Commentary
A friend’s daughter spotted a strange anomaly in her residential rental contract. It was cheaper per month to sign a lease for 7 months as opposed to 12 months. This runs against even the most basic intuition. A longer commitment to pay would seem to suggest lower rents in each pay period. This is for the same reason it makes no sense to stay in a hotel night after night instead of signing a lease for a month.
Why might this anomaly be occurring? I can think of possible explanations. It could be that the property owner or mortgage holder is expecting far higher costs in the future than the present.
These costs could involve repair bills, insurance rates, or utility costs. It could also be that the owner expects higher demand for the units in the future than the present, which is not an unreasonable assumption given the housing market. With fewer people able to afford homes, more people will be looking to rent. That higher demand translates to higher prices, all else equal.
There is another possible explanation that is ominous. The leading presidential ticket, Harris/Walz, has made it clear that it favors nationwide price controls: real controls on residential rental units of corporations with more than 50 units as well as “price gouging” restrictions on all grocery stores and probably more. Once you get going on price controls, anything can be hit.
What are you going to do as a rental company when faced with the prospect of rent controls in 7 to 12 months? You would use the time right now to build in rental increases as much as possible, with full awareness of the risk that in the future, annual increases will be limited to 5 percent. What that means is that the policy proposal alone could be having the unintended effect of increasing rents now.
The rental market is already really messy out there. The application process is extremely tight because unit owners are very risk-averse. In 2020 and 2021, the federal government imposed an eviction moratorium that seemed to permit people to forego paying their rents. The excuse was that we didn’t want homeless people with COVID wandering around and spreading disease. The Supreme Court ultimately said that this regulation was unconstitutional and it was repealed. But rental companies paid attention and tightened the approval process.
Now, just getting approval to sign a lease is an arduous and data-driven task. You must cough up information about your credit and residency history and prove stable income along with income-tax returns and much more. It’s hard to get approved, and when people do, they cling to it for dear life. This is all in the interest of guaranteeing the highest-quality renter, and this is totally understandable.
The prospect of a real price control on rents is another blow. That it is being talked about at all is extremely alarming. To my knowledge, we’ve never had nationwide rent control in this entire country’s history. It’s hard even to imagine how the U.S. Constitution could allow such a thing.
Rent increases, then, could become an immediate crisis in the sense that they could shock people over the next six months. Watch your leases. You could be in for a surprise. Already rents have been hit very hard in this inflationary cycle.
The Consumer Price Index shows a 24 percent nationwide rent increase since 2020 (6 percent per year), but Zillow rent index shows a 34 percent increase over the same period (8.5 percent per year). Between the two, we have every reason to trust industry sources rather than government agencies. If that trend continues, and it likely will, restricting rent increases to 5 percent could have a devastating effect.
(This is only one of many anomalies in the inflation data. There are many components left out completely and otherwise that are so abstracted from reality as to make them complete fiction. The understating of inflation has terrible consequences on all industries and business planning, not to mention tax rates, salaries, and realistic assessment of business cycle conditions.)
Rent controls mean repairs are not done. Breakages persist. You cannot get people on the phone to fix the leak, change the lightbulb in the hall, keep the pool clean, trim the hedges outside, or otherwise provide any new amenities. When the equipment in the gym starts to decay, you will get mad at your apartment manager, but the real culprit behind the scenes is the rent control that has made profitability less possible. Indeed, rent-controlled units fall apart over time, as decades of experience in New York City have shown.
To be sure, the proposals I’ve seen provide certain exemptions for small landlords and first-time renters but this will have strange effects on residential structures. Some corporations will sell off properties and new renters will be hit with real surprise over time.
It feels awkward to have to make a case against price control after centuries of failure, but that is where we are. Inflationary times tempt politicians to try strange nostrums that do not deal with the underlying problem.
Issuing edicts, even if they are later declared to be unconstitutional, is far easier than balancing the budget, stopping the printing presses, and dramatically deregulating. To control prices is to reach for the quick fix rather than use intelligence and wisdom to resolve the problem.
Even the president who knew better, Richard Nixon, did this against the advice of everyone. On Aug. 15, 1971, he introduced wage and price controls nationwide, leading to vast shortages and economic chaos all around. They were repealed before they were tested in court and prices shot up in the first of three rounds of inflation that lasted a full decade following the end of the gold standard.
The alarming possibility is that even the talk of repeating that mistake, on the campaign trail by the ticket that seems to be ahead in the national polls, could cause markets to hike prices now while it is still legal to do so. That will provide a stronger pretext to controlling prices after the inauguration, thus piling error upon error.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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