Democrats are pushing for expanded rent controls across the country. In every major state, rent control measures are being pushed by Democrats as rents rise.

Home builders are being hurt by the new single family home sales market so they are increasingly building multifamily apartments to keep construction going and workers employed.

rent-controlsThe demand for apartments has been rising for years as builders move to meet that demand. Democrats want to crash one of the few expanding markets, multifamily construction, with rent controls. Rent controls are a bad idea and they don’t work very well. They create inefficiencies in the market place and result in a loss of construction jobs. That is not an opinion but a fact. I will explain the mathematics and economics behind rent controls and what they actually do to the economy.

Keep in mind that almost any time the government tries to raise taxes, raise the minimum wage, and attempts to redistribute income from the rich to the poor through mechanisms like rent control, food stamps, Obamacare, and Medicare, those controls tend to interfere with the efficiency of the free market and result in a loss of jobs.

Let’s begin with a supply and demand chart for rent control:

suppy and demand

Price is on the vertical axis and quantity on the horizontal axis. The demand curve slopes downward and is labeled D. The supply curve slopes upward and is labeled S.

The Law of Demand (D) For Apartments

The lower the price of the apartment, ceteris paribus (Latin phrase that means “holding other things constant”), the more consumer demand for that apartment.

The higher the price of the apartment, ceteris paribus, the less consumer demand for that apartment.

The Law of Supply (S) For Apartments

The lower the price of an apartment, ceteris paribus, the fewer multifamily apartment complexes construction companies will build.

The higher the price of an apartment, ceteris paribus, the more multifamily apartment complexes construction companies will build.

Where the supply and demand curve cross is where we find market equilibrium between supply and demand. This is the most efficient balance between supply and demand that is achieved by a relatively free marketplace.

What Rent Control Does To The Supply and Demand Curve

Knowing the law of demand, what do you think will happen when the price of apartments is lowered? The demand will go up. Here is the demand side of the equation on the supply and demand chart:

suppy-demand-2

Notice that the demand curve slopes downward and so you can see that the quantity demanded goes up (D) when price (P) is lowered.

Everybody follows what I’m saying up to this point fairly well. Demand is almost an intuitive concept as everybody understands that when price goes up, demand goes down and vice versa. Where a lot of people get lost is when thinking about the supply side of the equation. That law of supply dictates that when price goes down, so does supply. In other words there’s less profit to be made building apartments when rent controls are in place. Banks give loans based on the number of units and what the market price is for rents. Brokers value a multifamily property by the number of units and what the market rent for those units are. Suppliers, or in this case multifamily construction companies, will not build as many multifamily apartments if they can’t make enough money on it. Here is the supply side of the equation on the supply and demand chart:

suppy demand

The chart above shows a big problem. There is a huge gap between demand (D) and supply (S). The demand of lower priced apartments far exceeds the supply as a result of rent controls. This is why you have 4+ year waiting lists for Housing Authority and Section 8 multifamily apartments. It is an inefficient marketplace where consumers are frustrated because of the lack of supply of available low income apartments.

Market equilibrium, freedom, and capitalism go hand in hand as evidenced by the supply and demand curve. When businesses and consumers are allowed to freely engage in transactions, a market equilibrium is established that is the most efficient outcome. Under socialism and communism where the government interferes with the freedom of the market place by setting artificial price controls, it creates gaps between supply and demand and makes an economy inefficient. This is the biggest reason why America is #1 in terms of both supply and demand side economics and that a communist country like China will never really pose a threat to our economic superiority because of the huge inefficiencies in their economy.

Notice the box that was formed in the chart above by the difference between the quantity demanded and the quantity supplied. This box represents a market shortage of rental units.

suppy demand

rent-controlNormally during a shortage, prices go up, supply goes up, and a new equilibrium is established. In a rent control shortage, rents are not allowed to rise freely and so the shortage stays. This shortage also represents a loss of jobs in the multifamily construction industry as less multifamily apartments are being built.

By Democrats pushing rent controls in every major state across the U.S., they are targeting the building of multifamily apartments, one of the few bright spots left in the construction industry. At a time when good paying jobs are scarce, that’s a really bad thing to do.

Take, for example, Standard Pacific (SPF), which builds both multifamily and single-family homes. With higher taxes and environmental regulation brought on by Democrats, and a weak single family home building sector, SPF has barely been able to tread water since May of 2013. This explains the sideways pattern on the chart in SPF where the stock has gone no where for more than 2 years in a Democrat proclaimed “economic recovery”:

spf-chart

What do you think will happen to Standard Pacific stock if widespread rent controls are enacted across the U.S.? According to supply and demand economics, Standard Pacific will have their margins squeezed and they will build less multifamily apartments and will layoff lots of workers as a result.