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Populist answers are rarely the correct answers

January 26, 2017

oregon-econbomics-blog-logoBy Fred Thompson,
Oregon Economics Blog

So Portland has a problem with affordable housing.  Rents are high and increasing, which sucks for all those looking for rental housing (and is great for those with property to rent) and property values are soaring which is great for those who own homes but bad for those that want to buy.  Politicians hear the complaints and want to avoid being seen as passive so they try to come up with policies that sound good to voters.  Unfortunately, these ideas are generally half-baked and done without nearly enough research and thought. And poor policy can have bad consequences.

Thus we have this proposal from City Commissioner Chloe Eudaly with the support of Mayor Ted Wheeler.  This proposal would require landlords to pay the moving costs of tenants evicted for “no-cause.”  The idea is to discourage such evictions. The actual result is most likely to make the rental housing situation worse.

How so?  Well first let’s start with the premise that no-cause evictions are part of the problem of unaffordable housing.  Perhaps, but Oregon has a statewide ban on rent control policies, so why is getting a new tenant any better than raising the rent on an existing tenant? Especially when you factor in the cost of a vacant apartment or house, the cost of getting it ready for a new tenant, etc. It is not at all clear why this policy would help at all.

Second, rental housing is a market and markets adjust to distortions created by policymakers.  This policy clearly raises the cost of doing business for landlords.  So who pays for these increased costs?  All students of economics learn from their very first class that the incidence of taxes and other distortions are shared.  Increased costs shift the supply curve back and a new equilibrium results.  How does that new equilibrium compare to the old one?  Higher price and fewer properties rented.  Exactly the opposite of what commissioners say they want to see in the rental market.

Third, there is the incentive to create more rental housing.  What Portland needs more than anything are new rental units to increase supply or shift the supply curve out.  More units would do the opposite of the above: it would lower price and increase units rented.

Finally, this policy creates advantages for sitting tenants and disadvantages those looking for rental housing.  If landlords are less likely to evict tenants, tenants are prone to stay longer in rental housing and those wanting housing will find less to rent.  Why are we placing the interests of one group above another group?

And by the way, I know a little of what I speak.  I have two papers on these types of ‘soft’ rent control policies that are designed to protect sitting tenants:

The Economics of Tenancy Rent Control.” (w/ Kaushik Basu) The Economic Journal, October 2000, Vol. 110, No. 466, pp. 939-962.

Efficiency Pricing, Tenancy Rent Control and Monopolistic Landlords.” (w/ Kaushik Basu) Economica, May 2003, Vol. 70, No. 278, pp. 223-232.

If you really want to help the rental housing market the first thing you should do as a policy maker is to do no harm: don’t start distorting markets without considering the consequences.  The second is to promote the creation of new rental housing if you really want to help.  But I have a message to policy makers: the good news is that the market is promoting the creation of new housing right now without your input at all – it is called high rents.  So by all means do what you can to speed the construction of new housing, especially housing targets to lower income renters, but please don’t resort to bad populist ideas.

  
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Bob Clark January 26, 2017

Eudlay is like letting your teenage daughter run your house, like her setting her allowance.
Before Eudlay the City of Portland was a scary place for adult like adults, having the wisdom of having lived many decades with government ineptitude no matter the politician running government.
Now, Portland is clearly a scary place for adult like adults. Adult like adults think dynamically whereas the Eudlays think mostly linearly, not able to comprehend the concept of unintended consequences.

So in this case what happens when you mess with landlords by requiring them to maybe pay thousands of dollars in moving costs.
The renter now maybe thinks…oh, if I start acting flaky maybe I can get my land lord to pay my moving costs as I am wanting to move to another location closer to my new job.
Or, maybe a landlord has a tenant who is causing neighbors in or next to his apartment complex nuisances…now the landlord can’t just force the tenant to stop his behavior or move…if he evicts with reason then he may have to go through expensive court proceedings.
But maybe just as importantly, now if you are a property investor…you are saying about building in Portland or owning in Portland, I am really uncertain about whether my investment will be in a way confiscated by government rental policies.
So, what happens is government gets more and more into building housing which it has demonstrated already a high degree of ineptitude, with like the Bud Commons costing something like $1,000 per square foot to build (this against a more routine private building cost of $200 per square foot).
If you got money and are completely mobile, get out of the City of Portland but probably more freedom wise; get out of Oregon altogether and head to one of those no income tax states.

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