Rent Control Part 2: Black Market, Deterioration and Discrimination

With New York’s new Governor’s rent subsidized by his landlord and California debating the best ways to end rent control through Proposition 98, I thought it was a good opportunity to discuss the negative aspects of rent control.

This post is the second in a four part series on the rent control. Read all four posts:
Rent Control Part One: Microeconomics Lesson and Hording
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict
Rent Control Part 4: Conclusion and Solutions

Black Market and Deceptive Acts

As current renters hoard their rent-controlled apartments, it is rare that new apartments become available. Sometimes, tenants would illegally sublet their units at higher rents.
Landlords do under-the table deals or rent to friends and family. New York had to crack down on landlords charging “key fees” as high as several thousand dollars to new renters.

Landlords will often find loopholes that will let them de-regulate a building, just to be released of the financial burdens. For example, in NY landlords will take their rent-controlled building and deregulate it by using the entire building as a residence for a certain number of years. This is space that could otherwise have been rented at a market rate.

Deterioration of Existing Housing Stock

Because of the disincentive to improve and maintain the property, landlords will often become slumlords and allow unhealthy conditions or activities to take place in the apartments. This lack of improvement not only is unpleasant to the current renter, but accelerates the end of the usable life of the aparment building. The Rand Corporation studied Los Angeles’ rent control law and found that 63 percent of the benefit of lowered rents was offset by a loss in available housing related to deterioration and disinvestment.

The burdens of rent-control could become so heavy on a landlord that he may find it beneficial to burn his building down to collect insurance. Of course, this is dangerous to tenants and neighbors, but happened regularly in the Bronx. The Bronx’s arson epidemic led sports announcer, Howard Cosell to proclaim “‘There it is, ladies and gentlemen, the Bronx is burning”, as the TV camera panned over the neighborhood during a 1977 Yankees World Series Games.

Professor Joseph Salerno’s lecture called “Bomb Damage or Rent Control”:

Discrimination

The free-market typically disincentivises any discrimination based on factors other than price, quality, and quantity because of the self interest of the participants. However, rent control removes this disincentive.

Since under rent control the price is set and there are many applicants, a landlord has the incentive to choose tenants based on other factors. A landlord will more carefully examine applicants’ credit history and income, which a good landlord should do, but lends toward biases against younger applicants. A landlord may decide renting families is less desirable, or may prefer to rent to attractive young females. Often times, racial preferences have influenced renting decisions, which typically worked against minorities. Thus, rent control can exacerbate segregation problems because landlords choose not to rent to people who would change the demographics of an area.

Continue on to Rent Control Part 3: Mobility, Regional Growth, Development and Class Conflict. To make sure you don’t miss any of the series, subscribe to the feed or sign up to receive posts in your email.

For more reading, see the section on Rent Control on the Links to Articles and Academic Papers page.