Swedish economist Assar Lindbeck once said, “Rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.” The reason for this stark statement is rooted in economic theory: rent control reduces the incentive for new housing developments. By capping potential rental income, landlords and developers are discouraged from investing in new properties or improving existing ones. Instead of allowing market forces to regulate supply and demand, rent control effectively distorts these natural mechanisms.
The Free Market’s Shortcomings in Real Estate
While Lindbeck’s view has merit, I argue that the free market, on its own, is insufficient when it comes to allocating real estate. The housing market is plagued by several inefficiencies that prevent it from functioning like a typical free market:
- Oligopolistic Control of Land: In many cities, land ownership is highly concentrated, meaning a small number of property owners control a significant portion of available land. This limits competition and drives up prices, as landlords and developers face little pressure to lower costs or innovate. The increasing concentration of land in the hands of a few exacerbates inequality, leaving renters with fewer choices and less bargaining power.
- High Switching Costs: Moving homes or businesses involves significant costs—both direct and indirect. For businesses, relocation often means losing a customer base they’ve spent years building. For individuals, moving disrupts routines, adds logistical headaches, and incurs expenses like moving fees and deposits. These switching costs create friction, trapping people in housing situations that might be suboptimal, simply because the cost of moving is too high. This inertia allows landlords to charge high rents knowing that there is low elasticity of demand of existing tenants.
- Regulatory Impediments: Building restrictions such as zoning laws further distort the housing market. In many cases, these regulations are driven by Not In My Backyard (NIMBY) sentiments, where local residents oppose new developments. While zoning laws may serve important purposes—such as protecting environmental areas or preserving community character—they often result in artificial limits on housing supply. This creates an imbalance between supply and demand, driving rents higher and making affordable housing more scarce.
What Are People Really Paying For?
It’s important to recognize that the cost of a property is not just about the building itself. The price of a home or apartment is driven largely by the value of the underlying land and its proximity to economic opportunities. People aren’t just paying for the extra space, modern appliances, or large windows. They’re paying for access—to better job markets, prestigious schools, and a vibrant social scene.
For instance, people stay in Oxford because they’re tied to the university, which mandates that students live within 25 miles of Carfax Tower (or 6 miles for undergraduates). In London, people pay a premium to be in close proximity to jobs, culture, and a variety of other amenities not found elsewhere in the UK. These factors have little to do with the specific characteristics of the property itself and more to do with location and the opportunity it provides.
Moreover, many of the elements that make a neighbourhood desirable—such as crime rates, public infrastructure, and local amenities—are directly influenced by government policy and investment. When the government improves these factors, it inadvertently subsidises landlords by increasing the desirability of the area, allowing them to charge higher rents without investing in their properties. In this way, public investments often funnel wealth into the hands of landlords, further widening the gap between property owners and tenants.
Property prices seem to have a nasty habit of rising relentlessly, making it harder for many people to afford housing in cities like London, New York, or San Francisco. For those who argue that rent control would eliminate landlords’ incentives to improve their properties, I first point out the surging London rentals rates, and then invite you to try to differentiate a London rental from a European prison cell. In many cases, landlords already have little incentive to upgrade their units because they know the demand for housing far exceeds the supply.
Rent Control as a Temporary Fix
Rent control mechanisms, like other price controls, are often introduced during times of crisis to forestall runaway price increases. Historically, rent control policies have been enacted during times of war, natural disaster, or economic instability when housing shortages became acute. But while rent control may alleviate immediate pressure on tenants, it’s not a long-term solution.
Playing with market mechanisms like rent control does little to address the underlying causes of housing shortages. Without structural fixes—such as modifying the market structure, loosening zoning restrictions, or introducing a supply shock in the form of new developments—rent control merely treats the symptoms of a larger problem. In the absence of these changes, rent control risks creating more problems than it solves, such as deteriorating housing quality and reduced investor confidence.
Furthermore, introducing rent control on existing properties can also be dangerous for investor confidence. Real estate is a major investment, and sudden policy changes that cap rental income or devalue property can create significant market instability. Investors rely on predictable returns to justify the capital they pour into developments. When governments implement rent control without addressing supply-side issues, it signals to investors that property ownership has become a riskier proposition. This could deter future investments and further exacerbate housing shortages in the long run.
Structural Reforms Over Quick Fixes
Rent control can be a useful short-term tool to protect tenants during housing crises, but it should not be the first missile we reach to in our arsenal. The mistake is in creating a false dichotomy between rent control, and allowing the market to sort itself out without any new policy measures. The housing market is too complex to be fixed by simple price controls alone. The real challenge lies in addressing the structural inefficiencies in the market—reducing oligopolistic control of land, lowering switching costs, and removing regulatory barriers to new development. There is room to intervene in this market, given the factors that reduce the true mechanisms of the invisible hand.
For one, zoning regulations should be revoked to ensure that we are not arbitrarily protecting the asset values in the name of conservation. Conservation of architecture is nice, but I would argue that it takes backseat when people find it increasingly difficult to fulfil the most basic tier of Maslow’s Hierarchy.
For another, we should consider changing tax structures. Henry George advocated for a land value tax, that has not gained the popularity of Keynesian/Classical theories. This would disincentivise the holding of land for speculative purposes, because this merely exploits the scarce nature of land (it is immensely costly to produce new land through building higher). Instead, the market for land should be structured to more tightly optimise for putting the land to its most productive use.
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