Why Rent Caps Have Tradeoffs

When housing becomes too expensive, government can mandate rent caps.

But the tradeoff could be a problem.

Rent Cap Proposals

According to a NY Times look at 100 U.S. cities, rents were up in 55, down in 38, and stable in seven. Perhaps though, because median rents have increased nationally, especially from pre-Covid levels, President Biden will ask the Congress to establish a five percent cap on rent increases from the largest corporate housing owners. Those who violate the mandate would lose their current tax breaks.

The following table was for 2023. You can see that New York City, San Francisco, Miami, and Boston had the most expensive one bedroom rents. However, the top ten’s year over year changes, ranged from Jersey City’s whopping 23.3 percent increase to San Jose’s 3.7 percent decline:

Our Bottom Line: Price Ceilings

Whenever rent caps hit the headlines, economists always cite ceilings. A ceiling is a mandated maximum rent from government that is below the market’s equilibrium price.

Politicians create ceilings because they believe that the market misplaced its equilibrium price. To correct the market’s decision, government can implement a price ceiling. Illustrated as a horizontal line below equilibrium, the ceiling changes the market’s decision. It is called a ceiling because price wants to move higher toward equilibrium but the horizontal line–the ceiling–prevents it.

Below, supply and demand met at a higher rent than the violet line drawn by government. The one glitch is where the line crosses supply and demand. As you can see, the line designates a quantity supplied that is less than the quantity demanded. As a result, price ceilings typically create shortages. Also called rent control, they diminish landlords’ incentives to build new housing:

And that leaves us with a dilemma. One reason for high rentals is a housing shortage. But solving the high rent problem can make the housing shortage worse.

So yes, as economists, we can always predict a tradeoff.

My sources and more: The White House has described President Biden’s rent cap proposal. From there, for more information, I checked CNN , NPR,  WJTV and the NY Times.