Jul 24, 2022Liked by Cameron Murray

The ACT has legislated limits in rent increases for existing tenants (rental CPI +10%). I suspect the law is not very effective because it relies on tenants pushing back against proposed increases. My guess is most tenants don't know about the limits, and many of those who do judge (probably correctly) that they'll be worse off if they push back

Expand full comment

You’re looking at the wrong metric, really. Obviously rent control controls rent where it has jurisdiction. The problem is that it changes the sample set, so it has side effects outside of those to whom it applies. Under rent control some housing that would otherwise be supplied in a particular location is not supplied. Whoever would have lived in that housing instead must continue to demand housing where they currently live, thus raising the rent there—but this effect is not captured in the rent controlled jurisdiction. For example, rent increases often coincide with an influx of higher income people moving to a neighborhood or city. Preventing rent increases prevents these people from moving in. Which means the net effect is that they consume more housing where they currently live, raising rents there, or preventing them from falling. Sadly this usually means they live in a place they don’t prefer, and maybe even one where they are less helpful to society due to lack of capital they can skillfully operate. Misallocation of labor due to inability to move into more economically productive regions is a massive, under-the-radar problem. So while your logic is certainly correct about the effects of rent control on the people to whom it directly applies, it misses the point, since much of the harm it does is to people who are not paying rent in the rent-controlled city, but otherwise would have been.

Expand full comment
Jul 25, 2022·edited Jul 25, 2022

I sort of assumed that the ideas of rent controlled are to do with the lag in the market responding to price signals. Hypothetically if higher rents lead to more construction, then no controls would eventually feed into more supply than otherwise, which would eventually depress rental growth and return rental prices back to their long term trend growth.

And I guess we can see that in the index chart where over some periods rents growth above the 3% trend and in other periods are below it.

Whereas supposedly regulating them would limit the price signal to build more supply, and in turn delay or reduce additional construction. However I wonder if it would merely smooth out housing cycles by also preventing a glut/bust period where rents grow below trend.

And that's assuming regulations were set at trend. I can see how regulating rents of new construction to the point where it starts affecting estimated long term cash flows would start having an impact, because then you altering the expected pay off. But in a way if it's merely smoothing the rental cycle then maybe you could expect it to curtail windfalls and potentially stabilise supply booms and busts.

Expand full comment

Here's how the two views might be not contradictory. Consider a case where rental returns are not uniform, and are not known in advance.

So the market can push down rental yields in aggregate, while some properties maintain high yield that will be affected by rent controls (and therefore rent control can affect supply).

The variation can also happen across time (through then it depends if rent control is applied yearly or cumulatively).

In any case, rent control has a chilling effect on investment, at the very least because it signals the readiness to interfere in the market. A non biting rent control can easily become biting, it's a slippery slope.

Expand full comment