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The cultural impact of rent control

Summary:
The Economist has an article discussing the predictable failure of Berlin’s new rent control law: And indeed a recent study by the German Institute for Economic Research found that rents in the newly regulated market of flats built before 2014 have declined by 11% compared with the still-unregulated market for newer buildings. But the problem, entirely foreseeable and foreseen, is that the caps have made the city’s housing shortage much worse: the number of classified ads for rentals has fallen by more than half. Tenants, naturally enough, stick to their rent-capped apartments like glue. Landlords use flats for themselves, sell them or simply keep them empty in the hope that the court will nix the new regulation. Meanwhile, rents and sale prices in the

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The Economist has an article discussing the predictable failure of Berlin’s new rent control law:

And indeed a recent study by the German Institute for Economic Research found that rents in the newly regulated market of flats built before 2014 have declined by 11% compared with the still-unregulated market for newer buildings.

But the problem, entirely foreseeable and foreseen, is that the caps have made the city’s housing shortage much worse: the number of classified ads for rentals has fallen by more than half. Tenants, naturally enough, stick to their rent-capped apartments like glue. Landlords use flats for themselves, sell them or simply keep them empty in the hope that the court will nix the new regulation. Meanwhile, rents and sale prices in the still-unregulated part of the market, and in cities close to Berlin, such as Potsdam, have risen far faster than in other big German cities.

In addition, rent control also discourages landlords from properly maintaining their buildings.  In the long run, the quality of rent-controlled buildings will tend to approximate their price.  And this can cause discord between tenants and landlords:

The rent cap has managed to make Berlin’s housing shortage even worse—and poisoned relations between tenants and their landlords.

Socialism is sometimes defined as statism plus egalitarianism.  But these are actually quite different policies, and in my view statism is far worse.  Regulations such as rent controls, minimum wage laws and immigration restrictions tend to pit one person against another, reducing cooperation and making society more cruel in the process.  Egalitarian policies such as progressive taxes can also have negative effects in areas such as work incentives, but they don’t tend to undermine civic virtue in quite as pronounced fashion as statist policies.  I’d rather live in a free market country with progressive taxes than a statist economy with flat taxes.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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