Comedian John Oliver last month dedicated a 22-minute segment of his weekly HBO late-night show to a deep dive on housing policy and rising rents.
In the segment, which has garnered more than 4.6 million views on YouTube, he points out that “rent is skyrocketing” — explaining that it’s “up 15% since the same time last year, well above the rate of inflation. And it’s up over 30% in cities like Cincinnati, Seattle, and Nashville, and nearly 50% in Austin.” This is a significant problem because, as Mr. Oliver mentions, over a third of American households rent.
More difficult than pointing out the problem of high rents, though, is figuring out why they are so high. Mr. Oliver says that it “is partially true” that “high rents are a supply and demand issue: basically, too many renters, not enough units.”
However, he posits that this explanation is not sufficient. He believes that the status-quo can be more accurately attributed to 1) greedy landlords that will “take any opportunity to push rents higher” and 2) deeply-rooted structural issues that give landlords significant power in their relationships with tenants, such that tenants are left without any real options.
This is an explanation that has been embraced by many, including national figures such as Vermont Senator Bernie Sanders and Rep. Ilhan Omar (D-MN). But how reflective of reality is it? And what can be done to fundamentally change the landscape of the rental market?
Let’s take a closer look.
The Incomplete Narrative of ‘Greedy Landlords’
Mr. Oliver’s contention about “greedy landlords” is not without some merit. After all, one would be hard-pressed to argue that self-interest — a synonym for greed, to some — is not a part of human nature. Therefore, if a landlord is able to charge high prices, he will naturally do it because it helps him and his business.
On its face, this seems like a pessimistic proposition. Who wants to live in a society where success is zero-sum and people will squeeze every cent they can out of customers? Well, almost nobody. For this reason — and because we cannot change our predisposition towards self-interest — it is our job to create systems that channel human self-interest for good.
This is where the free market comes in.
In the current market — where demand is far greater than supply — landlords have significantly more bargaining leverage than tenants. Potential tenants do not have many options, which allows landlords to charge high prices and, in some cases, be careless with the quality of the product they are providing. These high prices reduce the number of people who are actually able to afford the rent. This is clearly not an ideal situation.
However, in a true free market — where new housing supply is not hindered by the government — the landlord-tenant power dynamic would be far different. Even though landlords may still want to charge high rents and provide less service, it is no longer in their self-interest to do so, unless they want to lose tenants. The landlord’s “greed” is checked in a market where there are many competing firms because, if he charges too much, most people would simply do business elsewhere. So, if the landlord wants to make money, he must be in tune with the needs of the tenant. Moreover, the price would naturally go down due to the increased supply — therefore also helping tenants.
This is how the natural drive towards self-interest is harnessed for good in a free market. It is still there, but the incentives have changed in a way that benefits consumers.
In his segment, Mr. Oliver includes a video of a prominent landlord talking about how there is currently an “unprecedented opportunity” to “press rents.” The reason? Well, he points out that “the country is highly occupied. We’re 97.5%. And so, where are people going to go? They can’t go anywhere.” Mr. Oliver’s takeaway is to blame landlord heartlessness. But the real implication is clear: if the tenants had somewhere else to go, then landlords would not be raising rent.
Why Are Rents So High?
If the skyrocketing rents cannot be chalked up to “greed,” then what can they be attributed to? The answer is surprisingly simple: there is a shortage of housing.
Why is there a shortage of housing? Again, the answer is surprisingly simple: it can be attributed to housing policies that discourage new construction, thus constraining supply and driving up prices.
Let’s take each part of that in turn.
First, in order for people to have access to housing, there must be adequate supply. But that supply of housing does not simply appear out of thin air. Rather, as I have written before in FEE, “Individuals or businesses must conclude that it is in their financial self-interest prior to adding units to the market.” The issue is that, over the years, policies across the country have been put in place that disincentivize — and in many cases prohibit — individuals and businesses from putting new units on the market.
In many communities, there are strict zoning laws that prohibit, or severely limit, the construction of high-density, multi-family units. Additionally, even in places that may allow construction of such units, public hearings are often required before the project is able to be approved. This not only puts extra regulatory roadblocks in place, but those projects also “are more likely to be rejected.” This, combined with restrictions such as “minimum parking and maximum building height requirements and prescriptions regarding lot size, lot coverage or floor-to-area ratio,” make the process to build new housing for an increasing population an absolute nightmare. This is not to say that repealing all laws that regulate building is the proper solution, but a critical second look at many of the policies currently in place is surely needed.
We can also look at a few examples of policies instituted over the past year or so that have kept housing supply down. For most of 2021, in response to the Covid-19 pandemic, the Centers for Disease Control and Prevention (CDC) imposed an eviction moratorium. The stated intention was to ensure housing for millions who were in terrible circumstances. However, it ended up backfiring in numerous ways. It created the possibility that the landlords — who were often middle-class individuals just trying to get by — would not get paid and would consequently be forced to pay for other people to occupy and use their privately owned land and property. This likely led many to take their units off the rental market, as they didn’t perceive the risk to be worth it.
In many cases, public policy has also discouraged the construction of new housing.
Last November, for example, residents in St. Paul, Minnesota, passed a city ordinance to institute rent stabilization, which is a type of rent control. In the six months after it passed, the number of building permits issued for housing decreased by 84% — from 2,180 permits down to 352 — relative to the same period during the prior year. This makes sense because even though the policy had not yet gone into place, producer expectations are a crucial determinant of supply. When considering how many municipalities across the country have some form of rent control, it is hard to argue that it is not contributing in real ways to the issue of housing supply.
The primary consequence of these policies is a housing shortage — which is present in most American cities today. According to Realtor Magazine, the gap between the current number of housing units and how many we need is 5.5 million. And econ 101 tells us that when some factor — in this case, restrictive housing policy — leads to a decrease in supply, prices rise and quantity goes down. This is precisely what we have seen in practice across the country.
As for the many other issues that Mr. Oliver pointed out with the current rental market — such as many landlords’ refusal to accept Section 8 housing vouchers or rent to people who had been evicted in the past — research cited in Reason suggests that “landlords would likely be willing to take a chance” on such tenants “in a world of housing abundance” (i.e. in a more competitive housing market in which landlords didn’t have the luxury of being picky).
And regarding the solutions Mr. Oliver puts forward — such as expanded funding for Section 8 housing vouchers — they cannot work unless the supply issue is solved first. As Christian Britschgi writes in Reason:
"Dumping a bunch of housing vouchers into supply-constrained housing markets will only raise prices. If there are not enough units already, and it's difficult to build more, landlords can easily raise prices to capture the value of the new vouchers without fear that they'll lose customers. People that don't receive a housing voucher will see their housing costs go up. The government will have to perpetually increase voucher funding to try and stay ahead of the higher prices they're causing."
So, Mr. Oliver’s interventionist “solutions” to the real problem of skyrocketing rent are not solutions at all. Rather, they will raise prices even further, which likely will only prompt calls for more intervention.
This is a phenomenon we’ve seen repeatedly throughout history.
Ludwig Von Mises described the dynamic in his book Bureaucracy:
“Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which — from the viewpoint of its advocates themselves — is much more undesirable than the previous state they intended to alter.”
“As a remedy for the undesirable effects of interventionism,” Mises says elsewhere, “they ask for still more interventionism.”
This is why Mises believed that “middle of the road” policies were a pathway to socialism. He wrote: “If the government, in order to eliminate these inevitable but unwelcome consequences, pursues its course further and further, it finally transforms the system of capitalism and free enterprise into socialism.”
Mises’s warning is especially applicable to today’s housing market. Intervention leads to less affordable housing, which leads to more intervention, which leads to less affordable housing, ad infinitum. . And the cycle will continue as long as politicians and the John Olivers of the world continue to champion government “solutions” instead of simply getting out of the way and allowing housing markets to function.
The solution to high housing prices isn’t more subsidies or price controls. The solution is more housing.