New York. The Independent Rent Guidelines Board just froze the rent. That means if you're one of the more than 2 million New Yorkers who lives in a rent stabilized apartment, your rent is going to be frozen next year. That's right. New York, but also Dublin, Barcelona, Berlin, Amsterdam and Paris. All of these increasingly unaffordable cities, especially for regular people, have recently introduced or tightened rent controls. And people just love it. And it makes total sense, right? If you live in these cities, you know that rent can easily half, if not more, of your paycheck. Meanwhile, landlords are often unresponsive, irresponsible, and yet all too eager to jack up the rent whenever they can. So no wonder that even in polarized America, rent controls are something that both liberals and most conservatives support. That's right, everybody loves rent controls except one particularly annoying group of people. Economists agree. In a 2012 US panel of prominent economists, only 2% agreed that rent controls have a positive impact on the amount and quality of affordable rental housing. 2%? Yes. Even left wing economists like Emmanuel Saez or Raj Chetty think rent controls are generally a bad idea. So what's going on here? Are economists just out of touch with how regular people live, or are they so neoliberal brainwashed that they'll instinctively oppose any government intervention anywhere on principle? Well, no. Economists are not so pro free markets everywhere that they are against government price controls in general. In fact, there's a textbook case where almost all of them agree that price controls, similar to rent controls, are exactly the right tool for the job. So when do price controls actually make sense? The answer can be summarized in just one single word monopoly. That is, if you're the only seller of something people need, you have a super strong incentive to charge more and increase your profits as much as you can, because your customers simply have nowhere to go. Just think of the wire that brings you electricity or the pipe that brings you water. In these cases, there is no natural competition and there never will be because digging up every street to lay a second pipe or wire would be insanely expensive and wasteful. Therefore, economists call these types of markets natural monopolies. So wherever these networks are in private hands, economists tend to advise governments to set a limit to what these monopolies can charge, because once prices are capped and squeezing customers is no longer a viable option. The only way left for commercial enterprises to earn more money is either cost cutting or serving more people, which is both good for the company and for the people. So economists are not always against price controls, yet they are firmly against rent controls. Why? The answer is very simple. Landlords are not monopolists. Sure, big investment funds with lots of housing in their portfolio do exist, but the rental ownership is far less concentrated than people think. For example, in Spain, a country where rent prices in major cities have skyrocketed in the last decade, two thirds of the rental units are in the hands of landlords with just 1 or 2 houses. On the other hand, individual landlords with ten units or more only represent 3.6% of Spain's rental market. And according to an investigation of the Bank of Spain, investment funds only control about 8% of the rental units. And this is not just a Spanish thing. In Germany, only about 13% of rental apartments are owned by private companies, which tend to hold large portfolios of housing units. Well, most apartments were actually owned by private individuals and community owners. Finally, in the US, where the Wall Street is buying up all the houses, the story is loudest. The Census Bureau's latest surveys find that investment trusts and corporations with more than a thousand units owned less than 2% of the single family rental market, while three quarters of them are in hands of owners with less than ten units. So rental markets are the opposite of a natural monopoly, because there are just so many landlords competing for the best renters. And crucially, if a market is already competitive, then prices should, in theory, be as low as they can be. Sure, landlords will still make a profit, but this should not be excessive for one simple reason if rents are too high, this introduces a massive incentives for landlords to simply build more homes, for example by building on vacant land or by building larger structures. So in theory, landlords should on average be pretty good and not make too high profits. And in theory, rent controls will disturb a healthy market and therefore lead to all sorts of unintended bad consequences.

But is that actually true? Because on this channel I have the following simple rule. Yes, theory is nice, but what really matters is evidence. So what actually happens when rent controls are introduced? Luckily for us, economist Konstantin Kholodilin did the dirty work of tracking down essentially every empirical study on rent controls ever written. 92 peer reviewed studies covering 36 countries from 1967 all the way to 2022. So what did all of these studies find about rent controls? First, let's state the obvious. Yes, rent control policies do work in the sense that they lower and they have a negative impact on rent for tenants living in rent controlled apartments. 36 out of the 41 published studies find that once rent controls are introduced, rents do indeed go down. But remember, the rental market isn't nothing like a natural monopoly. Small landlords do compete with each other to find renters, for example by investing in properties to make them more modern and attractive. So when you say the rent can only be this high, you essentially interfere with this market process and landlords react in typically one of two ways. First, some landlords decide that if they cannot rent at market prices, they would rather sell their properties. Of course, that's actually good news for buyers because they will have more options available for them. Indeed, most published studies find that rent controls tend to increase home ownership, but in the short term, every home sold to a buyer is, of course, a home all the way from renters. So, not surprisingly, nine out of the ten published studies found that while home ownership increases, the rental supply shrinks, goes down. And given that not everybody can or wants to get a mortgage, it means that people who cannot afford to buy will find it more and more difficult to actually find a rental apartment. On the other hand, because now everyone wants to be inside these nice rent controlled apartments, of which there are fewer and fewer are left because landlords are selling. Almost all studies find that rent controls greatly decrease mobility. That is, people who would have otherwise moved because for example, they found work in another city, they started earning more, so they wanted a bigger apartment, or they need a smaller apartment because their kids just move out. Many of these will now not move because they fear losing their nice rent controlled apartment. So while rent controls may benefit renters that were already in the city, they make life much harder for people that need to move into a new city in the future, because fewer and fewer apartments will be becoming available. Because some are sold and many people stay in place for a long time. This will force new people to look where the rent controls do not reach, like, for example, newly built homes which are sometimes exempt, or apartments in the next town over. So of course, virtually every study finds that while rent controls in major cities or neighborhoods cause rent to decline, there, they cause rents to go up in uncontrolled markets nearby. So concretely, if Mamdani introduces rent controls in New York City, is likely to drive up rent prices in New York, which is nearby, but it gets even worse. Yes, some landlords sell their rent controlled properties and some do not. But those that do not still face lower rent and more and more people that want to get into their apartment. So what do many of them do? Well, they simply stop investing in keeping their apartments nice. They become worse landlords in other words, when the government reduced their income by capping rents, they simply responded by reducing their costs to protect their profits. Indeed, out of the 13 published studies that examined housing quality after rent controls, about 11 of them find that house quality goes down after rent controls are introduced. But perhaps most worrying of all, most studies by far show that rent controls decrease new construction of rental properties because of course, they have become less interesting to invest in. In other words, the real effect of rent controls is that a lucky group of insiders who already had a nice apartment get a lower rent. And perhaps that really helps them. But many of them still pay for it because their landlords will maintain these properties less. And second, more importantly, perhaps every renter who just happened to be not in a rent controlled apartment at the time of rent controls being introduced, will find that it is increasingly difficult to live in these cities at all. And this is why most economists believe rent controls had a negative impact on the amount and quality of affordable rental housing.

And yet, most economists do agree that rents in major cities are out of control. So if rent controls are not the solution, what solution do most economists actually agree on to reduce out-of-control rents? It's very simple. Just build more housing units. You see, if cities like New York, Dublin and Paris keep growing, they will of course need more workers, and more workers need more homes. So the obvious solution to out-of-control rents is that mayors like Mamdani should simply build more homes. Otherwise, they end up creating a shortage. And a shortage is what gives landlords the power in the first place. Rent controls attack the symptom, increasing rents, and while that does reduce rents, it simply changes the problem to increased scarcity and the year long waiting lists for rent controlled apartments. On the other hand, building more addresses the problem directly the disease when tenants have options, landlords will compete for them and rents fall without anyone capping any prices. A good example is Auckland, New Zealand's biggest city. In 2016, Auckland rezoned a large part of the city to allow higher density. Building and construction absolutely exploded. And while rents still went up, they did so far less dramatically than in, for example, another New Zealand city, Wellington. Specifically, if we correct for inflation, we can see that Auckland's rent prices stabilized while Wellington's exploded. And now this is not just that the free market fix everything. Many economists agree that public housing is important as well. When 50 people show up to see an apartment, there are always some unlucky people that sit at the back of the line with very few prospects of being ever picked up by landlords, such as, for example, single moms or young people without a college degree. And these people may literally end up on the street if rental apartments are too expensive. So if the market fails to offer enough, the government should step in and offer more public housing. So the answer most economists support is just build more houses of every kind. Market rate housing, public housing, social housing. And yes, even if you see developers building mostly luxury towers, this still helps everyone else, even the poor, through a process that economists call filtering, which is similar to musical chairs, in which you will of move into new units, freeing up the older units they vacate and the chain reaches down the income ladder further than you might think at first. So cities that build more like Auckland will become more affordable compared to cities like Wellington that do not build more. Sounds simple right? Case closed. No, not quite. Because if the answer is so obvious, why does almost no expensive city like New York actually do it? The answer turns out to be that new construction is very unpopular because, perhaps not very surprisingly, most people do not think like economists. For example, in a recent experiment, economists Elmendorf, Nall and Oklobdzija asked thousands of Americans a very simple question if your city suddenly gets a lot more houses, what would happen to prices and rent? Well, only a minority of people said prices or rents would actually fall. Well, a whopping 42 or 43% of people thought the opposite would happen. More construction means higher prices. And this is very strange because they do seem to understand the basic logic of supply and demand. In fact, when asked how supply chain problems in the market for new cars so fewer new cars would affect the price of used cars, 86% of respondents correctly predicted that there would be higher prices for cars if there were fewer cars available. So it's very clear to people that if you were, cars can be made, then prices will go up. But for some reason, housing is where the logic breaks down. So when asked who is to blame for high housing prices, most respondents pointed their finger squarely at developers and landlords, which, while a bit depressing given all the evidence that we've seen so far about rent controls, was also quite enlightening because it can fully explain why, despite so much evidence against rent controls and in favor of simply building more housing. Politicians often choose rent controls and the much simpler and crucially, much more popular option. So, in conclusion, why do almost 90% of economists about rent controls? It's simple. The evidence from dozens of studies shows us that while rent controls do work in lowering rents for current renters, they do not solve the underlying problem a housing shortage. Instead, they shift the problem from the current and future tenants to just future tenants that were just unlucky not to be in a rent controlled apartment at the time that rent controls were introduced. Instead, the experience of cities like Auckland shows us very clearly that building more homes will stabilize rents. Yes, even if those are luxury homes, because that means rich families will leave less luxury apartments available for others. But can't we just do both? Well, the evidence seems to point the other way. Studies have found that one of the most damaging effects of rent controls is that they actually reduce construction by making renting less interesting for landlords to invest in new housing units. Yet you could imagine that someone like Mamdani will announce a massive public housing construction plan alongside rent controls, but so far he has sent mixed signals on just how committed he is to building more at least market rate housing only focusing on publicly subsidized, permanently affordable, union built, rent stabilized homes, which, thanks to its very narrow definition, that only a few types of homes will be incredibly difficult to build at scale. Yet who knows, maybe he can do it anyway. Those are my two legs. What do you think? Do you think economists are right to prefer building more over imposing rent controls? Given all the evidence that you've seen? Let me know in the comments below. And if you want to dig deeper into more analysis on what actually does work to make housing more affordable, I highly recommend you check out the following three articles from our advertising sponsor, The Economist. First, for a big picture view of Europe's housing crunch, start with this piece on why renting a one bedroom apartment in Lisbon now costs more than the average Portuguese salary. Then, for another example of policy to protect the renters can make things worse. Check out this article. And finally, check out The Economist's Deep Dive into the structural forces pushing rents higher across the entire world. As these examples show, The Economist delivers insights that help you see the bigger picture and think for yourself. And this is why I almost always rely on their analysis from my research, and it's why I highly recommend you subscribe. And that is actually now more interesting than ever, given that they are offering a special 50% summer discount if you follow our link. 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