Econ 101: Price Controls on Rent Would Cause Further Housing Shortages in CA

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Posted by Derek Peterson on Monday, July 29th, 2019, 9:20 AM PERMALINK

In a basic economics class, students are taught that price controls result in shortages and rationing. This is not just a theory, but a fact that has been well-documented throughout history.

Yet, price controls are exactly what some California lawmakers are hoping to impose on the hardworking people across the Golden State. If implemented, Assembly Bill 1482, which was recently approved by the Senate Judiciary committee, would make it illegal for property owners to raise rent by more than 7 percent, plus the Consumer Price Index in a given year.

While it is no secret that the cost of renting in California is among the highest in the country, AB 1482 is a feel good “solution” that does not address the root of the problem, and would result in negative consequences.

Basic economics teaches that when demand for a good or service is high while supply is low, prices increase. This is what is currently happening in the California housing market. Demand for housing is high, but the supply of available housing is low. As a result, the price of rent has skyrocketed.

AB 1482, which “treats” the symptoms, would actually exacerbate California’s housing supply problem. Under the status quo, it is more costly and complex to develop properties in California than almost every other state.

Just look at the permitting process, for example. In San Francisco, it takes an average of 3.8 years to obtain a permit for a project that would build ten or more units. Meanwhile, the national average for projects of the same size to receive a permit is just 2.1 months.

The tax burden in California is also a major deterrent to investment. California’s top marginal corporate income tax rate ranks among the highest in the nation, at 8.84 percent, and its top marginal individual income tax rate of 13.30 percent is the highest in the nation.

As such, placing an arbitrary ceiling on rent in California, which would make it even more difficult to recover the cost of development, would result in even less investment. Indeed, there is widespread agreement among economists about the harm that is caused by rent control. Economist Assar Lindbeck, who chaired the Nobel prize committee for 14 years, said rent control is “the most efficient technique presently known to destroy a city—except for bombing.”

Rather than imposing rent controls on landlords, California lawmakers should focus on reducing barriers to housing development. Getting government out of the way and allowing for increased supply and competition is the best way to naturally drive down costs without risk of negative consequences.

Photo Credit: Don McCullough

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