Roofs or Ceilings?

Kevin Brancato of Truck and Barter has scanned in Friedman and Stigler's classic attack on rent control:

Truck and Barter: Roofs or Ceilings?: Sorting through some papers I acquired a while back, I found an original copy of Roofs or Ceilings? The Current Housing Problem by Milton Friedman and George Stigler, as originally published in 1946 by the Foundation for Economic Education. This classic essay argues against the use of rent control:

Rent ceilings, therefore, cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance of rent ceilings, or subsidization of new construction and a future depression in residential building. Formal rationing by public authority would probably make matters still worse.

Although the essay is in the public domain, I couldn't find it on the net. So I've scanned it in, and put it on my university server.

Enjoy!

Comments

[Jason]

The most telling comment in this paper is the following:

"The rise in rents that would follow the removal of rent control is NOT a virtue in itself. We have no desire to pay higher rents, to see others forced to pay them, or to see landlords reap windfall profits..."

I would love to hear an admission like this by any of the modern day free market gurus. I wonder what the authors would make of the currently overpriced housing market?

[karl]

Most current rent control regimes are not of this type (rigid price cieling on property). NYC famously have just this type the persists on some properties but they also have a system that is very popular in Claifornia and in Europe and Asia. Controls on rental inceases imposed on current tenants, but the freedom to charge market rents for vacant apartments (with the necessary protections from unwarranted evictions). These create different and interesting market distortions based on how parapatetic the types of tenants are (of particular interest, perhaps, to Berkeley students).

Kaushik Basu and Patrick Emerson have two seminal papers on the subject. One a 2000 Economic Journal article and the other a 2003 Economica paper.

[Bruce Cleaver]

Thanks for the yeoman work, Brad!

[Charles Kinbote]

Check out the bios - Friedman is identified as the recent co-author of 'Taxing to Prevent Inflation.' Not the sort of position I'd ordinarily associate him with.

[A. Zarkov]

An apartment building usually sells for some multiple of the yearly rent. I think the historical figure is something like 12. So unless the building owner is the original landlord, the price he paid reflects the effect of rental control. So he would indeed get a windfall profit in the event rent controls were lifted. It always seemed to me that the original landlord suffered an unconstitutional taking of his property. But the courts have held otherwise, being at heart political animals. At least New York City exempted buildings with less than (I think) four units. Not so in Berkeley where even someone renting a single-family house or a mere room to a student was subject to rent control. But I learned long ago that Berkeley and SF are really weird places. SF is about to regulate bloggers.

[knut wicksell]

We have rent control where I live -- or maybe one can call it, in honour of Arthur Okun, rent guidelines. In my city a landlord's life is potentially an unhappy one. We can't demand a deposit up front, and if the tenant doesn't pay we have to chase after him, eventually in small claims court. Lucky for me, my wife's a lawyer. I even know someone who rented out the other half of his duplex to a tenant so terrible he eventually had to sell it to get away from him.

So much for the bad news. But it isn't all that terrible. You have to work a bit harder selecting tenants. In 30 years, I've only had one child molester. I charge the highest rent I can get when the apartment changes hands, on the grounds that the signal keeps away the riff-raff (I live and rent in a pricy neighborhood). I raise the rent each year by the amount of the annual tax increase (we don't have prop 13 and we get evaluated every three years, with the increases spread over the three years in between). I dump most of each increase back into improvements for the tenants. I write them off as expense, and the house gains value.

The thing about rent control is that you have to pay attention. You can't let a year go by without raising the rent to the limit, because an increase is forever, unless the rental market crashes. We've done well by it. So have the tenants. It just takes more work. Nothing is free.

[JRoth]

Zarkov-

I only caught part of it, but there was an NPR story yesterday about a boom(let?) in rental property purchases. It wasn't clear to me whether this represented a direct response to low interest rates (they quoted some guy saying that the current rents would cover the mortgage regardless, so he felt he was covered even if the market flattens) or an alternate response to an issue that's been discussed around here a lot: the disparity between rents and mortgages. I wonder if some people are looking at for-sale housing prices and rental rates, and anticipating not that sales will plummet, but that rents will rise?

Anyway, I brought this up beacuse I wonder what it's doing to the 1:12 ratio you reference? And I also wonder how the amortization works - on a 30 yr., it seems to me a 1:12 ratio doesn't give that much profit, because you're paying at least as much interest as you do principle. Stretched out over the 30 year life of the loan, you've only got 6 years of maintenance + profit. Maybe that's why profitable landlording is capital-intensive; it only works if you can slap down a big down payment.

Corrections to this rambling are welcome.

[liberal]

The most important "rent control" is the one that says that landowners get to pocket Ricardian land rent in return for nothing (except for a little land tax that in most jurisdictions is far smaller than the land rent).

Another form of "rent control" is excessively stringent zoning restrictions that favor single-family dwellings over denser residential forms. (It's rent control in the sense that it has the unfortunate consequence of limiting Ricardian land rent.)

Speaking of Milton Friedman: "In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago." -- Milton Friedman

So...when's Brancato going to scan in Henry George's _Progress and Poverty_?

[Progress&Poverty]

Not Brancato, but there is a link.

[tenant]

Developers will always building rental housing for the top end of the market in an effort to maximize their profits whether or not there is a market for it, as history has shown.

There has been a perpetual shortage of affordable housing the past century and only the government can assist in providing it.

This link is for the Canadian case in support of Rent Controls
http://www.ontariotenants.ca/rent-controls.phtml