Monday, 16 April 2012

Rent control remains a bad idea

The Christchurch Press provides daily updates of the mess at the bottom tail of the Christchurch rental property market.

I don't have relative numbers on net emigration from Christchurch and housing destruction, but the spike in rental prices suggests fewer people left Christchurch after the quakes than had their houses wrecked. At the same time, those lucky enough to be getting anywhere with EQC and who are getting repair work done are pushing into the market for temporary accommodation. And, demolition crews coming in from elsewhere also need places to live. So there isn't enough housing to go round. 

In a sane world, we'd already have a fair bit of new housing coming on-stream; it's been more than a year since February 2011. There was no shortage of builders looking for work after September and after February; nobody could get any repair work done until their EQC estimate. There are lots of big empty paddocks on the west side of town that could easily turn into subdivisions. But zoning regs prevented it. 

Building has finally started in a few spots, and some bare sections are coming available. And the government's starting to put higher priority on fixing state housing - government-owned houses rented to low-income tenants. But it would be remarkable if things eased much before winter.

So we've essentially a fixed stock of houses that's small relative to demand - at least for the near future. And, so far, the market has been clearing on prices. Christchurch East M.P. (Labour) Lianne Dalziel has been calling for rental price caps, noting a few cases of people forced out of their houses by very large rent increases. The visceral case for rent control seems strong - families pushed out of houses by weekly rents going up from $360 to $600, in the case cited by Dalziel. But rent control doesn't solve the underlying problem that there just aren't enough houses to go around. And, rent control can make things worse.

Let's set things up. Housing ranges in quality from great family homes on large sections to redone partially insulated garages with some plumbing. Tenants range in quality from reliable folks with secure incomes and who won't damage the property to far riskier tenants with bad payment histories. And, housing intensity varies from a single guy in a 10-bedroom place to a garage* serving a family. 

Now, imagine that rental prices are fixed. The single guy living in a 10-bedroom place pays no more than he did pre-earthquake, as does the family living in the garage. We get no stories about people being pushed out of their properties because of rental hikes. But lots of people whose rental housing was destroyed are out of luck, as are people who need a rental place for a few months while their houses are being repaired. When rental properties become available, landlords can't increase prices. But they have their pick of tenants. The risky tenants at the bottom of the distribution on month-to-month leases are pushed out when their landlords get a longer-term offer from a better-quality tenant. Some people are able to find rooms with friends and family, but welcomes wear thin after a while. 

When prices clear the market, we still don't get new housing. But we do get increases in housing intensity. Everybody's rent goes up and the single guy in a 10-bedroom place is going to have a hard time outbidding three families pooling their money. More renters in secure tenancies will be willing to take on flatmates to help pay higher rents. We do get stories about people being pushed out of their properties because of rental hikes, but fewer people wind up living in their cars. More people seeing high rental prices decide to fix up the back shed to take on tenants or rent out the spare room. The risky tenants at the bottom of the distribution on month-to-month leases are also the low income tenants; they're pushed out when landlords increase the rent. But they have a better chance at finding somebody willing to take on a partner to share the rent. 

There's another margin floating around that we also oughtn't forget: the disutility of being a landlord has to have gone up. Tenants expect things fixed; owners have to wait for EQC sign-offs and repayment. Christchurch has a lot of small-scale landlords - people with a rental property or two on the side who aren't always well placed to wear costs while waiting for insurance repayment for repairs. Rental price controls are likely to push some landlords to sell their rental properties, again forcing tenants out.

If the elasticity of housing intensity to rental prices is low, then the welfare effects of the rent hikes on poorer cohorts may dominate; rent control then isn't awful in the short term. But at the same time as Dalziel cited the rent hike from $360 to $600, she also cited a case of eleven people living in a two-bedroom house. This is not a desirable or laudable outcome. But it is likely a better outcome than one of the families from that house living in their car. 

None of this says the government shouldn't be doing something, just that rent controls aren't likely to be a very effective something and could easily be counterproductive. Better would be increasing availability at caravan parks to help fill the gap until state houses are fixed and more houses get built. And Council does need to move fairly quickly to make sure we're not stuck in the same spot again next winter. 

* I don't know any large families living in garages. But one neighbour has often had short-term tenants in the back shed, both before and after the quakes; another has had a tenant in the room behind their garage since we moved here. This way of increasing the intensity of housing use is hardly novel; it was just part of the zoning-induced high cost of housing relative to incomes in Christchurch. Sadly, more people doing this is part of the solution to the current bad situation.


  1. Many landlords don't raise rents, even if they could, because they want a long-term tenant, rather than someone who will rent for 6 months and then move on.

  2. Rents haven't moved in ten years which is quite pertinent. The other issue that is eqc induced where they insist homeowners move out while their houses are repaired, in the private market this very very rarely happens. Fletcher's need to supply a few more dust sheets.
    I am dealing with the council and it is unbelievably expensive and time consuming and we are doing the easier option where you supply PS4s from engineers at huge expense to lighten any liability on the council.