Shocker from Argentina:
free markets work in housing, too
William L. Anderson | October 18, 2024
Rent control is in the news both in California and elsewhere. In California, voters will decide Proposition 33, which would permit local governments to impose draconian rent controls and other restrictions on property owners unlucky enough to be landlords. Democratic presidential hopeful Kamala Harris also has endorsed rent controls and other restrictions to reverse huge increases in rents that have occurred as inflation surged in the United States.
Despite everything we know about the history of rent control – something economists have warned against for years – these policies are popular with voters and are almost impossible to eliminate once politicians have implemented them. Wealth transfers provide powerful incentives for beneficiaries to keep the status quo, even if the policies themselves cause harm overall.
Another reason there is pressure to keep rent control and other price control laws on the books is the mistaken belief that price control laws actually keep prices lower than they would be in a regular market setting. Furthermore, price-control advocates seem to believe when such laws are passed that they have no effect upon the supply of a good – and that without price controls goods will rise in price with no market constraints whatsoever.
For example, when presidents Jimmy Carter and Ronald Reagan deregulated price and allocation controls on gasoline in 1980 and 1981, the media mostly gave play to the claims of Edwin Rothschild, director of what was then the Citizen/Labor Energy Coalition, an activist group that lobbied for state control of energy. Rothschild was well-known for making outlandish claims about future gas and oil prices, should they be deregulated.
Gas and oil prices did not go up. Instead they fell, as the lifting of price and allocation controls provided incentives for oil and gas producers to increase supply. The policy also reduced bureaucratic barriers to energy production.
This last point is instructive, as the same kind of thing has happened in Argentina, as President Javier Milei recently repealed a 2020 rent-control law that placed severe restrictions on landlords. Among the law’s requirements included three-year leases for tenants, with landlords forced to accept payment in ever-depreciating Argentine pesos. The government had strict rules for how much rent could be raised, accounting for inflation. Renters obviously favored such rules, but landlords realized the law placed their property at risk. According to Reason’s Katarina Hall:
While the law seemed to offer relief for tenants, it backfired. By late 2023, one in seven homes in Argentina sat empty, yet Buenos Aires residents struggled to find available rentals. Faced with inflation and rigid restrictions, landlords were hesitant to sign long-term leases. Many either set excessively high rents to hedge against future inflation or withdrew their properties from the rental market altogether. Others opted to sell in U.S. dollars or list them on short-term rental platforms like Airbnb, where they could charge in foreign currencies.
As Hall notes, the results of the law were the opposite of what politicians intended: “The crunch of rental properties triggered a full-blown housing crisis. … A study by the Institute of Economic Research of the Cordoba Stock Exchange found that rents increased by an average of 140% in inflation-adjusted terms between 2020 and 2023.”
When governments restrict the supply of goods that are in demand – whether apartments or apricots – prices likely will rise both in nominal and real terms. Throw in central bank policies of rapidly expanding the money supply, and it doesn’t take long for a crisis to spiral out of control. When Milei repealed the rent-control law, many believed that it would lead to skyrocketing rents, just as critics of energy deregulation in the USA believed it would bring higher energy prices. However, the opposite happened.
Following repeal, “The Argentine capital is undergoing a rental-market boom,” according to The Wall Street Journal. “Landlords are rushing to put their properties back on the market, with Buenos Aires rental supplies increasing by over 170%. While rents are still up in nominal terms, many renters are getting better deals than ever, with a 40% decline in the real price of rental properties when adjusted for inflation.”
The results in Argentina are instructive not because they are miraculous or even unusual; these are the results one would expect from a normal market economy. An economic exchange is not a life-and-death struggle between two opposing entities or a WWE steel cage match. Instead, it is a voluntary transaction in which both parties expect to be made better off as a result.
This is a lesson that is often lost in America today where property owners often are regarded as little more than thieves and swindlers. For example, the housing situation in San Francisco mirrors that of Argentina before Milei repealed the rent-control law. Writes the Pacific Research Institute’s Kerry Jackson:
San Francisco’s residential vacancy rate is around 13% to 15%. Tens of thousands of housing units are unoccupied. Some might see this as merely the natural order of things, the market response to the conditions on the ground. But politicians, and a majority of voters – 54% – believe it’s a solution to the homelessness crisis waiting to be leveraged. So the law now says these empty spaces must be taxed and their owners punished.
As Free Cities Center Director Steven Greenhut notes, by holding apartments off the market, apartment owners are forgoing potential income of $40,000 or more a year, given the current market rents. However, as he and others have pointed out, San Francisco’s rent-control laws are so punitive that property owners would rather have no income from these apartments given the high probability that problem tenants could ruin them financially.
Instead of following Argentina’s example, however, San Francisco’s voters and political leadership have decided that fines and punitive regulations are a superior way of “encouraging” property owners to rent out their vacant units. Much of this mentality is due to the city’s progressive political traditions, which favor coercion and confrontation to peaceful market exchange.
Milei and Argentina have demonstrated that housing markets can work well in a free-market setting. One hopes that someday American politicians will follow suit.
William L. Anderson is an editor with the Mises Institute and Emeritus Professor of Economics at Frostburg State University, Frostburg, Md. He lives in California.
