The week of July 15, 2024: Rent control (again), student loans, climate, economic policy, and much, much more.
The week of July 15, 2024: Rent control (again), student loans, climate, economic policy, and much, much more.
Never underestimate the extent to which the political value of an idea to those advocating it can outweigh consideration of its economic consequences.
From the White House (July 16, 2024):
Today, President Biden is announcing new actions to lower housing costs, including:
Calling on Congress to pass legislation giving corporate landlords a choice to either cap rent increases on existing units at 5% or risk losing current valuable federal tax breaks…
Corporate landlords, eh?
Scroll down to find more details of what the president is proposing:
Under President Biden’s plan, corporate landlords, beginning this year and for the next two years, would only be able to take advantage of faster depreciation write-offs available to owners of rental housing if they keep annual rent increases to no more than 5% each year. This would apply to landlords with over 50 units in their portfolio, covering more than 20 million units across the country. It would include an exception for new construction and substantial renovation or rehabilitation. The policy is a bridge to rents stabilizing as President Biden’s plan to build more takes hold. The President believes that this combination of anti-gouging policies and historic levels of support to build more affordable housing effectively balances the needs of tenants without limiting incentives for more supply. The Administration looks forward to working with Congress to ensure renters are protected and corporate landlords comply with the intent of this proposal.
Notice the reference to “gouging,” almost always a sign of a politician who wants to find scapegoats rather than solutions. Solutions take time. Scapegoating is the work of a moment and can play well politically. The humdrum work of increasing supply to meet increased demand will take a while and is less obviously something that voters will not link to a single political decision. In making this proposal, Biden is rationally responding to the incentive that such a scheme might yield him a political return in the fall. That its longer-term consequences may be to reduce the supply of rental properties will be of little consequence to him. If re-elected, he will not be eligible to run again, and the only elections he would have to think about would be the midterms in 2026. Through his own choices, the president is showing the power of incentives, the same power he ignores when it comes to the economic effects of his proposal.
The president’s defenders will maintain that what he is suggesting will only affect larger corporate landlords, it’s only for a transitional period, and it does not apply to those building new rental properties or carrying out substantial renovations. Besides, this is only about tax “breaks” anyway.
But that argument ignores the signaling contained in the president’s proposal. Large corporate rental companies may well take note of the fact that they had been singled out for special disfavor and think twice about increasing their exposure to the sector.
That the proposed new rule would only apply for two years would be of limited reassurance. If keeping the new rule turned out to be more popular than letting it lapse, two years would become three, then four…
And that the new rules only apply to larger corporate landlords might be less reassuring to smaller corporate landlords or, indeed, any landlords, thin end of the wedge and all that.
Prospective landlords will note that five percent. Clearly it is derived from current inflation rates, and with rest of the proposed legislation, is supposedly temporary, but it’s not hard to see how five percent could be enshrined as a generic “fair” number, with a lengthy political afterlife and one that, say, at the state level becomes a totem that no politician will touch.
To be sure, Biden’s proposal falls short, in a formal sense, of rent control. It merely denies certain corporate landlords of existing properties a tax “break” if they increase rent by more than that arbitrary five percent, but, again, that’s not how corporate enterprises considering building new rental properties will read it.
The Wall Street Journal weighs in:
Enter Mr. Biden, who on Tuesday pitched conditioning “valuable federal tax breaks” on landlords capping rent increases at 5% annually. The White House says its plan would apply to “corporate” landlords with more than 50 units, covering more than 20 million units or roughly half the country’s rental stock.
What are such lucrative tax breaks? The press release refers to “faster depreciation write-offs.” Under the current tax code, residential rental property owners can depreciate a building’s value over 27.5 years, rather than 39 as for other types of commercial real estate. A shorter depreciation schedule increases the incentive to invest in rental housing.
Conditioning this tax benefit on landlords limiting rents to 5% would do the opposite. It would reduce and could even eliminate the return on rental housing investments, especially since inflation has driven up insurance, construction and maintenance costs. Investors will have to pay higher taxes or accept a lower return. The Administration wants to increase subsidies for affordable housing even as it promotes policies to make such projects less financially attractive.
The White House says its rent-control ultimatum won’t discourage new housing investment because it would apply only to existing units. But developers will rightly anticipate that the policy will eventually be extended to newer units, which will factor into their investment calculus. Reducing the return on completed projects also reduces the capital available to invest in new ones.
This is also what the Department of Housing and Urban Development (HUD) did in March when it capped annual rent increases at 10% for rental units that benefit from the low-income housing tax credit. The ceiling was previously set at twice the annual increase in the median household income, which would have been 14.8% this year.
In Britain, the former center-left Conservative government waged war on landlords whether corporateor not, very often by the removal of tax “breaks,” producing this response from Matthew Lynn in the Daily Telegraph in 2022:
In Ireland, foreign exchange students are forced to live in tents because of the shortage of homes to rent. In Sweden, the market has just about collapsed. And Berlin has just been forced by the constitutional court to end a catastrophic experiment in price controls.
Right across Europe, there are horror stories emerging of housing disasters as left-leaning governments intervene with controls, restrictions and price caps on anyone foolish enough to risk letting out a property. We might think that this is only happening on the other side of the English Channel or the Irish Sea. But the trouble is, we are stumbling towards a rental catastrophe in the UK as well.
The Government has spent five years waging a war on landlords. The predictable result? Many of them are pulling out of the market, sending prices soaring and creating intense supply shortages…
In Sweden, people now often have to wait a decade or more just to find somewhere to live, double the average waiting time a decade ago.
More on Sweden, from Harrison Griffiths, writing in the Spectator this year:
The consummate case study is Stockholm, where policymakers control rents to keep them at an ‘average level’. In 2022, the average waiting time for an apartment was nine years – and more than 11 years if you’re after a short-term lease. The number of people waiting for a rental property was 775,000.
Sure, if you already have a rental agreement, rent controls artificially suppress the amount you pay each month. But that cushy gig for incumbents comes at the direct expense of those who aren’t so lucky.
Griffiths also turns his attention to Scotland:
Rent controls can actually increase rents. When the Scottish government capped rent increases at an arbitrary 3 per cent in April 2023, private rents rose by 6 per cent, the largest increase on record. This is because landlords will hike rents for new tenants in order to maintain their margins over the course of a contract
Back to the Daily Telegraph’s Lynn:
Meanwhile in Berlin, a much-hyped experiment in rent controls has been brought to an end by the courts after prices soared out of control.
Looking specifically at the U.K., Lynn writes:
The results have been depressingly predictable. There is increasing evidence that private landlords are selling up and quitting the market in droves. According to the estate agent Chestertons, the number of properties available to rent in London fell by 38pc last year – a figure it perfectly accurately describes as “staggering” – while the number of tenant enquiries has grown by 60pc.
With that kind of imbalance between supply and demand, it is hardly surprising that overall rents are up by 20pc over the last year alone in the capital, and are still rising by an estimated 3pc a month.
Or this (also from 2022) from the New York Post, on New York City, that poster child for rent control:
New York City is in the midst of a housing crunch — and “ghost apartments,” empty rent-controlled units that are not in any rentable condition, are contributing to it.
Almost 50,000 such units need expensive renovations and upgrades (often close to $100,000) before they’d be legal to rent. But because each unit’s rent is set by the rent laws, the owner could never recover her costs for bringing them up to code.
Rent control messes with the market pricing mechanism, with predictably destructive consequences, and, once put in place, creates a powerful constituency of renters, who, for reasons that are not difficult to understand, will resist anything but minor changes.
Swedish economist Assar Lindbeck is perhaps best known, at least in Sweden, for heading the commission looking into his country’s financial crisis in the early 1990s. I was lucky enough to hear him speak to a relatively small group (meaning there could be a Q&A) at that time. To say that he was impressive is a wild understatement. Writing for the Financial Times, shortly after Lindbeck died in 2020, Carl Hamilton noted the impact that commission had had:
The commission’s report suggested reforms that revitalised Sweden’s economy, stabilised the political system and argued in favour of making the country’s central bank independent. These reforms helped pave the way for Sweden’s remarkably stable and dynamic economy over the subsequent three decades.
Lindbeck and his commission played a very large part in taking Sweden away from a Social Democratic system which had proved the truth of Margaret Thatcher’s adage that “the problem with socialism is that you eventually run out of other people’s money.” The result is that today’s Sweden is very different from the wishful fantasies of some on the American left.
Sadly, Lindbeck was unable to overturn Sweden’s disastrous rent control regime, but he did have something very memorable to say about it:
“In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
And that exception may not always apply. Writing for FEE in 2019, David Henderson quotes this story:
NEW DELHI—A “romantic conception of socialism” … destroyed Vietnam’s economy in the years after the Vietnam war, Foreign Minister Nguyen Co Thach said Friday.
Addressing a crowded news conference in the Indian capital, Mr. Thach admitted that controls … had artificially encouraged demand and discouraged supply…. House rents had … been kept low … so all the houses in Hanoi had fallen into disrepair, said Mr. Thach.
“The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy,” he said.
—From a news report in Journal of Commerce, quoted in Dan Seligman, “Keeping Up,” Fortune, February 27, 1989.
Javier Milei, Argentina’s new libertarian (it’s complicated) president, has no time for rent control. Shortly after assuming office in December he enacted a sweeping emergency decree — the megadecreto— which included provisions designed to start the process of deregulating his country’s cruelly hobbled economy. Rent control was among its targets.
So, what happened? In January, the Cato Institute’s Ryan Bourne took up the story after giving some background:
A form of tenancy rent control was introduced in Argentina in 2020…Tenancies were mandated to a minimum length of three years and permissible annual rent increases were capped at a weighted average of inflation and wage growth. Both measures aimed to provide tenants with more economic ‘security’. Landlords were still free to adjust rates between contracts, but ending tenancies prematurely was basically impossible. Deposits were capped, while rents themselves had to be paid in pesos.
The provision about pesos is important. In a country where the value of its domestic currency has been depreciating for years, many larger (and not so large) transactions take place in dollars. In 2020 annual inflation was 42 percent. The month before (October 2023) Milei was elected, annual inflation was running at 142 percent and accelerating toward hyperinflation. The peso was in free fall. Somebody I met in Buenos Aires in June told me that she had had to pay her monthly rent in a small suitcase of peso bills.
Bourne then explains what the consequences of the 2020 law were always likely to be:
Economic theory grants us predictions about these regulations. Tenancy rent control and contract length regulations burden landlords with more risk of obtaining submarket rents within tenancies and being stuck for three years with troublesome renters. On the margin, this makes it more lucrative to sell properties for owner occupation, list on excluded short-term rental sites like AirBnB, or even just leave properties empty. By reducing the supply of traditional rental homes, this raises the average level of rent, even if the growth of rent is capped within minimum length tenancy contracts.
An environment of high inflation worsens these risks for landlords. With surging prices, it makes sense to change rent levels more regularly. This allows tenants and landlords to find contract provisions to make sure rents both reflect market realities and tenants’ ability to pay (as wage growth often lags inflation). Yet these regulations only allowed rent adjustments once per year (or twice from October 2023). High and volatile inflation thus interacts with these regulations to raise rent risk and vacancy risk (given the sharp jumps in rents). Landlords might therefore like to hedge against inflation by charging in another currency, like dollars. But this was prohibited too.
Landlords, it’s worth noting, fared very poorly during Weimar Germany’s hyperinflation.
Argentina’s landlords reacted rationally to the new law:
Around the policy’s introduction, it’s estimated that 45% of landlords stopped renting to instead sell their properties, not least because most home sales were made in dollars. A lot of landlords shifted to short-term rentals on AirBnB too. In 2019, Buenos Aires had 10,000 properties listed on AirBnB; now it’s over 29,500. There have thus been no end of stories about a rental housing crisis, with tenants unable to find rental accommodation, despite the Financial Times reporting late last year that energy use implies ‘one in seven homes’ in Buenos Aires, the capital, laid empty.
This supply crunch led to soaring rents. Bloomberg reported that rents jumped sharply after tenancy rent controls were announced, as landlords opted out of the market or front-loaded rent increases to protect against inflation. Having been falling in real terms through 2018 and 2019, and tracking inflation for most of the previous decade, rents in Buenos Aires grew at 1.7 times the pace of inflation in 2020, broadly tracked inflation in 2021 and 2022, and then accelerated much faster than inflation again in 2023 as the rate which rents could be increased within tenancies was tightened further to the lower of wage growth or inflation.
The megadecreto’s liberalization of the law meant that rents would be a matter of negotiation between the parties. The three-year minimum contract length was scrapped, and rents could be paid in a foreign currency, which, for practical purposes, meant dollars.
Landlords responded rationally to the changed incentives.
Bourne:
Broker Soledad Balayan has shown a 50% rise in notices for traditional rentals since the decree. A host of other sources, including the Argentine Real Estate Chamber, have confirmed large supply jumps. Perhaps unsurprisingly, reports show new rental prices falling, by between 20 and 30% so far.
There’s a lesson there.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 179th episode, David is joined by Jennifer Kaehms. Kaehms is a former Forbes 30 under 30 venture-capital visionary and leader, and a prolific expert in the subject of AI, venture investing, and bioengineering. Is AI the end of the humanity? Is it the biggest over-hyped nothing since the blockchain? Or is it, maybe, just maybe, somewhere in between?
The Capital Matters week that was . . .
Student Loan Forgiveness
The first sign that the pandemic has permanently changed student-loan repayment was the introduction of Biden’s Saving on a Valuable Education (SAVE) plan, which I wrote about in 2023.
Climate & Climate Policy
The Nature Restoration Law, which would be yet another EU regulatory burden imposed on farmers and industry, was assumed dead until, suddenly, the position of Austria changed from abstention to support. This was decided by Leonore Gewessler, Austria’s federal minister for climate action and environment.
In doing so, she went against the wishes of her (Green) party’s coalition partner, the center-right Austrian People’s Party (ÖVP), which counts the Austrian chancellor, Karl Nehammer, in its ranks. Ahead of the vote, he warned the Belgian EU presidency that the approval by Gewessler was unlawful, stating: “Austria’s abstention, which has already been registered in accordance with the usual procedures, must remain in place. . . . This is partly because there is a valid negative opinion from the federal states and the necessary agreement between the federal ministries concerned is lacking.” …
Headlines calling 2023 the “hottest year on record” mushroomed when 2024 began, and with summer in full swing, the media keep talking about the possibility of a new record in 2024. As usual, though, they exaggerate the significance of such events. A single warm (or cool) year does not constitute evidence of climate change. Nevertheless, in the absence of natural climate variations, we might expect rising atmospheric carbon dioxide levels to make each successive year warmer than the last. But by how much?…
ESG
In late 2021, at the height of the obsession with ESG and DEI, Tractor Supply CEO Hal Lawton laid out his vision for what the “life out here” motto meant for this leading retailer of agricultural supplies. Lawton noted that “ESG has emerged as the universal standard for good corporate citizenship,” and affirmed that “Tractor Supply has the resources to take positive action and is committed to doing so.”
A skeptic might ask if emphasizing ESG and DEI initiatives was the only path forward for Lawton…
Labor
The Motor Carrier Act of 1980, signed by Jimmy Carter, deregulated interstate trucking and removed that government support to the Teamsters’ power. Nonunion trucking companies were allowed to compete. This worked out great for businesses, which no longer had to deal with mobbed-up, overpriced trucking companies, and for consumers, who reaped the benefits through lower prices.
The government still continued to chip away at Teamsters corruption, indicting individuals on a case-by-case basis, but it was clear that the organization’s structure was inherently linked to organized crime…
Economic Policy
Casey B. Mulligan & Kevin Hassett:
President Trump’s political opponents have been posting billboards and running political advertisements attacking the Heritage Foundation’s Project 2025 and asserting that it is the Republican secret agenda. While many in the media have parroted this assertion, it is clearly false. There is nothing secret about President Trump’s agenda. Indeed, he unveiled at the Republican National Platform a detailed 20-step plan. There is no reason to hypothesize about a secret plan when a plan is there to be analyzed. The plan takes Reaganomics and modifies it for the 21st century.
Donald Trump gave a long interview to Bloomberg, published on Tuesday. It covered a wide range of topics, some of which Trump is strong on and some of which could use some work. For the purposes of this post, I’m interested in his economic views, which made up a good chunk of the interview. Other issues he talked about won’t be mentioned.
Here’s the lowdown…
Free Trade
Opponents of free trade reliably invoke national security to justify their views. Of course, there are situations where free trade should not be allowed. Sanctions and embargoes can be part of an effective national-defense policy. We don’t want free trade in nuclear weapons technology. But arguments for national-security exceptions to free trade are often flimsy.
One such case is steel protectionism, which is nearly always justified, at least in part, with national-security reasoning…
Argentina
When Argentines voted for Javier Milei, a self-described anarcho-capitalist (although, in practice, the truth is more nuanced than that) as their president, this didn’t (sadly) reflect a sudden mass conversion to libertarian-type economics. Rather it was a recognition of how totally their corporatist, heavily interventionist, tariff-protected system had failed, and for how long it had failed (there’s a lesson there, but I’ll let it pass for now). The last Argentine president to try something different was the center-right’s Mauricio Macri. He was elected in 2014, but, daunted, I suspect, by the extent of the challenge he faced, opted for a gradualist approach. It failed…
Housing
Phil is correct to note that J. D. Vance’s explanation for housing costs makes no sense. Politicians have taken more notice of high housing costs in recent years, but understanding the federal government’s role in the housing market is vital to correcting policy errors…
Water Policy
Chronic water scarcity in California is indeed the new normal, but it’s not because of climate change. Even if the state is destined to experience lengthier droughts and reduced snowpack, most scenarios also forecast an abundance of years when the state is inundated with a series of so-called atmospheric rivers. That diluvian scenario was experienced by Californians this past winter, and even more so in the winter of 2022–23. Yet water remains scarce…
To sign up for The Capital Letter, please follow this link.