{"id":9991,"date":"2018-05-17T08:33:12","date_gmt":"2018-05-17T12:33:12","guid":{"rendered":"http:\/\/business.financialpost.com\/?p=1592305"},"modified":"2018-05-17T08:33:12","modified_gmt":"2018-05-17T12:33:12","slug":"william-watson-ontarios-politicians-flunk-econ-101-again-with-rent-control","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2018\/05\/17\/william-watson-ontarios-politicians-flunk-econ-101-again-with-rent-control\/","title":{"rendered":"William Watson: Ontario\u2019s politicians flunk Econ 101 (again) with rent control"},"content":{"rendered":"<p>Maybe you saw the short <a href=\"http:\/\/nationalpost.com\/pmn\/news-pmn\/new-york-city-loft-dweller-fined-185k-for-tourist-rentals\">article<\/a> in the National Post the other day about the New York artist ordered evicted from her rent-controlled apartment for having let it out on Airbnb. Eileen Hickey has been in the apartment, which is in Tribeca, on the lower west side of Manhattan, for 43 years and was paying US$1,500 a month for an entire floor. She was renting it out on Airbnb for the equivalent of US$4,500 a month. According to one real estate website, that\u2019s the median rent for a one-bedroom apartment in Tribeca.&nbsp;<\/p>\n<p>\u201cEcon 101,\u201d thinks an economist when reading that. Control prices and craziness happens. Rent control is the classic example. As the Swedish economist Assar Lindbeck once put it, \u201cNext to bombing, rent control is the most effective technique so far known for destroying cities.\u201d&nbsp;<\/p>\n<p>If the control price is the price the market would have produced anyway, no problem. Well, almost no problem: Even if prices don\u2019t get out of whack, rent control introduces rules and regulations that add to the cost of being in the apartment business.&nbsp;<\/p>\n<ul class=\"related_links\">\n<li><a href=\"http:\/\/business.financialpost.com\/opinion\/doug-ford-was-right-toronto-housing-wont-be-affordable-unless-we-develop-the-greenbelt\">Doug Ford was right: Toronto housing won\u2019t be affordable unless we develop the Greenbelt<\/a><\/li>\n<li><a href=\"http:\/\/business.financialpost.com\/personal-finance\/mortgages-real-estate\/condo-owners-make-big-gains-but-nearly-half-in-negative-cash-flow-report\">Condo owners make big gains, but nearly half aren\u2019t making enough rent to cover costs<\/a><\/li>\n<li><a href=\"http:\/\/business.financialpost.com\/real-estate\/renting-a-condo-in-toronto-is-a-losing-battle-with-dizzy-prices\">Got $2,166 a month? \u2014 you\u2019ll need it to rent a condo in Toronto, if you can find one<\/a><\/li>\n<\/ul>\n<p>But of course rent control\u2019s goal is precisely to put prices out of whack \u2014 to keep them below where the market would set them. Once you do that you create shortages and \u201cshadow prices.\u201d Shortages are simple: Sell something for less than its true market price and you get more would-be buyers wanting to buy than sellers wanting to sell. That\u2019s almost definitional: The true market price is the one that equalizes the number of would-be buyers and sellers. Any other price doesn\u2019t.&nbsp;<\/p>\n<p>The \u201cshadow price\u201d is the true value of the apartment, which over time diverges more and more from the official, legally sanctioned, controlled price. The controlled price in the New York example was US$1,500 a month, what the tenant was paying. The true market price was at least three times higher. How come? A lot has changed in 43 years. People\u2019s incomes have risen and Tribeca is no longer a dry-goods-and-textiles commercial district but a trendy corner for artists and celebrities just a 15-minute walk from Wall Street.&nbsp;<\/p>\n<p>Rent control usually lets landlords capture at least part of the costs of any renovations and upkeep they do on their properties. But changes in the value of their property all go to the renters. Normally renters have trouble monetizing them. They\u2019ll have the satisfaction of knowing they\u2019re paying $1,500 a month for something worth $4,500 or more, and the saved money to spend on other things. But apartment-sharing apps like Airbnb create the possibility of easily monetizing the regulated privilege they\u2019ve won via long tenure under rent control.&nbsp;<\/p>\n<p>At least some rent control regimes, like New York\u2019s, don\u2019t allow you to monetize your rent privilege. That\u2019s actually a little strange: Enjoy the benefits in kind and you\u2019re OK. But try to monetize exactly the same benefit and that\u2019s not OK. Logical or not, it\u2019s one of the few aspects of rent control that favours landlords. Even so, the court case to get Hickey evicted took four years, so you still have to be a little crazy to want to be a landlord in New York (which may help explain Donald Trump).&nbsp;<\/p>\n<p>As I say, this is all Econ 101. Control rents and you\u2019ll get apartment shortages and strange redistributions from landlords to people who don\u2019t obviously deserve big handouts courtesy of government regulation. All of this is covered the first two weeks of an intro economics course.&nbsp;<\/p>\n<p>How many politicians do you suppose will admit to understanding this basic part of economics? There\u2019s an election on in Ontario, so count that province out. The governing Liberals are running an <a href=\"https:\/\/www.youtube.com\/watch?v=dfFP2A-4Heo\">ad<\/a> in which Progressive Conservative leader Doug Ford says he\u2019d prefer to let the market dictate what rents should be. On the other hand, Ford\u2019s a populist so good economic sense is more likely to lose out to angry tenants who see prices going up (a couple of his candidates already issued a press release this week <a href=\"https:\/\/www.sudbury.com\/local-news\/pc-party-election-news-release-ford-wont-touch-rent-control-party-says-924924\">promising<\/a> that Ford won\u2019t touch rent control).<\/p>\n<p>The text accompanying the Liberal ad reads: \u201cDoug Ford wants renters to fend for themselves, saying he believes \u2018the market\u2019 is better than rent control laws designed to protect tenants from higher rents and unfair rent increases.\u201d<\/p>\n<p>The Liberal premier of Ontario probably doesn\u2019t copy-edit her YouTube ads personally but if a party puts air-quotes around \u201cthe market\u201d you probably don\u2019t want it running a modern economy. What protection do renters have against unscrupulous landlords? Other landlords \u2014 and lots of them.&nbsp;<\/p>\n<p>As Adam Smith taught, all competitors want to stifle competition and raise prices. It is human nature. The defence against it is to have lots and lots of competitors so that, however much they want to collude, they can\u2019t. Government\u2019s role is to encourage as much entry as possible into the housing market. Controlling rents and regulating the market to death do exactly the opposite.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What protection do renters have against unscrupulous landlords? Other landlords &mdash; and lots of them<\/p>\n","protected":false},"author":578,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/9991"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/578"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=9991"}],"version-history":[{"count":1,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/9991\/revisions"}],"predecessor-version":[{"id":9992,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/9991\/revisions\/9992"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=9991"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=9991"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=9991"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}