Friday, November 29, 2013

Rent control and home ownership

A new and recent trend in the United States has been the decline in the homeownership rate. While I have mentioned before that homeownership (the "American Dream") is not necessarily a good thing, both privately and socially, it is heavily favored by government policies. And while obviously the recent housing debacle has reduced homeownership, the trend started before that. To understand why the trend is down, it may be of interest to understand how it went up.

Daniel Fetter looks at the period where the nationwide homeownership rate went up the fastest, World War II. Paradoxically, this was a period were home construction was actually severely restricted. Yet, the 10 percentage point increase (half the increase over the entire century) happened in the context of widespread rent control. Exploiting differences in rent reductions through control across cities, Fetter finds that a majority of the increase in the homeownership rate was indeed due to rent control. I suppose it was renters somehow coerced by their landlords to buy the home they lived in, with no alternatives available. Would this mean that imposing rent control now would reverse the decline in ownership? I doubt it, as the market has now segmented between owned homes and rented apartments, and they are not close substitutes for the most part. And you would not want rent control anyway.

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