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How interventionists drive up rents
Gerard Jackson
The Tenants Union in Victoria, Greens and the Soviet Left of the Labor Party are demanding that the state government impose rent controls to counter rapidly rising rents in Melbourne. The hypocrisy of this lot is sickening. This is the same mob who are forever yapping about the destructive effects of free markets. The very same people who promoted policies that restricted urban development and in doing so helped raise rents for the poor. These policies were implemented without opposition from a single politician, thus highlighting their economic illiteracy.
The real enemy, however, is not lying two-faced lefties but public ignorance of basic economic principles. If these principles were widely understood those regulations that have done so much to harm the poor by driving up rents would not have passed muster. It ought to be self-evident that accommodation needs land and anything that prevents the efficient utilisation of residential land in the face of a growing population will cause land prices and rents to rise. Laws that successfully prevents the development of 'high and media-density' housing (however defined) causes land to become artificially scarce.
This leads to a wealth transfer, generally in the form of capital gains, from those seeking accommodation to our inner-city trendies. It is easy to see how this process operates once we realise that the actions of those who prevent resembles the behaviour of a cartel that enjoys the protection of the state.
The first round-effects of these restrictions are felt on those who would have otherwise moved into these wealthy areas. This would certainly not include the unemployed or low-paid. However, it must come to pass that demand will be diverted into lower-priced areas, consequently raising property prices, including rents. This is what happened to the inner city suburbs of St. Kilda, Prahran, Elsternwick, etc., with the result that the unemployed and low-paid found themselves being squeezed out by rising rents, a situation further aggravated by anti-social height restrictions on buildings.
Some years ago it was suggested to me that those caring souls that propose restrictions on urban development pay a heavy price for their activities in terms of opportunity cost (sacrificed opportunities) because lifting restrictions would raise the demand for land in these suburbs and hence the price of property. This suggestion was based on the implicit assumption that there are two markets here and that building flats, for example, would actually raise the value of existing housing by raising the demand for land.
BrookesNews.Com
Monday 26 May 2008
Not necessarily so. The supply and demand illustration shows why. In the figure below S is the supply of land in terms of units per accommodation which are fixed. The effect of development would be to increase the amount of accommodation per unit of land, mainly by building up, giving us the curve SS. In economic terms this amounts to increasing the quantity of land. Therefore, if demand remained unchanged the price of land would fall, meaning that house prices must also have fallen. (Part of the S curve is vertical because the quantity of land is fixed under these conditions).
So the view that assumes that (a) there would be little or no substitution effect or (b) a shift in demand in response to changed conditions would raise land prices above their previous level should never be taken for granted. These are certainly not the kinds of assumptions I would care to make, neither would the residents, I wager. The economic instincts of these urban activists, these courageous little Aussie battlers, are, in my opinion, spot on.
Allowing unrestricted development would have slowed the rate at which houses have been rising. In any case, there is no disputing the fact that any activity that restricts the supply of land in the face of an unchanged or rising demand for housing must raise rents. Nonetheless, never let it be said that our inner city activists would ever be motivated by anything as sordid as money, snobbishness or selfishness. Like activists everywhere, these people are only concerned with the public good.
For instance, a few years ago a certain Mr Hammond claimed that regulations and laws that restrict the supply of land are needed because if we have "laws that permit one owner of land to exploit (emphasis added) that land to the detriment of a neighbour, then you are likely to have conflict" .
Ignoring his rhetorical use of the word exploit, what did this brilliant legal thinker mean by detriment? As a lawyer, Hammond knows very well that a body of law dealing with all aspects of property, including development and nuisance, has been built up during the centuries. These laws defend an individual’s person and property. Yet anyone who read The Age interview with Hammond would be justified in thinking that the contrary was true (Our saviour who art in Malvern 28 June 1999).
(Incidentally, the socially conscious Mr Hammond was reported as being a member of the Liberal Party).
Unfortunately the likes of Hammond have been a curse to the poor from the beginnings of civilisation. However, their self-serving nonsense has been effectively demolished by common law judges. In one particular case an English judge stated categorically that:
I know of no general rule of common law, which . . . says, that building to stop another man's prospect [amenity] is a nuisance. Were that the case there could be no great towns; and I must grant injunctions to all the new buildings in the town. (R. H. Coase The Firm, The Market and The Law, The University of Chicago Press 1990, p 121).
If political activists were really sincere about the effect of rising rents on the poor they would demand that the state government immediately repeal all regulations and laws that restrict the amount of rental properties. That they refuse to do this might have more to do with Lenin's dictum that "worse is better" rather than just plain economic illiteracy.
Gerard Jackson is Brookes’ economics editor