It seems straightforward. When prices get too high, price caps can keep them from going higher. Indeed, this is what residents in many places hard-hit by inflation are arguing should be done in the rental housing market. The fact is this: not only would price caps result in damaging unintended consequences, but they’re not even the best method for achieving reasonable rental prices. Instead, proponents of affordable rental housing should argue 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 last year, places like St. Paul, Minnesota and Kingston, New York have passed rent control measures, limiting the amount rents are allowed to increase each year. A few years earlier, Oregon and California passed statewide limits on rent growth, bringing the number of states with statewide rent control laws up to five.
Certainly, rent control legislation will limit the ability of prices to increase, at least for the rental units directly impacted by these price ceilings. Yet this emphatically does not mean that low-income tenants are universally helped by this type of regulation.
For one, prices in non-controlled apartments often increase as landlords in these non-controlled apartments struggle to accommodate those unable to secure housing in rent-controlled units. Additionally, controlled pricing dampens the incentives of developers to build new rental housing (particularly affordable housing), since they know they might not be able to adjust their prices in response to changes in market demand.
So what should residents in tight rental markets support instead? Counterintuitively, policies that increase economic freedom also tend to make rental housing more affordable.
According to data maintained by Apartment List, the five most expensive rental markets right now are Hawaii, California, New Jersey, New York, and Massachusetts. Three out of these five – Hawaii, California, and New York — rank in the bottom quarter of the Fraser Institute’s economic freedom index, which rates and ranks U.S. states in terms of how market-friendly their laws and institutions are. New Jersey doesn’t fare much better, ranking 36th out of the 50 states.
I got curious and plotted the relationship between economic freedom and rental housing prices nationwide. Unsurprisingly, to me at least, there exists a clear positive relationship between economic freedom and affordable housing. That is to say, as state-level economic freedom increases, average rental housing prices fall.
Importantly for the current rent control proposals, this relationship is still present when we look across metro areas instead of states. Metro areas with higher levels of economic freedom tend to have lower rental prices. This is an important observation, since most of the current rent control proposals are coming from the local level.
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What is the mechanism relating economic freedom to rental prices? Economic freedom is often considered to be a reasonable proxy for a market-friendly environment. It is within these sorts of institutional backgrounds that individuals feel free to innovate and experiment. Economically free places tend to experience a variety of benefits, including higher levels of economic growth and higher rates of domestic in-migration. People and money like to move toward places with more economic freedom, and economically free places are better able to accommodate these new entrants.
Despite their appeal, rent control policies are the wrong tool for achieving affordable housing. Maybe it’s time to try a new approach: the economic freedom approach.
Meg Tuszynski is the managing director of the Bridwell Institute for Economic Freedom, and a research professor in the Cox School of Business at Southern Methodist University.