Human Rights Commission fails Economics 101
The New Zealand Taxpayers' Union is disturbed to see the Human Rights Commission suggesting economic policies for which they clearly have no knowledge or understanding of.
The Commission recently called for urgent action on rent control, an idea normally spouted by economically-illiterate far-left organisations such as the Green Party.
There is strong consensus among economists, along with substantial real world evidence that shows rent controls reduce housing supply, cause deterioration in quality and harm those who are struggling to find accomodation. The government's own advisors warn against rent controls stating that "evidence from overseas shows that there are significant adverse consequences in the housing market, such as disincentivising supply, driving up prices in parts of the market where rents are not controlled, and reducing incentives for landlords to maintain their properties."
Economist Assar Lindbeck famously said, "in many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing" – we agree.
Economics 101 will tell you that when you reduce the price of something, the supply of that thing will reduce. In the case of rental properties this is clear and can be logically explained.
Firstly, rent controls reduce the potential return that landlords and developers can get on their investment. This disincentivises them from investing in building new properties or renting out those that are currently vacant. At a time where we need to be building more houses, discouraging people from doing just that only makes our housing crisis worse.
When the price for a good is below the market price, there are more people wanting to rent and less people willing to supply rental properties to the market. This creates a shortage of rental properties making it difficult for those who are not currently locked in to rent-controlled accomodation. This results in reduced mobility in the rental market as people know they will be unable to find new accommodation.
Because people are unwilling to leave their current properties, we end up with a large number of people in living situations that are neither suitable or efficient. Families who have more kids or people getting into relationships stay in their small overcrowded houses, not willing to risk being thrown onto the street. Similarly, empty nesters are less likely to move out of their rent controlled properties and end up living in larger properties that would be better suited to more people. This has other wider societal effects such as people not moving to areas with more job opportunities or for education.
Landlords are also more likely to sell their properties to owner-occupants in order to realise the full market value of their property. This results in the supply of housing moving away from those most in need of affordable housing towards young professionals who are fortunate enough to afford a deposit, perhaps with some help from the bank of mum and dad.
Some may argue that the impacts of this can be mitigated through exemptions for new builds or certain kinds of property. This is also a bad idea because, in a rent controlled market, any properties not subject to controls face high rental prices, pushed up by the spill-over of people unable to win the lottery of a rent controlled house. Furthermore, overseas analysis says that when these kinds of exemptions are in place, landlords convert properties to be compliant with exemptions or even demolish them completely to rebuild as uncontrolled new builds.
The final point is that the conditions of homes will deteriorate. When landlords get less return on their properties, they invest less in them. When there is a shortage of housing it is easy to find new tenants so anyone complaining will be turfed out, tenants are unlikely to risk this.
If the price of groceries is too high, we don't put a cap on the maximum price for a loaf of bread. Instead, we look for ways to increase competition in the market such as by reducing barriers to entry as recommended by the commerce commission. The same thinking should be applied to renting.
If you want cheaper rent and better conditions, the simple fact of the matter is that we need more houses. We want a renters market where landlords are competing for tenants, undercutting each other with lower prices and higher quality. In the mean time, we can create more competition in the market by significantly reducing the regulations on rental properties.
Allowing people to rent out properties that are not compliant with current standards provides lower cost alternatives to those who want it. These kinds arrangements won't be suitable for everyone but provide a low cost alternative to those who are willing to accept it while simultaneously reducing the demand (and cost) of all other available properties. Reducing red-tape on constructing and renting out 'tiny houses' on vacant land also provide quick, low-cost solutions in the short term.
We invite anyone from the Human Rights Commission, the Green Party or any other organisation advocating for rent controls to join us for a debate on our podcast. In the mean time the Human Rights Commission should stick to their remit and take some time to listen to our podcast on this issue with Brad Olsen.