How Rent Control Reduces the Supply of Housing

Zohran Mamdani campaigned to be Mayor of New York City on the promise that he would freeze the rent for all rent-stabilized homes, with the intention of making New York City more affordable. Rent control schemes are criticized by economists because although their intention is to create affordable housing, one of their results is to reduce the supply of housing.

The price of rent, like everything else, fluctuates according to the supply and demand for housing. Henry Hazlitt argues that if rent controls are implemented in a city and prices are not allowed to rise when it is most demanded, “New housing is not built because there is no incentive to build it…” (Hazlitt, 1979, p. 128). If the cost of building materials increases due to inflation, then “the old level of rents will not yield a profit” (Hazlitt, p. 128). If cities like New York City or San Francisco have a history of implementing rent control policies, those who wish to build more housing will refuse to do so because of fear that the government will eventually implement rent control (Hazlitt, p. 129)

Thomas Sowell argues that rent control also reduces the supply of housing because the artificially low price encourages people to take up more space than they need. Sowell writes that when rent controls were instituted during and after WWII, this created a severe housing shortage even though the supply of housing had grown at the same rate as the population. Since rent control made housing artificially cheap, “more people had a demand for more housing space than before rent control laws were enacted…When some people used more housing than usual, other people found less housing available” (Sowell, 2015, p. 38). Young people who would normally live with roommates or older couples who would downsize when their children grow up, end up hanging on to their affordable housing, leaving those who really need it and are willing to pay for it without housing. Hazlitt argues that if rents are allowed to rise according to supply and demand and inflation, “…individual tenants will economize by taking less space. This will allow others to share the accommodations that are in short supply…” (Hazlitt, p. 128). The higher rents will encourage the construction of more housing, which will eventually reduce the price of rents.

References

Hazlitt, Henry (1979). Economics in One Lesson: The Shortest & Surest Way to Understand Basic Economics. Three Rivers Press.

Sowell, Thomas (2015). Basic Economics: A Common Sense Guide to the Economy (5th ed.). Basic Books.