Friday, March 28, 2008

Comments on my Washington Post letter on Rent Control

I learned yesterday that the Washington Post allows reader comments on the letters to the editor that it prints, so I was interested to see what kind of response my recent letter defending landlords from rent control received. Most of the comments were favorable, but this unfavorable comment (from a landlord nonetheless) stuck out:

I own rental property in DC, though not enough to be covered by rent control laws. Frankly, if I were in a position to buy more rental property, I would do so. The article only hints at how active the rental property market is. No one buys rental property out of desperation, so I think those who advocate for totally unregulated a market need to explain why so many would "volunteer" for odious regulation.
I think that the author's use of scare quotes around the world "volunteer" is quite telling; the author knows that there nothing voluntary about the government's regulation of rents under the penalty of the law. And the reason why landlords stay or enter the rental business despite government regulation is easily explained simply by looking at a supply and demand graph. Price controls punish those whose costs are greater than the legally mandated price; they put some people out of business, but they don't put everyone out of business.

In the case of rent control, it's those landlords with the thinnest margins (perhaps by owning an older, more maintenance-heavy building) that are the most impacted. Other landlords, with more efficient buildings, may be able to operate under the regulatory caps with no ill effect, but this is hardly uniform and proof of the negative fallout that I claim is evidenced by the blight one sees in the typically older, less affluent neighborhoods.

Rather than serve the poor as the proponents of rent control assert, these regulations do little more than attack businessmen and women who absent rent control would be more than willing and able to provide housing to the poor—but at free market rates. Again, at root, you cannot build a house of cards where is possible to get something for nothing and not expect that house to come down.

2 comments:

softwareNerd said...

The economics of this type of situation work something like this...

Say the rent received is $200,000 a year; and costs are $40,000 a year, for a net of $160,000 a year.

Now, suppose typical landlords want a 16% return on their investment. That would make the building worth $1 million.

If rent control reduces the rent from $200,000 to $140,000, the profit is $100,000 per year. If the landlord wants to sell, he will find people willing to buy his property, but not at $1 million.

If we assume that the new landlord wants to make 16% on his investment, he will only be willing to pay $625,000 [because 100/625 = 16%].

A few years later, people like your correspondent see businessmen paying $625,000 for those properties and making money on them just as the old landlord did.

In real-life, the changes are not that drastic. The rent might be fixed at what it is today. So, the landlord does not see an immediate reduction, but no future increases, or future increases but ones that do not keep up with the increases in his costs. So, instead of seeing the value of his property drop from $1 million to $650, he sees a bleed over years. The bleed is made even slower because landlords try to compensate by reducing costs. So, the landlord will skip costs that are simply good service (a repaint or new carpet) and only do those that maintain his asset. The tenants can't ask for more because they are in a rent-controlled building. Further, inflation covers up some of the bleed.

But, those are the details. The basic fact is that the value of the property is lowered and therefore it still remains profitable to someone to play landlord.

In fact, once the situation has slipped into the new government-enforced equilibrium, it is actually a safer investment than some other buildings. Continuing the above example, a landlord may be willing to pay $800,000 (rather than $625,000) for the new building because the business is so stable. Since it is rent-controlled he has 100% occupancy. Also, residents of rent-controlled buildings often realize that the last thing they want to do is miss enough rent-payments to result in their eviction.

There is a community bank in New York (Symbol: NYB) that lends against the mortgage of rent-controlled buildings. It has a near-zero default rate on these types of loans.

Like many things in economics, it is the unseen (the "what it could have been") that eludes people like the commenter.

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