International studies prove that rent controls frequently backfire by reducing residential mobility, discouraging new construction, and driving up unregulated rents, demonstrating that deregulation is more effective than intervention, says Rainer Zitelmann

Rising rents and housing shortages are an issue in many countries. Politicians respond with numerous measures, such as rent controls. However, these often lead to the opposite of what was intended, as two recent scientific studies show.

Konstantin A. Kholodilin of the German Institute for Economic Research (DIW) has evaluated a total of 1,077 international studies examining the effects of government policies on the housing market in a recent paper entitled ‘The effects of government interventions on housing market: A meta-study of empirical literature’. There seems to be no limit to politicians’ imagination, as he examined a total of 74 policy tools across 96 countries.

The results are sobering and show that government measures often have no effect at all or even achieve the opposite of what was intended. Rent controls, for example, lowered rents for regulated dwellings, but at the same time reduced residential mobility, discouraged new construction, worsened housing quality, and drove up rents in the unregulated segment of the market.

Since rent controls are particularly popular, Kholodilin examined their effects in greater detail in a paper entitled ‘Rent control effects through the lens of empirical research’. This analysis was based on more than 200 studies.

As expected, the most pronounced effect of rent controls was on regulated rents, i.e., the rents paid by tenants in rent-controlled dwellings. Most studies (89 out of 101) show that rents in the segments subject to rent control actually declined, by an average of 9.4 percent.

By contrast, rent control generally led to higher rents for dwellings that were not subject to rent regulation. This is shown by almost all the studies. The introduction of rent ceilings exacerbated the housing shortage. As a result, waiting lists grew longer, and people looking for housing had to spend more time searching for a dwelling. If they lacked sufficient patience or had no temporary accommodation while searching, for example with friends or relatives, they turned to the unregulated segment of the market. This increased demand for unregulated dwellings and, consequently, their rents.

The majority of studies suggested that rent controls led to an increase in the homeownership rate. This could be explained by landlords wanting to sell properties that no longer generated sufficient rental income due to rent regulation. They therefore sold their dwellings or converted rental apartments into condominiums.

Reduced mobility

All studies found that rent controls reduced residential mobility. Tenants in regulated dwellings had little incentive to give up their apartments. This could have negative consequences for the labor market, since lower residential mobility also limited the ability to adapt to changes in the labor market. If the employment situation in a city deteriorated, tenants in rent-controlled dwellings were less willing to move to other regions with better employment opportunities.

Most studies conclude that rent control has either no effect or even a negative effect on new housing construction. And all studies found that rent control led to a deterioration in the quality of the affected dwellings. Landlords whose revenues were reduced by rent control had fewer incentives to invest in maintenance and modernization, resulting in a progressive deterioration in housing quality.

In the first study mentioned, the author also examined the effectiveness of other government interventions. The mortgage interest deduction costs the government a great deal of money but has little impact on homeownership rates, while clearly contributing to higher property prices.

The studies showed that the effectiveness of housing policies was severely constrained by the low price elasticity of housing supply. Measures that stimulated demand – whether through housing allowances, mortgage interest deductions, or expansionary monetary policy – tended to be partially reflected in higher property prices and rents rather than leading to improvements in housing availability or an expansion of supply. This finding underscored the fundamental importance of supply-side measures, particularly the relaxation of restrictive land-use and building regulations, which were among the main causes of high property prices and limited construction activity.

In my opinion, these studies confirm that instead of intervening more, the government should intervene less, and instead of introducing even more regulations, it should deregulate.

Rainer Zitelmann is the author of the book The Power of Capitalism