Rent control as a social bargain

Hoboken-Rent-Control-Discussion-NJ

This is one area of economics that really bugs me.  For a discipline professing to understand commerce, markets and investment, economics has no widely accepted accepted core theory that allows for systematic economic rents to land owners.

But that doesn’t stop most economists being confident about their opinions on the matter.

Rent control can work. With the right institutional structure we can have any economic outcome we want – it’s just a matter of ensuring rent controls do not conflict with other regulations or incentives.

In the case of rent controls, one key proviso is that alternative non-residential land uses are excluded from certain areas through planning controls.  Such provisions remove the potential for commercial uses to outbid for locations and force residential development into less desirable areas.

While this won’t force the development of new dwellings in these areas, it will force land owners seeking greater rents to develop new residential dwellings instead of other buildings.

It might seem odd to talk in terms of ‘forcing’ land owner to develop housing, but we do need to keep in mind that land owners as a group exert monopoly power – they can delay investment indefinitely under most reasonable conditions (for example, if there remains scope for future increases in the intensity of development, and/or if land value can be used as collateral to leverage other investments).

A simple thought experiment can help us get to grips with the dynamics of the rental market. Imagine that all renters could coordinate a nationwide agreement that no one would outbid the current tenant for a home for a period of 10 years.

Immediately each home in the rental market (a seller with a monopoly on its unique location) will face a monopsony buyer (a single potential tenant, since all others have agreed not to bid).  The rental bargaining power is evened up to a degree, but is still not that great for the tenant – after all, they can’t choose to rent anywhere else since they have promised not to.

In this situation rents might be bargained down a little.

If most renters had ‘outside alternatives’, for example if they could move in with others should the rental bargain go awry, then they would gain the upper hand.  Rents could be bargained down to marginal cost of occupancy (the extra costs incurred in having a tenant rather than leaving the property vacant).

But this is not a satisfactory long run outcome. Rents need to be at least higher than the marginal cost of constructing a new home, even with land costs are zero, if any new housing is going to be built by private land owners. Given the land component of the new housing is usually between 20 and 50% of the cost, this is still a significant scope for rental reductions.

We still face a major problem of competing uses of land, which would be able to bid up land prices. This is why it is necessary to couple rent-controls with zoning controls, to ensure that there are available sites for residential development without competing land uses.

Framing the problem in this way is by no means controversial outside of a particular circle of economic theorists.  We know, for example, that economists have “no fully articulated modern model of rent controls”, and that if markets are imperfect, than regulatory controls can be welfare enhancing.  Yet even now these models of rents under imperfect competition have had little empirical corroboration, partly due to the lack of consistent rental data collection over long periods of time.  Finally, much of the economic analysis focuses on the few cases of residential rent controls in the US, with little attention paid to the long and diverse history of rent controls across Europe.

I would suggest that part of the reason such little attention has been paid to empirically investigating rent controls is the challenge of understanding the complete policy framework in which they operate.

In any case, with this ‘bargaining framework’ in mind, here are some proposals to swing power back to tenants (none of these are original, just variations of what has been implements in different places at different times).

Regulate residential tenancies contracts into short and long term.  Short term will be 3 months or less and long term will be any period greater than 3 months.  This tiered regulation will allow for short-term holiday-style letting to be treated a particularly flexible way, while stable tenancies are granted much tighter regulatory control.  These tighter controls might include these couple of off-the-cuff suggestions

  1. Include limits on the rate of increase in rent to CPI, as well as limits to the frequency of changes to rents
  2. Create a national insurance pool for private landlords to cover legal claims on lost rent if certain conditions are met (low income renters etc) – this would allow more flexibility of landlords to accept tenants without track records and even up some of the bargaining power for poor tenants who need it most.
  3. Default limitations on the ability of tenants to sublease or transfer leases (that can be changed by agreement)
  4. A government owned corporation that competes in the market for low cost housing in strategic locations (as a builder/developer, not unlike the Brisbane Housing Company).

One we acknowledge that rental prices are a bargaining outcome, between tenants for fixed locations, and between home owners and tenants as a collective, many options for improving undesirable outcomes present themselves.  While this thought experiment is by no means the final word, it offers directions to pursue and I hope promotes some experimentation with new policy at least in some locations, which can be later assessed for widespread implementation.

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Comments

  1. I’m not sure about direct price controls per se.

    But I like the idea of the government flooding the market with public rental stock in order to drive down market rents.

    Ideally, low income renters should be given the option to buy the place they are in, perhaps with all or some of the rent paid contributing to the purchase price.

    This would renew the housing stock and give tenants an incentive to look after the place and community they live in.

  2. Price controls are a soviet instrument of central planning that create shortages, surpluses, black markets and inferior quality goods.

    • Thanks for your informative and constructive input to an article that didn’t actually mention price controls, but instead sought ways to modify the legal/institutional environment to shift bargaining power towards tenants.

      • Cameron, your sympathies to tenants is extraordinarily selective.

        You now display a surprisingly good understanding about zoning to prevent “alternative users of the land” from “outbidding residential users” for the land; how about a bit of clarity on our long standing disagreement over zoning that prevents RURAL users of land from being out-bidded by those who would put it to more valuable use?

        There simply isn’t a problem with housing costs (either ownership or rental) anywhere that this prevention does not exist.

        I presume you are aware that economic rent and “real estate market rent” are two different things, but your above approach seems to be confusing the two.

        I agree completely that the mainstream economics profession is an abject failure on the subject of economic rent in land, but you are certainly not helping.

        Economic “rent” is any unearned wealth transfer that results from exploitation of a distortion in markets. This includes overcharging for goods or services by cartels or license holders.

        But there is hardly a more obvious “economic rent” than there is in land. Some of this is purely the result of rising incomes, so that the owners of land in a growing economy reap increases in its value even if they do nothing to improve their own land. They also reap gain from government expenditure that benefits their location. This is the justification for land taxes.

        But this general theory is completely powerless to explain massive discontinuities in land values across regulatory boundaries, and as far as I am aware there is no mainstream acceptance as yet, of any attempts to address this deficiency (Alan W. Evans has made the most outstanding attempt that I am aware of so far).

        For example, the fact that in otherwise alike cities, one with a regulatory boundary and one without, the fact that land that does get built on is inflated in value tens of times in the one with a regulatory boundary, goes unnoticed by the economics profession, and worse, explained away by theoretical prestigitators (take a bow).

        Even the fact that a city can morph from one to the other case in a few short years, while alike cities do not, is not regarded as proof of interference in normal market function, even when the changed circumstance IS rationing of land supply.

        But here you are, advocating the creation of, if I understand you, zones of sufficient supply of rental property, “to bring the rents down”…..!!!

        So what, to your mind, is “sufficient supply”? Because “20 year” UGB’s have been a proven cause of increased land rent within them long since. If you really want to bring rents down, just create residential zones with no boundary at all between them and de facto infinite supplies of land in rural use – problem solved.

        I don’t need special “bargaining powers” created for me to protect me from economic “rent” when I go and buy food or clothing or a car or an IPod. I don’t need such a thing for my housing needs either, in any city without prohibition on conversion of rural land to housing uses.

      • “I don’t need special “bargaining powers” created for me to protect me from economic “rent” when I go and buy food or clothing or a car or an IPod. I don’t need such a thing for my housing needs either, in any city without prohibition on conversion of rural land to housing uses.”

        Actually, you do need ‘special’ bargaining power in these areas as well. That’s why we have the ACCC, State level regulators, etc, who prohibit exploitation by industries with varying degrees of monopolistic power. That’s why there are new laws governing mobile phone contract conditions and the like.

        So why should they exist in these areas but not in housing where monopoly power is very clear, as you and I both agree?

        “Because “20 year” UGB’s have been a proven cause of increased land rent within them long since.”

        Well, actually no such proof exists except in the minds of the true believers.

        As I have said many times the value of land is NOT related to housing affordability without consideration for development costs and other arrangements that affect capitalisation rates. The key indicator of housing affordability, as I have said many times, is the rental price to income ratio after controlling for home size.

        Again, arguing about housing affordability by pulling out numbers on land values is disingenuous, when you surely understand that the relationship between these prices and home values depends on many factors of which ‘years zoned supply’ is not one.

        Just think about your argument for a moment Phil. You are saying that 20years zoned supply is creating high land values, yet 30years will some how have a magical effect on price, despite almost no one actually knowing with any degree of certainty what 20 years of supply would look like? Not only that, for such things to have an impact on prices today, you must believe that these zones will be unchanged for more than 20 years.

        Lastly, the measure of 20 years zoned supply are typically for lots that can be subdivided into >10 dwellings, when as in reality 60% of dwellings are from subdivision of less than 10.

        Convinced yet?

      • Oh, rubbish, Toyota or Hyundai aren’t going to collude to rip me off. If they do, someone will sell me a Skoda instead. And these regulations you are talking about are to ensure that competitors are NOT excluded from “supplying the market”.

        But land rationing DOES prevent competitors from entering THAT market.

        “….Well, actually no such proof exists except in the minds of the true believers…..”

        Oh, rising land prices inside a “20 year” UGB four years after it is imposed, is only proof to “the true believers”. I think you’re the “true believer” in this discussion, not me.

        “…. arguing about housing affordability by pulling out numbers on land values is disingenuous…”

        And you were agreeing the other day that Coase was right that economists fail to engage with realities on the ground? Oh, don’t worry about actual data on land values when comparing two differing regulatory regimes……

        “….the relationship between these prices and home values depends on many factors of which ‘years zoned supply’ is not one…..”

        Blind to “supply” and “quota” effects, blind, blind.

        Your criticisms of the nonsensical basis on which “20 year UGB’s” are calculated is a basic reason not to bother with them at all. I agree they are nonsensical and planners suffer from economic illiteracy. Yet you defend them to the death as having no effect?

        I have already explained on numerous occasions how the market for land within a newly enacted UGB behaves. For example:

        http://www.macrobusiness.com.au/2013/04/sa-property-council-has-no-shame/#comment-233659

        “…..the value of land is NOT related to housing affordability without consideration for development costs and other arrangements that affect capitalisation rates…..”

        Very funny that cities with similar “conditions of development costs and other arrangements that affect capitalisation rates”, yet differing in growth containment regulation (or not) have such differing outcomes for housing affordability, then.

        “….The key indicator of housing affordability, as I have said many times, is the rental price to income ratio after controlling for home size…..”

        This is like analysing the share market using only earnings, not prices. House prices out of whack with rents is the same as the prices of shares being out of whack with dividend earnings. Expectation of speculative capital gains.

        It is a disgrace that a necessity, housing, or rather the land it sits on, has been turned into a speculative commodity by the rationing of supply. The result of persisting in this is seen in the UK: land prices rising so fast, over decades, that even shrinking lot sizes cannot keep the prices “stable”. The size of lots and houses built in the 1930’s in the UK represented a far fairer, economic-rent-free deal.

        http://www.macrobusiness.com.au/2013/05/european-economy-facing-generational-shift-down/#comment-245246

      • Oh, rubbish, Toyota or Hyundai aren’t going to collude to rip me off.
        Audi, BMW and Mercedes seem happy to. Their vehicles are 40%+ more expensive compared to other countries.

  3. I don’t know how people can seriously entertain these market interventions without acknowledging the unintended consequences.

    Of course there are ‘problems’ with the rental market. Namely, the limit of finite and scarce resources.

    Not everybody can obtain the property they desire at zero cost.

    But it is being suggested that markets do not respond to supply and demand efficiently, and that somehow there is an expert who can allocate resources more efficiently.

    As Hayek suggested, this kind of Fatal Conceit has to be fought every time it comes up.

  4. Imagine that all renters could coordinate a nationwide agreement . . .

    I would take that thought and run with it.

    All economic rent may be regarded as flowing from a failure or inability on the part of the Players to “coordinate an agreement”.

    We might then define rent as:

    a benefit arising from a “metastable” distribution of rights. A metastable distribution is a pareto sub-optimal [strictly speaking, “rights-based” pareto sub-optimal] distribution which persists over time due to the existence of a transaction cost barrier which prevents it from being negotiated away. Certain conditions (specifically Prisoners’ Dilemma) can act as anti-catalysts in promoting metastability: they operate to magnify small transaction cost barriers thereby increasing the stability over time of rent-transferring distributions of rights.

    (This is discussed further here.)

    This definition also provides its own solution to the problem of rents: reduce transaction cost barriers but – even more important than that – remove the institutional barriers that create Prisoners’ Dilemmas.

    The two greatest sources of Prisoners’ Dilemma (the two greatest obstacles to Players “coordinating an agreement”) are:

    a) the monopoly enjoyed by political agents over the initiation of legislation, a monopoly which is broken by (direct) Democracy; and

    b) the modern state’s monopoly of jurisdiction over the inhabitants of “its” territory, a monopoly which is broken by the Coasian “polity market” discussed last week.

    Solve these and all those other problems fall away.

  5. A good way to get rents down would be to allow more freedom in the creation of extra housing. This does not just mean allowing more of that hated urban sprawl (although I like that too!). For example if every house was allowed to be turned into a share house, this could create more housing.
    Also if old people were allowed to take in a boarder without affecting their pension or the capital gains tax free status of their house – this too could create extra accomodation and allow rents to fall.

    • “…if every house was allowed to be turned into a share house, this could create more housing.”

      There is plenty of scope for this in many location already (and has been for years). Depending on your Council and State regulations you may need to meet some minimum fire safety criteria.

      “Also if old people were allowed to take in a boarder without affecting their pension or the capital gains tax free status of their house – this too could create extra accomodation and allow rents to fall.”

      Changes to rules surrounding capital gains from homes and qualifying for pensions etc are all under discussion at the moment. The Productivity Commission has recommended that the incentives for single retired people to stay in large houses rather that relocate to smaller dwelling (or rent our rooms as you suggest) are not quite right.

      I would be interested to know how common ‘off-the-book’ borders are in different areas.

  6. “In the case of rent controls, one key proviso is that alternative non-residential land uses are excluded from certain areas through planning controls. Such provisions remove the potential for commercial uses to outbid for locations and force residential development into less desirable areas.”

    It appears that a central role for the planner is implicit in the key proviso?

    Reviewing and assessing every intended use. Determining whether to allow a home office, a workshop in the garage, a granny flat with a typist instead of a granny. A corner house with a shop in the garage. Closing down service businesses that have sprung up in residential areas and ‘taking up’ bed rooms.

    Sounds a bit like the current approach across Australia.

    And this is supposed to increase the supply of housing and reduce its cost?

    How about make it easier for people to make their own decisions where to live and what to build subject to some basic easily understood and assessed safety standards. By all means put the steel works somewhere safe (and perhaps even some light industry) but do we really need to control the location of offices, retail, residential and agricultural?

    Flexible supply (not dependent on the idiosyncratic ideologies and preferences of town planners) increases the likelihood that housing will be affordable to buy or rent and most importantly – reflective of the multitude of choices made by individuals.

    • “It appears that a central role for the planner is implicit in the key proviso?”

      Yes.

      “Reviewing and assessing every intended use. Determining whether to allow a home office, a workshop in the garage, a granny flat with a typist instead of a granny. A corner house with a shop in the garage. Closing down service businesses that have sprung up in residential areas and ‘taking up’ bed rooms.”

      No. Just like planning schemes of many thousands of cities across the world there will exist a scope of allowable development in certain areas (as there is in Houston Texas as well – with maximum residential densities, car park requirements and so forth).

      Land owners who meet the planning criteria in their area will be approved to develop. Those who don’t will not.

      For some reason people believe that the many hundreds of thousands of approve new dwellings in Australia are not enough for the near future, and that if we had just a few more approvals sitting off the market that prices will be affected. It’s nonsense thinking.

      Back in the 1980s the market model was shown to be false for infinitely durable goods (land in other assets), and that owners of such assets would have no incentive to sell if they were more patient than buyers.

      • My longer response was gobbled by gremlins.

        “.. a scope of allowable development…’

        Interpreting that phrase will keep an army employed.

        “For some reason people believe that the many hundreds of thousands of approve new dwellings in Australia are not enough for the near future, and that if we had just a few more approvals sitting off the market that prices will be affected. It’s nonsense thinking.”

        Some may believe that but most people (around these parts) believe that talk of ‘approval’ numbers as some indicator of sufficiency of supply is meaningless while rental vacancy rates remain well south of 5% and home ownership and increasingly home rental is beyond the reach of low income earners.

        It is not surprising that some people, especially Greens, resort to complex schemes like rent control to remedy market failure in a basic good like housing.

        Market failure is the inevitable result of the policies they have campaigned for and defend vigorously – tight urban growth boundaries combined with a purely theoretical support of brown field intensification – in practice too many of their supporters live in the best locations for brown field intensification projects.

        Greens are the ultimate conservatives – which of course would be fine if they also had a honest policy about population growth, migration and refugees.

      • “…..Back in the 1980s the market model was shown to be false for infinitely durable goods (land in other assets), and that owners of such assets would have no incentive to sell if they were more patient than buyers…..”

        So what’s more likely to reward “patient sellers”?

        A “20 year” or “10 year” quota of land for development, or freedom for any landowner to develop it as he wishes, without regard to grand central plans about where housing is allowed to go, period?

      • Here is a little block at Riverstone in North West Sydney – 14 lots – selling for $420K for the lot.

        http://www.realestate.com.au/property-other-nsw-riverstone-7564951

        Literally, 5 mins from Riverstone railway station – which is about 30 mins from Parramatta and approx 60 minutes to Town Hall.

        Currently zoned Rural 1(a) – for reasons that are elusive doesn’t look like prime merino pasture.

        Might be a good project for some young anarchists with a trust fund.

        By the Land – erect a wall or dig a moat to keep out the Town Planners and their henchmen and starting building.

  7. Residential rent control won’t work : the apartment owner will simply demand their rent in cash and bypass the control all together.

    Where Australia needs rental control is commercial real estate, since a shopping center have a monopolistic control over rent in an area. Everything outside of a shopping center pretty much dies, so individual shops have very little bargaining power.

    • None of you guys are even starting to think of the developer or the landlord, as having already paid over “economic rent” to the original vendor of the land, and then having to make a return on that.

      This is just classic planner conceit writ large by a sufferer of it, for our confirmation. Cameron sees the solution to a distortion that has been caused by regulations, as another layer of regulations. Classic, classic stuff – but seldom accompanied by such impressive sounding theorising.

  8. my finger slipped and I deleted my post!!! so – an abbreviated version……

    I can’t believe this retro nonsense. Rent controls had their day in the ‘social justice’ post WW2 environment. The deleterious impacts are obvious for anyone who cares to research it or, for example, look at the current price differential (not to mention sad /non-existent level of maintenance) for a ‘rent controlled’ vs other apartment building in NYC. Same for Oz cities prior to our getting rid of this historical anomaly (or necessity for its time for some)

    The availability or lack thereof, of affordable rental property is a direct result of the ***load of regulatory over-kill and restrictive and biased (in their administration by state tribunals) tenancy laws. Apply the concepts mentioned in multiple MB posts to free up supply and tenants (and landlords) will be better off.

    As a real residential property investor (ie, it’s a business not a tax deduction) any attempt to introduce this sort of policy would see me sell off/develop properties as owner occupied, higher priced homes, and take my profits offshore.

    • “As a real residential property investor (ie, it’s a business not a tax deduction) any attempt to introduce this sort of policy would see me sell off/develop properties as owner occupied, higher priced homes, and take my profits offshore.”

      So you are basically saying rent controls would lead you to adding to the supply of housing?

      By the way, what’s holding you back now? It surely doesn’t seem like planning controls.

      • “adding to the supply of housing’

        – well maybe with current ‘so-called investor’ owned properties which would likely come on the market with this sort of major policy change, but probably at prices unaffordable to a lot of renters. though might improve FHB supply as a one off. Longer term, very unlikely IMHO. As for myself:

        no i wouldn’t increase the housing supply – what would happen with 1 property for example, is 6 units which I rent at so called ‘affordable’ levels because I can get a good return as I bought the property some time ago, would be re-developed as 2 [very expensive] houses.

        why? – because planning/zoning controls will only allow 2 houses instead of the more economically efficient 6 town house type newer [more environmentally efficient etc, etc]
        residences that can fit on the site with plenty of green space etc, etc…..I want +ive cash flow, that is why I keep the property as is (updated and maintained) and it contributes to my financially independent, self supporting [baby boomer] status

        BTW – nothing is holding me back. I have vote with my dollars and invested [very profitably] in Houston residential….that is dollars that would have been invested in Oz if it wasn’t for the absurdities of our current environment have already gone offshore

        Surely this is a statement of the obvious or is the ‘social justice’ collective the way to go??

      • DavidJWalsh has hit the nail on the head. This might as well an incremental game being played by collectivists. Load markets up with regulatory distortions, and then convince everybody that “markets have failed”, demonise private property, remove people’s rights, kill the goose that lays the golden eggs.

        What I would be interested to know from David J Walsh, is how he decides how high to go to secure a site against other bidders under Australian urban land market conditions. If developers know they will be able to do more valuable developments, won’t they all just be prepared to bid up a bit higher, handing all the gain to the vendor of the site?

        Problem is, mainstream economists cannot see the difference between urban land markets in which the prices are set by “the maximum that people can stand to pay”; and those in which the prices actually include “consumer surplus”, as is the case with most goods and services for which there is a competitive market with unrestrained supply.

        Where fringe developments come to market at a price that is close to “rural value, plus cost of development, plus a modest profit”, it can be noted that the entire housing market will be behaving like a classic “increasing consumer surplus” paradigm. Houses get bigger and higher quality as a given proportion of income. Median multiples remain at around 3, which is clearly derived from a proportion of income that people are comfortable with allocating voluntarily to housing as opposed to other expenditure.

        Median multiples of 6 and over for shrinking, falling-average-quality housing, indicate an absence of “consumer surplus” and the existence of a kind of “monopoly rent”. Karl Marx was actually correct about this, not that the insight was original to him, or that anyone disagreed with him. It was the solutions that aroused controversy. Nationalisation, land taxes, “new towns”, or rapid spatial growth of cities based on transportation improvements?

        It is the latter that rendered Marx irrelevant. But the Marxists are rearing their ugly heads again now that their “Green” useful idiots have restored “monopoly rent” in urban land.

      • “Load markets up with regulatory distortions, and then convince everybody that “markets have failed”, demonise private property, remove people’s rights, kill the goose that lays the golden eggs.”

        To believe that markets themselves are not social and regulatory constructions is to miss the point of this post, and my repeated arguments, entirely.

        There is no baseline ‘free market’ case with ‘free market’ property rights – never was, never will be. Markets are regulations in their own right – regulations about property, contracts and so forth.

        To believe that planning controls have become more restrictive is to ignore all the evidence to the contrary. Strata titles did not even exist until the 1970s in most States, in 1980 three quarters of the then 56 local governments that made up greater Melbourne did no allow multi-unit development above 2 storeys.

        The reason older suburbs seem to offer larger housing lots is because minimum sizes were much larger than today in almost every local government area in every state.

        To any objective observer planning controls are less stringent and more flexible than ever.

        In any case, as I have said in the past, there is no housing shortage and rents are tracking incomes as you would expect. This post is about shifting the power back to tenants in the name of social equality, as is achieved in many other countries using policies similar to what I have suggested.

      • No housing shortage with circa 2 % vacancy rates in rental accommodation in most capital cities?

        Notwithstanding govt policy that has made ‘buy to let’ the nations no 1 industry.

        Imagine the room rates in hotels if they were sitting on 97% occupancy rates for an extended period.

        How do you explain that again?

        Or are you using willy’s approach of counting spare bedrooms and beach houses

      • If rents are tracking incomes, why are you so concerned about “empowering tenants”, yet you aren’t concerned about house prices definitely NOT “tracking incomes”?

        Larger lots were CHEAPER in real terms, in the old days, than small lots are NOW. The land price per square foot has inflated some twenty-fold. People CAN’T AFFORD a larger lot even when there are no regulations preventing their development.

        IF you combine fringe growth containment, which is a recent mania based on “save the planet” beliefs, with larger lot zoning, you get MUCH MORE EXPENSIVE lots again; this happens in some US cities like Boston and Santa Clara. This is the ultimate deliberate “exclusionary” tactic.

        The old exclusionary tactic of large lot mandates was ceasing to work because the real cost of land per square foot was falling and lower income groups were moving out into longer established suburbs with depreciated houses. A Seattle bureaucrat (retired) told me of a discussion he was party to in the 1990’s, where the point was made that growth containment COMBINED with large lot zoning, would actually create very expensive lots and restore the “exclusion” effect, made the eyes of half the people in the room light up.

        Actually, I agree that sophisticated markets are endogenous to the “construct” of property rights and contracts, that we owe to the John Locke generation (and we are in danger of taking for granted this “killer app” of our civilisation, to use Niall Ferguson’s term from “The West and the Rest”).

  9. I’m sure that there are more areas, but the two that come to mind are the limited rent controls in NYC and the broad based rent controls in Germany.

    Have you examined those two models or any others to see how that has affected the markets. I know that in Germany it has held prices down, and yet only about 40% own their own house/apartment. Keeping prices artificially low discourages investment, so it’s not always the most desireable outcome.

    In NYC it seems to be targeted to certain sections of the city to ensure that some less privileged renters can still inhabit NYC. I’m not sure whether it really works or just offers little more than lip service.

    • Yes I had Germany in mind writing this. However it is a struggle to read original documents and commentary without knowing the language.

      I did note that many researchers find the focus on NYC in economic analysis to be completely absurd when a variety of other rent-control mechanisms have been tested across Europe for most of last century (and relative to out situation we might say they still have a framework that gives tenants bargaining power).

      • You are probably correct re NYC – some of the prices are outrageous, so rent controls aren’t affecting the broader market.

        Germany is interesting – the population is diminishing, so are they really necessary still, and do they discourage new apartments.

        Really I don’t know, I’m just asking the question because demolitions must eventually be replaced with a better standard of housing. If there is no money in it they won’t be replaced.

        That model would be much more difficult in Australia with a growing population. We have to keep building. If there is no profit the situation would quickly become more dire than it already is.

      • “that gives tenants bargaining power”

        again per my post – get into the real world…you want bargaining power and equality, then address the bias/distortion in regs and their implementation now in Oz, not in some theoretical EU based model

      • “get into the real world…you want bargaining power and equality, then address the bias/distortion in regs and their implementation now in Oz”

        Sure, that’s what the post is about, correcting the bias in favour of landlords to reduce rental prices without reducing incentives to invest in new housing.

      • My experience of Germany re housing makes this country look ridiculous.

        In general people spend far less of their income putting a roof over their head ( and more on the good things).

        The housing is generally much more solid, modern and superior, (no tin roofed fibro crap).

        Property prices are very stable, no boom and bust casino mentality.

        Perhaps we could do with imitating their model, it can only improve things.

        Also none of the psycho class warfare/ renter scum mentality that pervades Australian society.

        Actually, thinking about it makes me wonder what I’m still doing here….oh, the weather, that’s it.

        You can get a reasonable well appointed apartment in Berlin for 150k if you want, and can expect a yield of 8-12% if you rent it out.

  10. I think the main problem with this post is that it assumes we have a problem that needs fixing and can be fixed. The system may be unfair to some and overly fair to others, but most likely the arrangement with rent (of all types) is “working as intended”. That is not a bug! – it’s a feature.

    In Australia, we no longer do very many productive things. There is very little opportunity for anyone to contribute to the betterment of the nation. The big opportunities are in parasite work. Collecting rents (of all types) has been promoted to a noble profession.

    The reason this is “working as intended” is that we have a stratified society with a gradual shift in size of house, living standard, status from the lowest to the most elite. Drive around Bankstown and see the fibro shacks then drive around the eastern suburbs of Sydney and see the vast stretches of magnificent houses.

    Take one of each house type (Bankstown v Mosman) and most likely the inhabitants will be equally useless. What keeps the useless people in the house in Mosman from being churned with the numnuts in Bankstown? Rent. The dozens of little fees, charges, tax rorts, corporate welfare, share dividends etc. etc. keep the wealthy afloat and the lower classes just treading water. This makes for a stable society. Unfair, but stable.

    In a post-productive society, to maintain stable social orders inherited from the past, you need to establish mechanisms of wealth transfer from bottom to top. The wealthy people need more money to live than the poor, and without any prospect of gainful employment, the only option is covert wealth transfers.

    This is an engineers point of view – I tend to see all complex structures as systems. I believe that this model provides a very easy to grasp explanation for many of the strange things we see in our society.

    In my opinion, poking around with policies and regulations is not realistic – in fact it will meet very stiff opposition. The fundamental problem is we are facing the redefinition of basic ideas like the value of human labour and its relation to money. Perhaps we are heading back to a type of feudalism? I wonder if that happened would our economists even notice?

    • +1 Very good post. We probably never really departed from feudalism, just replaced by different systems.

      • We did depart from feudalism in the 19th and 20th century because we needed to mobilise the middle classes to build the new world. The 20th century was built by skilled middle class artisans who created the wonders we have now. Engineers, machinists, draftsmen – they had life long skills that were valuable – so they were fed and housed and enjoyed prosperity.

        That time has passed. Mass production has matured and the basic human is almost obsolete. We are now post-productive and on the way to post-scarcity. Our economic and political philosophies are still rooted in the 19th century.

        Almost all the worlds troubles can be slated to the basic lack of understanding that the fundamental rules are changing and the old theories of money, property and work are dissolving before our eyes.

        My guess is that the two most likely future scenarios are:-

        1. Dark ages with AK47s and iPhones

        2. Virtual Worlds supplanting the old world.

        The really bizare thing is that almost all the worlds media bandwidth is dedicated to maintaining the illusion that the future will be just like the past. If you think about what might come in the next 50 years, fitting that into the world of asset bubbles and old world business cycles is crazier than any science fiction.

  11. Yes, somehow the whole German system “works”; but the fact that they avoid bubbles in the value of the land, and manias in capital gains, is an integral part of this.

    International investors piling into German property as a safe haven look highly likely to make Germany join the ranks of the bubble nations yet. If the Germans manage to halt this, full marks to them.

    There are a few things I suspect has helped Germany remain a stable urban land value nation. They did have a serious unaffordability problem in the 1980’s followed by a long unwinding. Firstly, they absorbed East Germany. Secondly, Eurozone membership has had a deflationary effect in Germany, contra to the inflationary effect in the “low cost” economies like Greece, Ireland and Spain.

    Then there is the German land supply system. Because their rural land holdings are in very small parcels, there are a lot more vendors competing with each other within any given “UGB”. In fact many such small land owners will develop a few sections for their own family and friends. This takes those people out of the existing market and takes pressure off it.

    Then there is the seldom-exercised but still-present powers of compulsory acquisition by government. Lastly, the formula by which local governments are bulk funded by national government, is designed to make local government pro growth, not anti growth.

    • “Firstly, they absorbed East Germany. Secondly, Eurozone membership has had a deflationary effect in Germany, contra to the inflationary effect in the “low cost” economies like Greece, Ireland and Spain.”

      Geez your insisting. You want to know what the inflationary effect in Ireland, Spain, the US, Canada, Australia, Netherlands…. was? Free money. Simple as. Even your loved Texas is way more restrictive than other states in this regard. Only macro policies can reduce the boom-bust cyclical nature of free money. The rest is just pandering to some frontier´s-cowboy mentality that blames “the Man” for all their problems but then comes running for another serving of pork-barrel. And the last time I checked pigs had bilateral symmetry.

    • @PhilBest

      German Population 1960 73 Million
      German Population 2011 82 Million

      In that period populations of Australia and Canada have doubled.

  12. Mind you, this is interesting about Germany:

    http://www.spiegel.de/international/germany/new-census-finds-smaller-population-and-fewer-foreigners-in-germany-a-903083.html

    “…….But there were also plenty of intriguing home-related findings. For example, the census found that 680,000 dwellings (1.7 percent) lack either a toilet or bathing facilities (shower or bath), and that almost 200,000 homes are without heating. Meanwhile, almost 2.5 million dwellings are heated by “ovens,” a category including night storage heaters and excluding heaters using gas or oil……”

  13. there is no housing shortage and rents are tracking incomes as you would expect

    Not a lot of truth there. Firstly there are many severe shortages related to the housing arena. “No shortage” is pure denial.

    In Sydney an ordinary house used to rent for 1/3 an ordinary wage. Now the same house rents for 1/2 an ordinary wage. That’s a 50% increase in real terms. Also an ordinary unit now rents for $500 per week. That is more than the aged pension and twice the unemployment benefit

    • I really appreciate your vague anecdote Claw. I’m just not sure I trust your definitions of ‘ordinary house’, ‘ordinary wage’ etc.

      I think I trust the ABS a little more.

      “Housing costs as a proportion of income for lower income private renters fell from 34% in 1994-95 to 28% in 2007-08, then rose to 30% in 2011-12”

      Add to that the increasing size and quality of homes and we are doing ok.

      It is simply my proposal that if we desire to shift the bargaining power towards tenants in order to increase the real wealth of the poorest households, we could do it.

      http://www.abs.gov.au/AUSSTATS/[email protected]/Latestproducts/4130.0Main%20Features22011-12?opendocument&tabname=Summary&prodno=4130.0&issue=2011-12&num=&view=

      • In Sydney in 1970 an ordinary house cost 1/3 an ordinary wage to rent. Your figures from 1994-2012 won’t show that.
        In other states, the rise in rents occurred more recently, so you might be able to find that in your figures (assuming you are interested in the truth).
        You might be smug about the increasing size and quality of some houses. Sadly many people are suffering expensive and low quality housing due to the shortages due to current housing policy. You seem to deny this. Why?

    • Cameron the claw is right, there is a shortage in a number of areas.
      I also have some genuine concerns with rent controls. If the return is depressed artificially then so to will the new supply and that’s critical in this country with a rapidly growing population.
      that might not be so evident in Germany where the population has fallen slightly, but even there it will eventually cause problems as many ageing structures begin to show their age.
      You need to tackle supply not rents.

      • “Cameron the claw is right, there is a shortage in a number of areas”

        but not in areas on city fringes. how will new land release help to fix a shortage in inner city areas where people want to live? what we need is urbanization of suburbs (demolish old dark moldy terraces and build proper modern units). it seems to me that we think we still live in a small colonial towns where everyone can get a house and still live few minutes from everything.

        btw. german large city population is growing again

  14. @ Rumplestatskin

    You are mostly right about housing. Land is clear natural monopoly and no market solution is able to do optimal allocation of resources. All “free market” solutions for housing failed. It is hard to admit but, even “eastern block” countries did it better despite poverty (all east european countries have very high home ownership rates and more importantly <5% private renters).

    If we want to solve housing problem we have to use same methods we use to deal with other natural monopolies (utilities, roads, rail-roads, …). Tools like: compulsory acquisitions, price and rent controls, long term urban planing, anti-nimbies laws, …

  15. Jumping jack flash

    Far more effective to introduce debt controls than rent controls, because rent is set to the point it is because of the availability of debt to make the purchase in the first place.

    But this would require our leaders to have backbone and vision.

    They have neither, therefore they are told what to do by those who have.

  16. Not sure I agree with the premise… wouldn’t a landlord only be a monopoly if he was the only one offering that product? (i.e. large shopping centres? but even then you don’t have to be a tenant….)

    I don’t know many landlords out there that are happy to have vacancy. Most developers compete fiercely. But if you’re referring to “strategic land banks” that you may want to “force” to the market, then wouldn’t higher land tax be a motivator?

    I’m not convinced the system is broken. If rents are too low, then you won’t get new development. Cheap rent = cheap inputs in a competitive market with competitive investors.

    Higher land tax has it’s own issues though… is it a tax or a dis-incentive? (originally started to fund the war effort). Should it only be high on unproductive land to encourage more/higher productive uses?

    If you’re talking about housing commission there are different issues at play. You touched upon some – cost of damage…. Brisbane Housing company is a great success story on many fronts, although they aren’t government! They do get assistance like NRAS.

    further on your points;
    1) capping CPI – an unintended consequence is dampened investor demand, higher upfront rent…. I think it would disrupt the market unfavourably and encourage kicking tenants out so as to not be capped
    2) damage insurance – people then say – smash it, don’t worry they’ll have insurance!! Society hinges on culpability and responsibility, it’d be anarchy without them.
    4)BHC – great company! but its run by dedicated people with ‘charity’ not profit in mind. Like many successful groups, they not institutionalised. But if there is a way to ecnourage more groups like them great!

    • By definition every property is a monopoly on its location.

      That doesn’t mean that there aren’t close substitutes and that these work to promote some degree of competition and investment.

      The issue here is not about already constructed buildings (where the incentive to keep vacancies low is very high), but the decision to invest in new buildings.

      So yes you are right that land taxes are a motivator to invest in buildings to increase returns from under-utilised land.

      The point I am making is that the economic rents to landlords can be shifted towards tenants if we so desired by changing the legal institutions that limit or promote the bargaining power on each side of the contract.

      This would also impact home prices via the investor channel – investor buyers would pay less of homes because rents are lower, and home buyers would pay less because renting is relatively cheaper.

      Despite one economic theory suggesting otherwise, lower rents do not imply reduced housing investment. They might even encourage more investment.

      Say you owned a site that had scope for further development. The rent you can receive as it is just dropped 20%. What do you do? Bring forward the development to improve your returns on the site. In this way rent control can be a lot like a land tax on a net basis (lower net rents for land owners).

      I do think a land tax is a better tool, but that doesn’t exclude the avenue of improving tenants bargaining power as a means to reduce housing costs (for renters and buyers).

      BHC is private, but mostly owned by State Government and BCC, and funded by grants from various level of government. I see no problems with this arrangement for government investment.

      • i get back to my points raised in earlier posts – you fail to address practical reality. I have had in excess of 30 yrs of directly managing my tenants – and I’m talking people of multiple demographics and geographical locations.

        Develop vacant land/ increase density on an existing owned block……refer my answer to you earlier in this post. I am prevented from achieving greater economic return/utilisation on my site due to oppressive and intrusive council and state government regulations.

        Adding yet another level of bureaucratic control and regulation – the inevitable result of ‘rent control’ policy will inevitably lead to yet further inefficiencies and expense for everyone.

        You can do all the research you like but it will not change the on-the-ground realities of real world business and commercially driven decisions.

        BTW – you assert (in response to my earlier post) the current system has a bias to landlords. If you really believe this, then frankly, whatever other qualifications you have, you are off with the fairies

      • I’d go bankrupt along with a huge number of others more. If I could develop the extra 20% I already would have.

        In effect you’re ultimately just making land cheaper because other costs would remain the same.

        Unintended consequences are large – investor uncertainty, capital value declines in a highly leveraged sector, unanticipated behavioural changes, voter backlash…..

        What happened to cycles? Vacancies are high tenants get good deals, vacancy is low tenants pay up, which ultimately encourages more development….. Tenant’s are certainly getting good deals in the commercial world at the moment!!!

        So there must be another reason why residential vacancies are low that isn’t to do with tenant bargaining power….