Hehir on rent controls


Finance Minister Grant Robertson, a veteran student politician, is quite concerned about rent increases.

According to Radio New Zealand, he recently wrote “there are rules in the Residential Tenancies Act about not putting rent up above the market rate, and we are looking very closely at some of the examples that have been put to us today to see if they would breach that act”.

But if people are still desperate to sign up for flats at these higher rents, then the rents are hardly above “market value”. One would hope Robertson understands that when supply is low and demand is strong, prices go up. The subjective theory of value has been with us for a long time, after all.

It is a bit of a worry that the Finance Minister is surprised that rents increased as student allowances increased. When supply is largely fixed, then this was very predictable.

In our response to all this, there are two words that should terrify us. They are “rent control” – proposed laws to cap rents to a certain amount or restrict increases to a certain percentage. …

So, what is the consensus on rent control laws among those who study them?

Well, as Paul Krugman, a Nobel prize winner and left-wing media darling has said: “The analysis of rent control is among the best-understood issues in all of economics, and – among economists, anyway – one of the least controversial.”

When you interfere with the market by dictating maximum rents, the effect is to drive more landlords out of the market. It also discourages landlords from investing in improving the housing they provide by limiting the potential return on that investment.

This is why, as Krugman noted, a survey of professional economists once found that 92 per cent agreed with the statement that “a ceiling on rents reduces the quality and quantity of housing”.

Rent control laws will lead to fewer houses available for rent. I suspect AirBNB would do very well though.

In 1989, Nguyen Co Thach, foreign minister of the Socialist Republic of Vietnam, gave a speech in which he spoke frankly of the harm caused by rent control in his country’s capital city. “The Americans couldn’t destroy Hanoi”, he said, “but we have destroyed our city by very low rents”.

Until matters stabilise, we should refrain from doing anything else that makes investment in housing less attractive.

Even socialists get it – well those who have experienced it!

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