Last month, comedian John Oliver devoted a 22-minute segment of his weekly late-night HBO show to a deep dive into housing politics and rising rents.
In the segment, which has garnered over 4.6 million views on YouTube, he points out that “rent is skyrocketing” – explaining that it’s “up 15% from the same time last year, although above the rate of inflation. And it’s up more than 30% in cities like Cincinnati, Seattle, and Nashville, and nearly 50% in Austin. It’s a significant problem because, as mentioned Mr. Oliver, more than a third of American households are renters.
More difficult than pointing out the problem of high rents, however, is understanding Why they are so tall. Mr. Oliver says it “is partly true” that “high rents are a supply and demand problem: basically, too many tenants, not enough units”.
However, he postulates that this explanation is not sufficient. He thinks the status quo can be more accurately attributed to 1) greedy landlords who “will seize every opportunity to raise rents” and 2) deep-rooted structural issues that give landlords significant power in their dealings with tenants, so tenants are left with no real options.
It is an explanation that has been kissed by many, including national figures such as Vermont Sen. Bernie Sanders and Rep. Ilhan Omar (D-MN). But to what extent does it reflect reality? And what can be done to fundamentally change the landscape of the rental market?
Let’s take a closer look.
The Incomplete Account of “Greedy Owners”
Mr. Oliver’s assertion about “greedy owners” is not without some deserved. After all, it would be hard to argue that self-interest – synonymous with greed, for some – is not part of human nature. Therefore, if an owner is able to charge high prices, he will naturally do so because it helps him and his business.
At first glance, this seems like a pessimistic proposition. Who wants to live in a society where success is zero-sum and where people will get the most out of their customers? Well, hardly anyone. For this reason – and because we cannot change our predisposition to self-interest – it is our duty to create systems that channel human self-interest for good.
This is where the free market comes in.
In today’s market – where demand far outstrips supply – landlords have significantly more bargaining power than tenants. Potential tenants don’t have many options, allowing landlords to charge high prices and, in some cases, overlook the quality of the product they provide. These high prices reduce the number of people who are actually able to pay the rent. This is clearly not an ideal situation.
However, in a truly free market – where the supply of new housing is unhampered by government – the landlord-tenant power dynamic would be quite different. Although owners can still want to charge high rents and provide fewer services, it is no longer in their interest to do so, unless they want to lose tenants. The owner’s “greed” is controlled in a market where there are many competing companies because if he charges too much, most people would simply do business elsewhere. So if the owner wants to make money, he to have to be attentive to the needs of the tenant. In addition, the price would naturally drop due to the increased supply, which would also help tenants.
This is how the natural tendency to self-interest is harnessed for good in a free market. It’s still there, but the incentives have changed in a way that benefits consumers.
In his segment, Mr Oliver includes a video of a prominent landlord explaining that there is currently an ‘unprecedented opportunity’ to ‘squeeze rents’. The reason? Well, he points out, “the country is heavily occupied. We are at 97.5%. So where are the people going? They can’t go anywhere. Mr. Oliver’s takeaway is to blame the owner’s insensitivity. But the real implication is clear: if tenants had go somewhere else, the landlords wouldn’t raise the rent.
Why are rents so high?
If skyrocketing rents cannot be attributed to “greed”, while box are they assigned to them? The answer is surprisingly simple: there is a housing shortage.
Why is there a housing shortage? Again, the answer is surprisingly simple: it can be attributed to housing policies that discourage new construction, thereby limiting supply and driving up prices.
Let’s take each part in turn.
First, for people to have access to housing, there has to be an adequate supply. But this housing supply does not just appear out of nowhere. Instead, as I previously wrote in FEE, “individuals or companies should conclude that it is in their own financial interest before adding units to the market”. The problem is that over the years, policies have been put in place across the country that discourage – and in many cases prohibit – individuals and companies from bringing new units to market.
In many communities, there are strict zoning laws that prohibit or severely limit the construction of high-density multi-family units. Moreover, even in places that can allow the construction of such units, public hearings are often required before the project can be approved. This not only puts in place additional regulatory hurdles, but these projects “are also more likely to be rejected.” This, combined with restrictions such as “minimum parking and maximum building height requirements and prescriptions regarding lot size, lot coverage or floor-to-area ratio”, make the process of building new housing for a growing population an absolute nightmare. That’s not to say that repealing all laws that regulate building is the right solution, but a critical second look at many of the policies currently in place is certainly needed.
We can also look at some examples of policies put in place over the past year or so that have reduced housing supply. For most of 2021, in response to the Covid-19 pandemic, the Centers for Disease Control and Prevention (CDC) imposed a moratorium on evictions. The stated intention was to provide housing for millions of people who found themselves in dire circumstances. However, this ended up backfiring in many ways. This created the possibility that landlords – who were often middle-class individuals simply trying to get by – were not paid and were therefore forced to pay for other people to occupy and use their private land and property. This probably led many people to take their homes off the rental market, as they didn’t think the risk was worth it.
In many cases, public policy has also discouraged the construction of new housing.
Last November, for example, residents of St. Paul, Minnesota passed a city ordinance instituting rent stabilization, which is a type of rent control. In the six months following its adoption, the number of building permits issued for housing decreases by 84% — from 2,180 permits to 352 — compared to the same period of the previous year. This makes sense because even if the policy was not yet in place, grower expectations are a crucial determinant of supply. When you consider the number of municipalities across the country that have some form of rent control, it’s hard to argue that it’s not contributing in any real way to the housing supply problem.
The main consequence of these policies is the housing shortage that plagues most American cities today. According to Realtor Magazine, the gap between the current number of housing units and the number we need is 5.5 million. And econ 101 tells us that when one factor – in this case, a restrictive housing policy – causes supply to decrease, prices go up and quantity goes down. This is precisely what we have seen in practice across the country.
With regard to the many other problems that Mr Oliver pointed out with the current rental market – such as the refusal of many landlords to accept Section 8 housing vouchers or to rent to people who had been evicted in the past – the research cited in Raison suggests that “landlords would probably be willing to take a chance” with these tenants “in a world of housing abundance” (i.e., in a more competitive housing market where landlords do not have the luxury to be picky).
And as for the solutions proposed by Mr Oliver – such as increasing funding for Section 8 housing vouchers – they can only work if the supply problem is solved first. As Christian Britschgi writes in Raison:
“Dumping a bunch of housing vouchers into tight supply housing markets will only drive up prices. If there are already not enough units and it is difficult to build more, owners can easily raise prices to capture the value of new vouchers without worrying that they will “lose customers.” “People who don’t receive housing vouchers will see their housing costs rise. The government will need to perpetually increase funding for vouchers to try to stay ahead of the higher prices they cause.”
So Mr. Oliver’s interventionist “solutions” to the real problem of skyrocketing rents are not solutions at all. On the contrary, they will raise prices further, which is likely to only spark calls for more intervention.
This is a phenomenon that we have seen repeatedly throughout history.
Ludwig Von Mises described the dynamic in his book Bureaucracy:
“Economic interventionism is a policy doomed to failure. The individual measures it applies do not achieve the desired results. They bring about a state of affairs which, from the point of view of its supporters themselves, is far more undesirable than the previous state which they intended to alter.
“As a remedy for the undesirable effects of interventionism,” Mises says elsewhere, “they demand even more interventionism.”
This is why Mises believed that “middle ground” policies were a path to socialism. He wrote: “If the government, to eliminate these inevitable but unfortunate consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism.
Mises’ warning is particularly applicable to today’s housing market. Intervention leads to less affordable housing, which leads to more intervention, which leads to less affordable housing, ad infinitum. . And the cycle will continue as long as the politicians and John Olivers of the world continue to champion government “solutions” instead of just stepping aside and allowing housing markets to work.
The solution to high house prices is not more subsidies or price controls. The solution is more housing.