Papa was a Rolling Stone…

The subtitle for this post could be why we need to resist the “temptation” to meddle with housing markets in North Dakota. There are times and places for interventions, but you need clear standards for action, clear goals, and clear exit strategies.

There has been a suggestion that we should adopt a rent control policy in western North Dakota. This is an idea unlikely to lead to the desired outcomes. Price increases in North Dakota, particularly the West, are both large and variable. They are a frequent and convenient target for both complaint and the interventionist tendencies of policymakers. The problem with this comes from the fact that most of these price increases are due to supply and demand working.

What is happening in places like Williston is phenomenal. We have seen such an increase in population and labor force that it is no surprise that prices are rising. Demand has increased at a phenomenal pace for most goods, outstripping any increases in supply. The result, equilibrium prices rise. This is what has happened with housing too. Demand increased faster than supply, and to make sure markets clear, prices rise.

Now nobody would suggest that there are not problems from this. Rapid increases in population can create similar changes in price levels. However, housing price changes are often not rapid. If you sign a lease and lock in the price for a period of time there is no opportunity to increase prices until that contract expires. This can contribute to the appearance that housing prices increase by more than others. If you are a rationale landlord, and expect prices to continue to rise after the tenant signs the lease, you might increase rent beyond the current levels.

Enter the idea of rent control. Rent control is meddling with the market, pure and simple. Rent control is a form of price-ceiling, a legal limit on how high the price can go. The intentions are good. Making housing affordable is a worthy goal for policy. However it is not going to work.

Let’s remember that we are already dealing with a situation of demand increases far outstripping demand increases. Prices rise to prevent a shortage, the quantity demanded exceeding the quantity supplied. Well, when you impose rent control, you end up creating a shortage. I am assuming the rent control is effective, that is, the price limit is below the existing equilibrium price.

rentcontrol

Now the law is the law, but the impacts are directly interfering with the way the local housing market works and forces us to resort to non-price mechanisms. As a landlord, if I cannot rent an apartment for the going market rate I am less likely to worry about maintaining the apartment or upgrading it. As a tenant, I am less likely to leave even after my income increased because the other rents I would pay would be so much higher. It is simply not efficient as a way of achieving desired outcomes.

5 Comments, RSS

  1. Michael Schumacher July 31, 2014 @ 4:27 pm

    Dr. Flynn, In this article you state “The intentions (of rent control) are good.” Do you have an opinion on subsidies, offered to those who qualify, as a replacement strategy?

    At first glance, it appears that it could achieve the goal (help those who otherwise can’t afford to live in the area”) while still enabling a landlord to charge market rates and perform building maintenance (or, perhaps more likely, buy that $80,000 SUV w/ air conditioned seats.)

    • David July 31, 2014 @ 5:04 pm

      This was mentioned on the air last week. Without knowing all the details it is difficult to say how good or bad a subsidy program would be. It would likely be less distortionary overall than price controls, but there would still be distortions. In particular, it might make units at the low price plus subsidy level scarce and drive their price up as well. Essentially you would increased the number of apartment seekers in certain classes and as a result there will still be issues.

      The subsidy approach would create a new supply or demand curve and allow there to be a new equilibrium, but it is likely the case there is still some inefficiency from the intervention.

    • David July 31, 2014 @ 5:11 pm

      And no comment on the air-conditioned seats. I was not even aware such a thing was an option.

  2. lexslexus September 9, 2014 @ 10:10 am

    Can you offer an example or two of “times or places for interventions” that would be economically beneficial? I assume you mean interventions by politicians.

    • David September 9, 2014 @ 10:20 am

      Well I was thinking more broadly than just politicians; the broader point I was making really gets at the need for a clear set of standards for intervention. Price being “too high” really is not, on its own, an adequate metric because it is the outcome of supply and demand forces. Public subsidization of vaccines is a good example of external benefits being great enough to justify the intervention. When it comes to an issue like housing though I think you are hard pressed to come up with examples that would be viewed as clearly being beneficial.

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