Rent caps reduce the number of properties available to rent

The argument

The argument is that rent caps reduce the supply of rental housing, and that this follows from what a cap does to the economics of being a landlord rather than from any bad faith on the part of property owners. A cap limits how much a landlord may charge tenants, which limits the return on investment available from a rental property. Since owning and letting property is one use of capital among others, restricting its return makes it less attractive relative to the alternatives. The predicted responses operate at both ends of the market. Fewer prospective landlords will buy to let, because the return that would have justified the purchase is no longer available. Those who already own rental property will be less willing to invest the time and effort required to lease out a second home, since letting involves ongoing costs and obligations that a capped rent may no longer compensate. Both responses point the same way, and proponents argue the result is fewer properties in the rental market and a potential housing shortage for the tenants the cap was intended to help. The evidence offered is the San Francisco experience. After the 1994 expansion of rent control there, researchers found the city's stock of rental properties depleted by 15 per cent as landlords sold off rental units. Proponents emphasise the mechanism the finding identifies: the units were not destroyed but converted to other uses or sold into owner occupation, which removes them from the rental market permanently rather than temporarily. The conclusion is that a rent cap improves terms for tenants who hold a controlled tenancy while reducing the number of tenancies available to everyone else, so the policy's benefits and its costs fall on different people, and the group it disadvantages is the one still looking for somewhere to rent.

Context

Basic economics dictates that if you introduce a cap that makes letting out a property less lucrative, fewer landlords will choose to let out their second homes.

Premises

Counter-arguments

While this may have played out in San Francisco, this is the exception not the rule. Rent caps introduced in New Jersey and Massachusetts did not lead to a housing shortage. Properties were constructed in the same volume as in cities without rent controls. In New Jersey, the volume of properties on the rental market actually increased, as landlords saw financial benefits in splitting larger properties into multiple units. Studies indicate that the housing and labour markets do not follow the established supply and demand economic models of other industries. Rent controls do not lead to fewer houses on the rental market, nor do they disincentivize the construction of new buildings.

Rejecting the premises

[Rejecting P4] Rent caps do not de-incentivize new builds. Therefore, the same amount of properties are on the market. In some places, rental property stock increased as a result of rent caps.

Framing

Prices dictate supply. When prices rise, suppliers are incentivized to increase stock. When prices fall, suppliers are de-incentivized to increase stock.