would have to take into account: 1) the concentration of economic activities in at least some industries, which means that for many individuals there aren't many alternative locations (at least if you think about long-term geographical decisions, especially when two spouses have to find a job), thus demand for housing might be over-proportional compared to the rest of the country (compared to supply); 2) the extreme disparities in income and wealth (including income and wealth of foreign residents who come to London from all over the world). This might cause complicated effects with regard to positionality. (There is also the issue of social segregation into different parts of the city, but that is more ubiquitous.) I would assume that if you really want to improve the living conditions, you cannot just interfere in the housing market, but you'd have to think about the underlying economic structures. If there are such huge disparities, and such a great relative shortage of housing, introducing rent controls might not be sufficient for changing the power structures between supply side and demand side. Landlords and rich candidates might find ways around the rent control in which a higher price is in fact paid – or at least that's what those who reject rent controls would argue. I think it's an argument worth taking seriously, but it is an empirical question whether or not this is in fact how things would play out.

  5. Thanks for adding this further argumentative twist, Andrew. I think arguments about signalling deserve serious consideration. In relation to the present topic, however, I would be inclined to respond along the lines you suggest, namely by questioning whether the extreme spiraling in rents currently witnessed is necessary to send a sufficiently strong signal for the development of new properties. In fact, the primary signal sent by rising rents seems to be that it is worth investing in any kind of property, already existing or not. If the policy concern was specifically to incentivise the building of new properties, there may be more effective ways to channel investments in that direction (by introducing rent controls on existing properties while offering loser controls or tax breaks for newly built properties, for example).

    Another thought would be that the signalling function of prices does not appear valuable in and of itself, but only, as you suggest, to the extent to which it actually leads to increases in supply. This, however, does not seem to be necessarily the case, especially in the case of London (otherwise we shouldn't be seeing such extreme increases to begin with). There are a number of possible reasons for this, such as general lack of land, zoning restrictions, etc. As long as these other impediments to increased supply persist, the effectiveness of the signals sent by rising rents will be severely constrained and appears questionable as a basis to justify the economic burden that rising rents place on tenants. At the same time, the fact that shortage of supply depends on other factors of the mentioned kinds provides additional support for the expectation that once impediments such as zoning restrictions are removed, the signals sent by a reasonably regulated market may well be sufficient.

    As a final thought, the fact that the signalling function of prices is independent of wealth inequalities on the part of tenants raises an interesting distributive question. To the extent to which free market prices can be justified on the basis of their signalling function, who should carry the associated burden? If rising rents are justified by reference to the greater social good of incentivising new developments, do you think that a full justification would require compensating individual tenants for rent increases?

  6. Thanks for the follow-up. The enforceability of rent controls would certainly be an important consideration. The specifics of the situation in London may speak against the generalisability of the relatively successful experience with enforcement in Germany. One question would be whether even only a partial enforcement of rent control measures might be preferable to the status quo.

    Setting aside the issue of enforceability, both of your empirical conjectures strike me as intuitively plausible. I would think, however, that they both strengthen the case for rent control rather than weakening it: the particularly great demand in London leads to particularly steep rent increases and the extreme income and wealth disparities make these increases particularly hard to justify. Rent control cannot be expected to correct all or even the most pressing of the underlying social problems, but it would suggest itself at least as an "emergency policy".

    There is, however, at least one caveat. There is a conceivable economic argument for giving priority, within limits, to high-income tenants in the allocation of living space, with a view to boosting local economies. Such a pro-active approach to gentrification may speak against rent controls. Depending on empirics, this argument may deserve consideration. The difficulty, however, is how to trade off the generalized economic benefits of such a policy against the individual burdens on tenants who, as a consequence, are driven out of the market. Is this part of what you had in mind?

  7. That is a very interesting question indeed, Florian. I am not sure I have much answer for it, but one thought does spring to mind: that much depends who is in the sets of (a) those who bear the burdens and (b) those who get the benefits. If they are fully co-extensive – e.g., those who pay higher rents now benefit from lower (real) rents in the future – I guess we could say that the latter are their compensation for the former, akin to a savings principle (short-term pain for long-term gain). But if the sets are different, we would have, at least, some basis for thinking about compensation. I guess obvious dividing lines here are (i) those who leave the area/those who enter it later, (ii) whether there are particular groups that bear a disproportionate weight of the burdens in comparison to the comparative amount they benefit they receive – that could include, on the one hand, particular areas that see disproportionate rises short-term, but do not benefit later because new houses are built elsewhere, or, on the other, landlords who, indeed, may only benefit short and long-term. However, I wonder whether it would be possible really to disaggregate these issues from much wider questions of distribution. What are your thoughts on it?

  8. Hi Florian, thanks for the post. Hope Yale is treating you well!
    I have a rather naive question. The way I understood it, your arguments starts from a positive case for rent control: the interest in affordable housing. I was wondering how much weight you want to give to this interest. Basically, how low are you willing to put the rent ceiling? Will it depend on how you further define the interest in affordable housing. For instance, does the interest have to be affordable housing in the place of your choice/the place where you work/how far from work/etc.. I would be interested in your thoughts on this.

  9. Thanks, Siba, this is a fair point to press me on. I was deliberately vague in my formulation, partly because I do not have a fully developed view about the exact shape and limits of the interests, or rights for that matter, that tenants can legitimately claim protection for in this debate.

    To avoid misunderstanding, I think that a rent ceiling, defined in absolute terms, may indeed easily have undesirable consequences of the kinds that critics tend to point out. This is reason to doubt that tenants would have a legitimate claim for rents to remain constant.

    My assumption was that, in general, people who cannot afford to buy their own homes have a legitimate interest in paying lower rather than higher rents, and that a policy choice (the lack of regulation is as much of a choice as the implementation of rent controls) that leads to rent increases therefore requires justification. Considerations of social and economic policy and even the interest of investors and property owners in rental profit are potential bases for such a justification and will speak in favor of letting rents fluctuate freely within limits.

    How far such justifications go depends a lot on empirical assumptions and they may include differential policies for different areas of a city. It seems, however, that the mere appeal to the interest in maximizing rental revenue seems insufficient to justify the burdens on tenants that result from a policy that allows rents to spiral at the monetary and geographic scale witnessed in London and other comparable cases. What do you think?

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  11. I think these distinctions are very much to the point. At the same time, it seems that it will be empirically challenging to always decisively situate individual cases in relation to these distinctions and to address the inequities in question in isolation from wider distributive questions. However non-ideal the available policy options may turn out to be, what the thought shows is, I think, that the mere appeal to aggregate social benefits may not be enough for a full justification.

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