Roofs or ceilings?

by Philippe Weil

The bill to promote access to housing and urban renovation provides for regulating rents “mainly in urban areas where there is a strong imbalance between housing supply and demand and where rents have experienced the steepest increase in recent years”. Rents that exceed the median rent, set by neighbourhood and housing type, by more than 20% “will be targeted for a reduction”. The purpose of the cap is of course laudable, as it is “designed to combat the housing crisis, which for many years has been characterized by a sharp increase in prices, housing shortages and a decline in consumer purchasing power”. The road to hell is, alas, paved with good intentions, as today’s ceilings often destroy tomorrow’s roofs:

  • “Rent ceilings […] cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction and indefinite continuance  of rent ceilings, or subsidization of new construction and a future depression in residential building. Formal rationing by public authority  would probably make matters still worse.”

Opposing rent ceilings does not mean, however, resolving the inequalities that arise with respect to housing:

  • “The fact  that, under free market conditions, better quarters go to those who have  larger incomes or more wealth is, if anything, simply a reason for taking long-term measures to reduce the inequality of income and wealth. For  those, like us, who would like even more equality than there is at  present, not alone for housing but for all products, it is surely better  to attack directly existing inequalities in income and wealth at their  source than to ration each of the hundreds of commodities and services  that compose our standard of living. It is the height of folly to permit individuals to receive unequal money incomes and then to take elaborate  and costly measures to prevent them from using their incomes.”

The authors of these two quotes, which enjoin us to allow the free market system to allocate the available housing to tenants and which advocate attacking inequality of income and wealth directly at the source, are none other than Milton Friedman and George Stigler – the two founders of the Chicago School. The title of this post is borrowed – I hope they forgive me – from their 1946 article “Roofs or Ceilings: the Current Housing Problem” [1].

The Duflot bill envisages a rent control mechanism that is far more sophisticated than the one denounced by Friedman and Stigler nearly seventy years ago. Its impact on the French real estate market can of course be evaluated in a few years, but the recent economic literature warns that so-called “second generation” rent control mechanisms often have ambiguous effects [2] – not always negative but not necessarily positive [3]. In these circumstances, it is regrettable that a preliminary experiment of the sort that prudence demands is not being considered for some randomly selected cities. While political urgency undoubtedly argues against delay, nevertheless in economics as in medicine it is crucial to ensure that efforts to cure the patient do not wind up killing him.

To conclude, the warning of Friedman and Stigler still holds: inequalities in income and wealth need to be attacked directly at the source, and not later down the line.

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[1] Foundation for Economic Education, Irvington-on-Hudson, NY.

[2] Cf., for example, The Economics and Law of Rent Control, by Kaushik Basu and Patrick Emerson, World Bank, 1998.

[3] Please see Le Bayon, Madec and Rifflart (2013) [ in French] for an evaluation of the regulation of the French rental market.

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