It sounds simple. When prices get too high, price caps can prevent them from rising. Indeed, that’s what residents of many places hard hit by inflation argue should be done in the rental housing market. The fact is, not only would price caps lead to damaging unintended consequences, they are not even the best method of achieving reasonable rental prices. Instead, proponents of affordable rental housing should advocate for measures that increase economic freedom.
Yet in many cities and counties across the country, rent control is now an active political concern. Over the past year, places like St. Paul, Minnesota and Kingston, New York have enacted rent controls, limiting the amount rents are allowed to increase each year. A few years earlier, Oregon and California had passed statewide rent growth limits, bringing to five the number of states with statewide rent control laws. State.
Certainly, rent control legislation will limit the ability to increase prices, at least for rental units directly impacted by these price caps. Yet, this by no means means that low-income tenants are universally helped by this type of regulation.
On the one hand, prices for uncontrolled apartments often increase as landlords of these uncontrolled apartments struggle to accommodate those who cannot find housing in rent-controlled housing. In addition, controlled pricing dampens developers’ incentives to build new rental housing (especially affordable housing) because they know they may not be able to adjust their prices in response to changes in market demand. market.
So what should residents of tight rental markets bear instead? Unexpectedly, policies that increase economic freedom also tend to make rental housing more affordable.
According to data maintained by Apartment List, the top five most expensive rental markets today are Hawaii, California, New Jersey, New York and Massachusetts. Three of those five countries — Hawaii, California and New York — rank in the bottom quarter of the Fraser Institute’s Index of Economic Freedom, which rates and ranks U.S. states based on how well their laws and institutions fit with the market. New Jersey doesn’t fare much better, ranking 36e out of the 50 states.
I got curious and plotted the relationship between economic freedom and rental housing prices nationwide. Unsurprisingly, at least to me, there is a clear positive relationship between economic freedom and affordable housing. In other words, as economic freedom at the state level increases, average rental housing prices fall.
Importantly for current rent control proposals, this relationship is still present when we look at metropolitan areas rather than states. Metropolitan areas with higher levels of economic freedom tend to have lower rental prices. This is an important observation, since most current rent control proposals emanate from the local level.
What is the mechanism linking economic freedom to rental prices? Economic freedom is often considered a reasonable indicator of a favorable market environment. It is within these types of institutional contexts that individuals feel free to innovate and experiment. Economically free places tend to enjoy various advantages, including higher levels of economic growth and higher rates of inland immigration. People and money like to move to places with more economic freedom, and economically free places are better able to accommodate these new entrants.
Despite their appeal, rent control policies are not the right tool to achieve affordable housing. It may be time to try a new approach: the economic freedom approach.
Meg Tuszynski is the executive director of the Bridwell Institute for Economic Freedom and a research professor at the Cox School of Business at Southern Methodist University.