The zero-sum fallacy is the assumption that economic transactions are based on a fixed pie in which what is gained by someone is indefinitely lost by someone else. The political left often wrongfully believes landlords extort tenants, and the government must act as a third party. This couldn’t be further from the truth, or the transaction wouldn’t occur in the first place, as each side will often accept the other’s terms rather than lose the benefit of making the transaction altogether. The landlord needs the tenant and vice versa. When the government involves itself in voluntary economic transactions, fewer terms are made available for transactions; thus, fewer transactions are made. When a government policy intends to help a tenant or a landlord, both parties often end up worse off since these transactions are mutually beneficial.
As a result, the consensus among economists is unanimous: rent control is a bad idea. Rent control is like any other government-mandated price control that places a “ceiling” on what landlords can charge tenants. However, these government controls often fail to target the reason for unaffordable housing in the first place: the government. Federal regulations and restrictions on residential development are detrimental to the housing market, reducing the supply of homes and raising the prices of existing ones.
Swedish economist (and socialist) once surprisingly said in 1977 that “rent control seems in many cases to be the most efficient technique so far known for destroying cities, besides bombing.” 1
According to the basic laws of supply and demand and extensive economic evidence, rent control reduces available housing and the number of low-income people who can live in a certain area. This is often why we see homelessness in areas such as San Francisco, where rent control runs rampant.
In Egypt, rent control was imposed in the 1960s and had lasting effects for generations. People stopped investing in apartment buildings, and the shortages in rentals and housing forced many Egyptians into horrendous living conditions, often with several families living in one apartment. Cities like New York, Hong Kong, Stockholm, Melbourne, and Hanoi sang similar tunes of housing shortages following the implementation of rent control. 2
New York City’s rent stabilization laws are well-established but have consistently failed to reach targeted groups. 1968 data shows there was no evidence the programs targeted those the most in need, and higher-income households often enjoy the benefits. 3 Although NYC’s rent control programs were supposed to target minorities and low-income tenants, white renters in 2017 claimed a 36% discount on market-rate rents, compared with 17% for Hispanic renters, and 16% for black renters and affluent renters received a 39% discount. 4 With housing shortages also comes the decline of auxiliary services in buildings such as maintenance and repair as landlords are no longer under the competitive pressures to spend money on things that would attract tenants when there’s more demand than actual supply of housing. Such a low return on the investment for apartment buildings because of rent control will also cause fewer to be built. For example, not a single apartment building was constructed in Melbourne for years after World War II because of the imposed rent control in Australia. 5
Although some tenants who already have an apartment will initially benefit from rent control, it is often short-lived, once the deterioration of the apartment building and lack of auxiliary services such as heat and hot water become no longer bearable despite the lowered rent. The trade-off becomes unacceptable, and both the tenant and landlord often end up worse off though in different ways. In short, by reducing the set of mutually acceptable terms, the set of mutually acceptable results are also reduced. This is the foundation for the argument against rent control in our economy and government-mandated price controls altogether.