Avoiding the “crater” effect of rent controls

By Julian Wood April 13, 2021

With the median weekly rent in the Wellington region climbing to $600/week in February, and rents skyrocketing similarly around the country it is not surprising that rent control has been proposed as a way to protect vulnerable renters from rapacious landlords. It’s such a shame then that this simple and easy “fix” is also a very bad solution. The reality is that rent controls work against good long term housing solutions. Indeed, as the Swedish economist Assar Lindbeck famously summarised: “in many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” 

The reasons behind the quote are varied but boil down to the fact that rent controls (setting a maximum rental price for a property or even a maximum price increase for rental accommodation) end up lowering the quality and supply of housing available and eventually create rent controlled ghettos. The alternative is that an quasi-illegal housing market develops; breeding the normalisation of corruption. Either way you lose. 

The reality is that rent controls work against good long term housing solutions

Rent controls do create some winners. Incumbent renters are protected from high rents and price increases over time. For these lucky few there can be an ongoing financial windfall. But this windfall has a dark side. Studies have shown that this can “lock” renters into houses that are bigger than they need when life and family circumstances change, as moving to a smaller, newer place would mean a new, more expensive lease. This is wasteful.

It also turns out that for everyone else (aside the lucky few above) rent controls make them worse off. Lower rents mean that there are fewer incentives to build new houses in rent controlled areas. Developers also face restricted finance options when it comes to rebuilding or renewal. Fear that the rent control areas will spread over time means that fewer houses are built in adjacent areas. Overall a smaller, poorer quality and more expensive housing stock emerges.

The alternative, once rent controls have been introduced, is for a grey market to develop. Landlords and prospective tenants find their way around the controls. Additional “pool cleaning,” “lawnmowing” fees or service charges appear. At its worst an off-record cash economy emerges. This might lead to further enforcement or regulation changes, which leads to an escalation of new avoidance mechanisms. All this undermines transparency and breeds corruption.

If we really want to help the housing situation in New Zealand, instead of arguing for rent controls, we should actively working to increase the supply of housing, which means supporting proposals for more dense housing in historically leafy, open suburbs. Some students might consider studying in alternative but comparable universities where rents are much lower. As Stuff recently reported “the average weekly rent for a flat bedroom in Ilam (in Christchurch), $143, is almost half what Wellington students pay.” The costs and risks associated with rent controls however, should give us pause when considering their use. Overall, what appears as a simple solution to high rents ends up making everyone worse off.

go back

Maxim Institute is an independent charitable trust that relies on the generous support of families, community groups, trusts, and individuals—without them, we wouldn’t exist.

We’d love to have you join our Community of Supporters. We need people like you to help us continue this work—and to grow it—so we can respond to today’s challenges and opportunities and help create a better future for the next generation.