California, New Jersey, and New York have the most cities with rent control. Sanctuary cities in California like San Francisco and Los Angeles have some of the toughest rent controls. Rent controls hurt the local economy and make rental unit availability worse. Aggregate deadweight loss from rent controls across the country negatively impacts the US economy and hence stock market. Let’s examine what happens with rent control from a macroeconomics perspective.
In a free, non-rent controlled market, the price of rent is established by the market where the supply and demand curves cross.
Look at what happens when rent control is introduced into a free market.
The red horizontal line represents rent control, or the maximum price landlords can charge for rent. The lower price of rent increases demand to “B.” However, since suppliers (owners) cannot charge the same rent that a free market would support, they choose to supply less rental units to the market at point “A.”
The gap between market demand and market supply is a shortage shown as a red shaded area. This shortage of rental units means that the competition for rental units becomes increasingly stiff and even well-qualified prospective tenants will find it difficult to find adequate housing in rent controlled cities. Worse, setting a price ceiling in cities like San Franciso and New York that have high property taxes and high maintenance costs means landlords would make hardly any profit and perhaps even lose money on rental properties. In other words, through rent control, the government has provided a strong disincentive for landlords to provide sufficient supply to meet a growing cities’ demand.
Rent control hurts local tax revenues as well because owners are bringing in less taxable income from their properties. Look at where the blue line intersects the demand curve at “D.” Point “D” represents the price renters would be willing to pay at the lower supply landlords provide under rent control. In other words, there are fewer rental units to tax (as supply contracts) and lower income tax paid by owners (because owners are making less). That’s a contraction in a local real estate market of both supply and lower tax revenues brought on by rent control. The local government must raise some other tax to offset what was lost from rent control, thereby increasing deadweight loss from taxation.
The blue shaded area represents a deadweight loss to a local economy from rent control. Deadweight loss is a loss of economic efficiency caused by rent control because more landlords could be leasing and thus more renters who could be renting (because of greater supply) if it were not for the price ceiling.
Finally, rent control shifts the aggregate supply curve inward or to the left which is not good for the economy as supply contracts.
As rental unit supply contracts, prices eventually rise. As William Tucker of the Cato Institute writes…
A look at the classified ads in rent-controlled cities reveals that very few moderately priced rental units are actually available. Most advertised units are priced well above the actual median rent. Yet in cities without controls, moderately priced units are universally available.