Real rent control

Dr Eric Crampton
The Dominion Post
7 September, 2020

It wasn’t that long after the Christchurch earthquakes that the calls for rent control came. The earthquakes had destroyed thousands and thousands of homes. Things were really rather dire. We lived in South New Brighton at the time; our neighbour had people living in her garden shed.

The shortage meant rental prices climbed to levels more commonly seen in Wellington. By April of 2012, New Zealand First was calling for rent controls, and the Tenants Protection Association agreed.

But then something happened. Christchurch rents flattened, and even dipped – while rental costs in Wellington skyrocketed.

The earthquakes were terrible but they brought one very big and important change. Councils on the fringes of Christchurch City started getting very serious about allowing new building. More housing became available, and rents dropped.

It’s too easy to see rental markets as a bit of a war between landlords and tenants, with landlords conspiring with each other to keep rents high and tenants pushing back through legislation restricting landlords.

Instead, landlords compete against each other for tenants, and tenants compete against each other for houses. When houses are in short supply, that process greatly benefits existing landlords; when houses are abundant, tenants do well. But few places in New Zealand have abundant housing.

After painful post-earthquake housing shortages, Christchurch became New Zealand’s most affordable major urban housing market. In Auckland, buying the median house costs over nine times the median household income. In Wellington and Hamilton, the median house goes for just under seven times the median household income. In Christchurch, the median house costs just over five times the median household income. Internationally, a median multiple of five is considered unaffordable, but we’ll take what we can get.

One simple but important lesson of economics is that the side of the market that has a harder time responding to changes in prices bears the brunt of price changes, for better or worse. The ‘inelastic’ side of the market draws the rent. Landlords still compete against each other for tenants, but when there are few houses available and owners are forbidden from tearing down existing ancient, drafty, mouldy wooden tents to put up dry and warm townhouses and apartments, tenants are in a pretty terrible spot.

When it is easy to build new houses, townhouses, or apartments, it is hard for rents to go up by that much. If rents go up, someone can profit by building new housing and renting it out. It is only when restrictions on building prevent that from happening that rents can really get out of line.

Just imagine what would happen to car prices, and to the quality of cars on offer, if the government made car importers go through a resource consenting process like the processes needed to build a new house, and banned taking ‘heritage’ cars off the road regardless of their state of repair.

Real rent control doesn’t mean legislated restrictions on what landlords are allowed to charge. Real rent control, and real tenant protection, instead means allowing such a flood of new housing onto the market that the ‘heritage’ houses that are barely fit for livestock would never be able to attract a tenant without substantial remediation.

It means getting rid of the barriers to building housing in places where people want to live.

It means letting developers’ expectations about what tenants might want drive decisions, rather than letting city councillors forbid anything that they cannot imagine anyone wanting – like housing that doesn’t have a carpark, or smaller apartments, or tiny houses, or apartments without balconies.

And it means recognising that every new dwelling that gets built makes all landlords compete just a little bit harder against each other for tenants – even expensive new apartments. People moving into new apartments leave another house open for someone else, and otherwise would have been competing with other tenants for other existing houses.

Legislated rent control, by contrast, does nothing to increase the number of houses available and cannot solve housing shortages or overcrowding. It is harder to get new housing built in cities stymied by rent control. Little has changed since Swedish economist Assar Lindbeck called rent control “the most efficient technique presently known to destroy a city – except for bombing.” The Brookings Institute summarised the evidence recently, finding that rent controls wind up decreasing affordability.

The new National Policy Statement on urban planning requires councils to allow more housing in places near public transport. It is an excellent first step. Christchurch built its way to housing affordability after the earthquakes, and the rest of the country can as well. But councils still have strong incentive to restrict new development, pushed by local government financial models that make growth costly for councils. There’s important work yet to be done to end the housing shortage and to bring real and effective rent control.

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