Rising rents and appropriate responses
I was recently involved in a discussion related to real estate and rising rents. A friend proposed this policy: “We should limit the extent to which the city can expand, and we should have rent caps so that the prices don’t go up.” I responded: “That means that purchase prices will go up dramatically, if the influx of new citizens doesn’t stop.” She said: “Yes, but that will be temporary—the prices will stabilize at some point, they cannot grow forever.”
I agree that they cannot grow forever. The prices will stabilize, that much is certain, but they will stabilize at a very high point. I proposed that there are essentially two futures: you either have a San Francisco scenario, where new construction is very difficult, but since people still want to come and live there, the prices for renting and owning are incredibly high OR you have a Tokyo scenario, where you tear down old neighborhoods to make place for gigantic complexes which allow very dense living (and still have high prices because the demand still exceeds the supply).
What happens if you institute construction limits and rent control? Ownership prices go up, and rent goes up in the surrounding places. People want to go to hubs so much that they will forego the benefits of living in other areas. The opportunities in the city simply outweigh what they can get elsewhere.
Given a constant influx of new citizens to a hypothetical city:
If you institute construction limits: this hits the poor the most, because now everyone is competing for a very limited resource (available housing).
If you institute rent control: this helps the poor temporarily because the prices are more affordable, but since you now limit how much construction companies can earn, there will be less construction. How much less? Difficult to say.
If you institute both: prices of owning will rise, and mobility among those who rent will drop (every rental property charges the maximum possible rent and is already rented out—which means you cannot just move out of your apartment and easily find a new one). If the influx of citizens remains constant, with time, all housing will be bought up (by those who can afford it) and there will be very little for renting (again, hitting the poor the most because if you’re poor, you have to rent).
If you do literally nothing at all: construction companies will build as much as they can, people will buy/rent as much as they can. The density will grow, and since individual construction companies don’t have an incentive to care about urban planning, just their own projects, you will get ugly neighborhoods and questionable infrastructure. There’s no guarantee that this will happen, but I’ve seen it happen in my city. Maybe, if you’re lucky, decision makers in construction companies will care about urban planning despite not being incentivized to do so.
Therefore, you probably have to do something. The force of people wanting to move to the city is very strong, and simply placing limits will not stop it (at least not without unintended consequences). What to do?
Build new hubs. Make it unreasonable for businesses NOT to move to this new hub: offer generous tax cuts, zero rent for employers, cover employee relocation etc. If people see a lot of opportunity to achieve their goals in your new hub, they’ll maybe move there instead, lightening the load on the old hub.
Have urban planning for new development. This will curtail new development a little bit, but not so much as an outright ban. And you will hopefully end up with neighborhoods that aren’t ugly and that have infrastructure.
I’m kinda disappointed because I have just invented a generic government: that’s precisely what governments are already doing (or claim to be doing).
Regardless, I’m posting this here with three requests:
Please criticize my model! I don’t know what exactly I’m wrong about, but I’m reasonably certain that I’m wrong about something.
What are the experts disagreeing on? What are the deeper questions?
Finally, what are some good resources to learn about these topics?