The Impact of Rent Control on Markets for Apartments

Rent control in the apartment market is much like any other type of price control in any market. It is a market distortion that benefits those able to take advantage of it but leads to problematic outcomes for others. In the case of rent controls, the problem will be a shortage of apartments available for buyers.

Supply and Demand

The most basic description of a market concerns two sides -- those supplying a product or service and those who wish to buy it. Each side has opposing motivations. Suppliers want to sell their output at as high a price as possible, and consumers want to buy the output at as low a price as possible. Usually, markets will enter an equilibrium, where both sides reach a price that they find acceptable.

Price Control Motivation

The basic idea behind price controls is simple -- use the force of law to alter the equilibrium of a market. For example, the government might decide that the steel industry needs assistance to survive, and therefore pass a law to set a price floor on steel. This means that all steel sold must sell at or above the floor price, which must be set above the equilibrium price for it to have any effect. The reverse could also happen -- the government can decide that steel is too expensive and set a price ceiling below its equilibrium price, so that all steel must be sold at or below that ceiling.

Distortion

Problems appear when the market experiences price distortions like controls. In the case of a price ceiling, the artificially low price has two different effects. First, it discourages suppliers from selling. With the low price, they make less money, which decreases the incentive to produce more. The opposite is true for the consumers, since the low price makes them want to buy more of the product. Normally, prices would rise until the amount of product sellers want to produce equals the amount consumers want to buy, but in this case, prices cannot rise above the ceiling. The result is shortages -- demand is much higher than supply, so lots of consumers who want the product can't get it.

Rent Controls

In a city like New York that institutes rent controls on apartments, a similar pattern will develop. Lots of consumers will be competing for a few rent-controlled apartments, leading to some consumers being left out of the market despite being willing to buy at the current price. Rent controls mean that those unlucky enough to not get those apartments will lose out through no fault of their own, and property owners will be forced to rent apartments at lower rates than they need to make money. Rent controls benefit people who manage to get these coveted apartments, but punishes landlords and those without such apartments.

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About the Author

Andrew Gellert is a graduate student who has written science, business, finance and economics articles for four years. He was also the editor of his own section of his college's newspaper, "The Cowl," and has published in his undergraduate economics department's newsletter.

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