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The Limits of the Accepted Orthodoxy on Rent Control

by Loïc Bonneval & François Robert & translated by Oliver Waine, on 22 March 2019

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In response to a recent critique of their work, Loïc Bonneval and François Robert defend their method and results. In their view, not only should the idea of the unwanted effects of rent control be qualified, but the negative effects of the lack of regulation of the private rental market, which characterizes the current situation, should also be highlighted.

Robert C. Ellickson and David Le Bris’s criticism of an article on rent control published in Métropolitiques in 2011 (and translated in Metropolitics in February 2019) provides an opportunity to reopen the discussion on the effects of rent control, especially in light of calls from mayors in the Paris region for greater regulation of rents made in December 2018. [1] The Paris administrative court’s judgment of November 28, 2017, which canceled rent-control measures put in place in the French capital, seemed to put an end to intentions to regulate rents contained in France’s 2014 law on Access to Housing and Renewed Urban Planning (known as the Loi ALUR). Nevertheless, the law to Reform Housing, Planning and Digital Technology (Loi ÉLAN), enacted on November 23, 2018, opens up the possibility of restoring these controls. The staying power of this topic in the public debate justifies a response on our part to Robert C. Ellickson and David Le Bris.

It should be noted first of all that the research that gave rise to our book L’Immeuble de rapport (Bonneval and Robert 2013) and the 2011 article did not focus on rent control but rather on the real-estate investment and management approaches and rationales of property owners over time. It was based to a large extent on the archives of a Lyon-based property administrator that had been active since the 1860s. The main purpose of the article was to draw attention to a result that seemed surprising to us at the time, namely the maintenance of good rates of return during the interwar period. Other results did not correspond to the popular discourse on rent control, such as the fact that changes in building prices only imperfectly followed those of rents [2] or the fact that tenant mobility continued to slow down despite the “liberation” of part of the rents in 1948. These results, and the context of the debate on the Loi ALUR, then led us to conduct further work specifically on rent control (Bonneval et al. 2015). We refer the reader back to it for a presentation supported by the arguments outlined here, as well as a discussion of the doxa that inspired Ellickson and Le Bris.

Ellickson and Le Bris’s critique has two levels: one very specific on the calculation of real estate profitability presented in Métropolitiques in 2011 and the other, much more general, on unwanted adverse effects. They use a well-known discourse on rent control. Although often presented as a coherent whole with consensus among economists, this discourse has a history and regularly reappears when it comes to revising rent regulations. It is no coincidence, for example, that Bertrand de Jouvenel’s No Vacancies, cited by Ellickson and Le Bris, appeared in 1948: following the second rent moratorium and the very strong rise in postwar inflation, rents reached their lowest level and critics, who were then virulent, constructed a homogeneous image of the effects of the rents policies conducted between the two world wars. [3]

Our answer will focus successively on these two levels, before considering what a reflection on rent control could be in the current context.

Calculating profitability

No reader can, in good faith, take from our work the idea that rent control has had no effect. On the other hand, several factors lead us to put the impact into perspective, even though the period studied presents the worst case scenario: a ceiling on the nominal amount of rents in a context of high inflation. Thus, the level of rents fell sharply in constant francs between 1915 and 1948, particularly after the moratorium on rents in the Second World War. This observation should be tempered insofar as, for buildings not yet depreciated in 1914, loan repayments have also decreased considerably due to inflation (they remained fixed while rents were regularly increased). Similarly, the loss of income related to the First World War moratorium (the moratorium being different from a control of rent increases) was partially offset after the war by the repayment of rent arrears owed by tenants (Robert 2017).

However, our 2011 article focuses on another indicator, real estate return, calculated using the rent-to-price ratio. Contrary to what Ellickson and Le Bris claim, this ratio is not without interest: on the contrary, it is the main indicator used by owners to judge the profitability of investing in stone. The calculation of the net present value, which Le Bris and Ellickson criticize us for not having presented in the 2011 article, does not change the orders of magnitude observed nor, above all, the relative values between the different periods taken into account. [4] Moreover, this method of calculation is not used by the landlords we studied, who limit themselves to the rent to price ratio. The complementary measure of profitability that we propose is an ex-post measure, which takes advantage of the data we had at our disposal, namely the rents actually received by the owner between the time of acquisition of the building and that of its sale. [5] It appears that owners who acquired a rental building between the two world wars did rather well. Even if this method of calculation is not very common, we maintain that it provides an interesting and complementary perspective to the other indicators.

Le Bris and Ellickson seek to separate our results on the heritage logics of real estate owners from our interpretation of economic indicators on profitability. However, the two are linked. Our book L’Immeuble de rapport describes less a “euthanasia of the annuitants,” according to Keynes’ formula, than a transformation of the relationship to real estate assets, which is reflected in particular in a sociological evolution of the group of owners and a slow shift from sole ownership of buildings to co-ownership. The regulation of rents has played a role in this, but it is reductive and symptomatic of a vision that seeks only to highlight the adverse effects of this regulation, to see it only as a factor of disaffection for stone.

Putting unwanted effects into perspective

This tendency to consider rent control only in terms of unwanted adverse effects [6] distorts the view. It leaves aside the market failures that lead to the implementation of such controls, most often to avoid evictions following rent increases. It also ignores other effects, such as the ability of such measures to retain modest tenants in downtown areas. Difficulties in ending control are also attributed to demagoguery or lack of political courage, while other factors come into play. The countries that most limited these policies after the First World War (without fully abandoning them) are those that, like the United Kingdom, have enjoyed some monetary stability. In countries such as France that have experienced sustained inflation, abandoning rent control proved impossible without risking sudden increases, massive evictions (ILO 1930) and social movements (the social issue is central here). This explains a trial and error policy and, in 1948, the decision to maintain a very modest rent control.

Nevertheless, the focus on adverse effects forces them to discuss them before setting out a different perspective. However, for the three effects classically highlighted, recalled by Ellickson and Le Bris (construction, maintenance and tenant mobility), there are also nuances to be brought to bear.

First, the effect on construction is far from self-evident. New buildings are generally exempt from rent control, or much less severely affected than old buildings (Bonneval et al. 2015). Similarly, rents above a certain amount are not subject to control. What was at stake in the interwar period was the transition from one mode of production to another. The type of construction already only partially met the needs of before 1914 and was preferentially oriented toward the buildings with the most expensive rents. It was already in a declining phase before the First World War and it was only with the development of a new system of actors, that of real estate developers in a market structured by public incentives, that construction was able to establish itself at the very high levels of the Fordist period (Topalov 1987). Moreover, the levels of construction achieved in countries other than France between the two world wars are explained more by construction stimulus policies than by the profitability of rental investment. [7] In Weimar Germany, cited by Ellickson and Le Bris, a rent tax is introduced on the grounds that landlords’ loan repayments have been reduced to zero by hyperinflation and that rents are used to pay rent and not investment. In 1930, under the Brüning government, the proceeds of this tax were transferred to the municipal budgets, which was accompanied by an immediate reduction in the level of construction (Mengin 2007). In the France of the Glorious Thirty, it is not the liberation of rents by the 1948 law that allows the relaunch of construction (ILO 1960), but the policies of aid to stone, in particular in the subsidized housing sector (Effosse 2003).

The effects on maintenance, then, can also be qualified: the detailed examination of expenditures in the sample we studied shows that it was the owners’ income that served as an adjustment variable and that they maintained their maintenance and repair expenditures, with the exception of a few periods, such as the one immediately preceding the 1948 Act. The only item that has been permanently affected by rent control is that of painting and facade maintenance (ten-year obligation). Rent increases, whether before 1914 or after 1948, resulted in little increase in maintenance expenditures, but more importantly, in increased income for homeowners. Overall, the results challenge the idea of a mechanical link between real estate income and the level of investment.

Finally, the effects on tenant mobility can also be discussed. Although turnover decreased between the wars, it also continued to decline after 1948 (Bonneval 2016; Bonneval and Robert 2012). The evolution of the tenant turnover rate does not follow the chronology of rent control measures, which are far from being a homogeneous whole between 1914 and 1948. Symmetrically, the barriers to mobility are also largely due to high rents: a mobile household often has to pay a much higher rent if it simply wants to find a home equivalent to the one it used to live in, which may discourage it from moving. Among the criticisms of rent control is that of protecting existing tenants. However, the objective is not illegitimate in itself, especially in a context marked by the reduction of affordable private rental stock in large cities and by the effort rates of private renter households, which are the most concerned by the difficulties in paying for their housing.

Lessons to be learned from history?

The objection may be made that providing nuances does not fundamentally call into question the existence of adverse effects. Nevertheless, the gaps between the dominant discourse on rent control and the results we achieve, as well as the questioning of the symmetrical premise that the absence of rent regulation mechanically stimulates maintenance, mobility and construction, lead to a change in the way we view this type of measure.

The current situation is radically different from that of the interwar period and, in many respects, even the opposite: inflation is low, construction levels are high year in, year out, and households’ accommodation problems are linked above all to high housing costs. And, broadly speaking, political orientations are also quite different: there was strong rent regulation and weak market stimulation during the interwar period, compared with today’s strong incentive policies at the expense of market regulation. However, the stimulation of the market has in no way prevented rises in property prices and rents in large urban areas. It seems to us that if a debate on rent control is to take place, it should be around the question of redressing the balance so that housing policies err toward more regulation. Without advocating a return to the price scales or “scientific rents” of the 1948 law, the current debate focuses on reducing rent differentials to avoid excessive rates (as in the system created by the Loi ALUR), or on introducing certain caps on rent increases when there is a change of tenant. Far from being just a relic of the interwar period, rent control is an issue that regularly comes back on to the agenda in public debate, as the tensions produced by the “free” market increase. One thing is for sure, though: the way to advance this debate is through the production of new empirical data, rather than simply rehashing a ready-made discourse designed specifically to avoid any discussion on the subject.

Bibliography

Footnotes

[1See: I. Rey-Lefebvre, “Des maires plaident pour l’encadrement des loyers” (“Mayors plead for the regulation of rents”), Le Monde, December 6, 2018.

[2For example, apartment-building prices did not rise simultaneously with rents after 1948, even though their value could skyrocket if they were split up and sold off as smaller lots, even in poor condition.

[3Similarly, in 1972, Arthur Seldon—who inspired Margaret Thatcher’s economic program—brought together several contributions initially published in different countries between 1929 and 1971, written by economists and observers close to the Mont Pèlerin Society, in a volume titled Verdict on Rent Control that sought to give the impression that rent control produces the same type of effects everywhere and at all times.

[4Let us repeat here that we have obviously taken inflation into account in the calculation of the various ratios used when working in constant francs (see Bonneval and Robert 2013, p. 87).

[5See the discussion on the different measures of profitability in our article: “Mesurer la rentabilité du placement immobilier. Le cas de l’immeuble de rapport à Lyon (1890-1968)” (“Measuring the profitability of real-estate investment. The case of rental buildings in Lyon (1890–1968)” (Bonneval and Robert 2010).

[6Let us note, however, some historical works that have instead sought to study its genesis and evolution (Morio 1976; Voldman 2013).

[7Even if, in France, the construction of social housing in the interwar period began to be supported by public investment.

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To cite this article:

Loïc Bonneval & François Robert & translated by Oliver Waine, “The Limits of the Accepted Orthodoxy on Rent Control”, Metropolitics, 22 March 2019. URL: https://www.metropolitiques.eu/The-Limits-of-the-Accepted-Orthodoxy-on-Rent-Control.html
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