Tuesday, 20 December 2016

Rent controls vs financial crises

In a slightly different context, BenJamin' emailed me this 1995 article about rent controls.

As we see, Georgism Lite was prevalent in most Western countries in the decades after WW2:

Rent controls were imposed in the United States shortly after the country's entry into World War II. Putting the country on a war footing required massive relocation of labor, with consequent pressure on many local housing markets. Controls were imposed to ensure affordable housing and to prevent profiteering. The appropriateness of imposing controls in wartime seems to be virtually undisputed.2 The form of controls was a freeze on nominal rents.

The rent freeze continued after the end of the war in the belief that the return of soldiers would otherwise cause a rapid and disruptive rise in rents, at least in certain markets. However, there was a housing boom in the late 1940s and early 1950s, which lowered market-clearing rents and permitted almost painless decontrol. The only jurisdiction to retain wartime controls was New York City, and these were applied only to pre-1947 housing.

European countries imposed wartime rent freezes, too. In fact, controls in several countries had lingered on from the First World War. The postwar experience of the European countries was less fortunate. Housing reconstruction took much longer because of their war-ravaged economies and extensive destruction of their housing stocks. As a result, many European jurisdictions retained a rent freeze on at least prewar housing long after World War II. While the nominal rent freezes were typically not absolute—intermittent adjustments were made—controlled rents fell significantly in real terms, to only a fraction of the rents in the uncontrolled housing that was constructed after the war.

It is the experience of these jurisdictions, together with that of New York City, which forms the basis for the common opposition to rent control among economists. The type of controls imposed in this period has come to be termed "hard" or "first-generation" rent control. Since the early 1950s, the pattern of rent regulation has been significantly different in Europe than in North America.

In much of Europe, the legacy of first-generation controls is still keenly felt. In some jurisdictions, controls gave rise to housing problems that prompted increasingly intrusive government intervention. In others, the uncontrolled rental housing sector grew healthily, while the older, controlled housing in the downtown areas deteriorated, but remained keenly sought after due to the wide disparity in (quality-adjusted) rents between the controlled and uncontrolled sectors. Over the last 15 years, largely as a result of the perceived failure of socialism and renewed faith in the market, European governments have been eliminating or relaxing controls.

Rent controls were just part of the overall package of course, they went hand in hand with mortgage caps; more social housing; higher taxes on rental income; and higher taxes on residential 'property'. Different countries had different packages, Singapore still has its own peculiar model of Georgism Lite with the inevitable resounding success.

Whatever the narrow impact of Georgism Lite was on the housing market per se, there were much wider ramifications which economists usually ignore:

1. The 18-year land price/credit boom bust cycle was kept largely in abeyance between 1925 and 1973.

2. The post war years up to the 1970s are seen as the golden age of Western capitalism, there was almost continuous economic growth and almost full employment. This was because of the absence of major financial crises and people putting their earnings into the real economy not land price speculation.

3. There was also inevitably more equality and the benefits of economic growth were felt more evenly.

4. This has all gone nicely into reverse since the 1970s, with Home-Owner-Ism at its most rampant e in the UK and Australia, although there has been a slight backlash in some German states which are now re-imposing rent controls.

Georgism Lite was just diluted Georgism without a full-on LVT. Both are ways of ensuring more stable economic growth as well as a more equitable sharing of the benefits of economic growth*. Full-on Georgism with much higher LVT is just a much better way of doing it**, because you get all the well established benefits of Georgism Lite plus the benefits of having much lower taxes on output and employment.

* Economic growth goes into higher rents; rent controls are a way of sharing that growth between landlord and tenant.

** The growth is shared by the whole economy with the landlord getting what's left over after LVT.


Lola said...

I really don't approve of any 'price control', therefore rent controls would be a bad thing in my lexicon. However, without compensating LVT there appears to be no alternative.

The trouble then is that without LVT but with rent controls bad outcomes happen as the rent controllers never have enough information to set the 'right' rent. Witness all those abandoned brownstone buildings in New York.

LVT. You know it makes sense.

Mark Wadsworth said...

L, agreed. Price controls = bad, but they are one way of dealing with monopolies.

Rent controls = undersupply = bad, so to compensate they had to have social housing, and you still need mortgage caps etc etc. All in all, the Georgism Lite we used to have 'worked' for most people, putting Bayard's 'frustrated renters' to one side.

Lola said...

MW. In re 'mortgage caps', yes.

As you know I am (was) in the mortgage business. There were two waves of wrongness. First wave ended in 1989, but leading up to that event multiples did not really go above 3.5 x main earner + 1 x second earner (From memory. Or perhaps that was just me?). Maybe it was the MIRAS that distorted it.

Second wave, which started in 1994, but really only go going under Brown Balls saw multiples go to 5x plus plus. Where in large part they still are.

FWIW I did a lot of self cert and up until about 2000 we didn't exceed 3.5X. Most of those borrowers didn't have income that mainstream lenders would look at, even though it was demonstrably there so specialist lenders turned up - UCB for example. This is relevant as their impairment rates were far less than Halifax (say).

One of the reasons we now do not do mortgage work is because on any sane measure most mortgages confound my 'prudency' metrics. And the ones that don't we refer out as that is more efficient. Nevertheless, who's the mug? If by borrowing HUUUGGGE amounts you can access tax free gains, why wouldn't you?