Economic Theory

Review: “Rent control effects through the lens of empirical research: An almost complete review of the literature” by Konstantin Kholodilin


The Journal of Housing Economics has recently published a paper entitled “Rent control effects through the lens of empirical research: An almost complete review of the literature”, written by Dr Konstantin A. Kholodilin from the German Institute for Economic Research (DIW). It is a meta-study which summarises the empirical literature of the various effects of rent controls.

It identifies 16 studies that specifically look at the impact of rent controls on the supply of rental properties. The oldest of these looks at Glasgow from 1968 to 1975, the newest one looks at Berlin from 2018 to 2021.

Out of those 16 studies, 12 find a negative effect on supply, 3 fail to find an effect either way, and one unpublished outlier study claims to have found a positive effect.

In addition, Kholodin also identifies 16 studies that look at the impact of rent controls on total housing construction. This is not the same thing as rental supply: the latter can change as housing units are reallocated between sectors (for example, a landlord deciding to take a property off the market, and use it for themselves), even as total housebuilding numbers remain unchanged.

Out of those 16 studies, 11 find a negative effect, 4 fail to find an effect, and one finds a positive one.

Out of 20 studies that look at the impact of rent controls on the quality of rental housing, 15 find a negative effect, and 5 find none. No study claims to have found a positive effect.

Rent controls are usually not applied universally: there are often some exemptions, for example for small landlords or newly built properties. They thereby split rental markets into a controlled and an uncontrolled sector. If rent controls cause shortages, we would expect a spillover of demand from the controlled into the uncontrolled sector, driving up rents in the latter. Of the 17 studies that try to work out whether such an effect exists, 14 find that it does. Two find no effect, and one study claims to have found an effect in the opposite direction.

Out of 13 studies that look at whether rent controls cause misallocations of the housing stock (for example, by preventing downsizing), every single one finds that, yes, they do.

Readers who are familiar with empirical economic research will realise that this is about as close to unanimity as it can realistically get. If you had 12 empirical studies on whether demand for cold beer goes up on hot sunny days, I suspect that 9 would find that, yes, it does, but there would also be at least two that fail to find any effect, and one contrarian would claim to have found that it actually goes down.

So unsurprisingly, Kholodin’s verdict is:

“[R]ent control […] results in a number of undesired effects, including, among others, higher rents for uncontrolled units, lower mobility and reduced residential construction. These unintended effects counteract the desired effect”.

None of those findings are new, or in any way surprising (although it is, of course, always worthwhile to make sure). The future “godfather” of the IEA, Friedrich Hayek, already wrote in 1929:

“The housing shortage which inevitably follows every statutory limitation of rent levels is directly related to the difficulty of finding new accommodation. […] In these circumstances a large unsatisfied demand for housing was obviously bound to emerge even without an increase in population […]

When, as in Vienna and Austria generally, there is […] a big difference between statutory rents and rents which would prevail in the open market, the prospect of fully satisfying the demand for homes at depressed rents seems totally illusory.”

And in 2000, the left-wing “rockstar economist” Paul Krugman wrote:

“The analysis of rent control is among the best-understood issues in all of economics, and – among economists, anyway – one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.” […]

Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go – and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended? Predictable. Bitter relations between tenants and landlords, with […] ever-more ingenious strategies to force tenants out – what yesterday’s article oddly described as ”free-market horror stories” – and constantly proliferating regulations designed to block those strategies? Predictable. […]

[T]he pathologies of San Francisco’s housing market are right out of the textbook, that they are exactly what supply-and-demand analysis predicts.”

Quite so. And yet, rent controls are one of those ideas that are both intuitively appealing, and fashionable. Which means that no amount of empirical research will ever make them go away.

 

Recommended reading:

Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).


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