Swedish lefty economist Assar Lindbeck once said back in 1972,
“In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”
Assar Lindbeck, The Political Economy of the New Left (New York: Harper and Row, 1972)
Well, rent control is coming to Israel. The price control frenzy will get worse and worse as the Bank of Israel keeps printing more and more money and the inflation seeps into the consumer sector. Tzipi Livni introduced this gem of a law, teaming up with Pretty Boy Yair Lapid. Those two are the dynamic duo of destruction it seems.
שר האוצר, יאיר לפיד, ושרת המשפטים, ציפי לבני, הציגו היום (ה’) את הצעת החוק שלהם לפיקוח על שוק השכרת הדירות בישראל. על פי ההצעה, החל מתחילת השנה הבאה ועד סוף שנת 2019, תחול מגבלה על יכולתו של משכיר להעלות את שכר הדירה משנה לשנה. המשכיר יוכל לקבוע באופן חופשי את שכר דירה אחת לשלוש שנים ולאחר מכן להעלותו בשיעור העלייה של מדד המחירים לצרכן בלבד.
Minister of Finance Yair Lapid and Justice Minister Tzipi Livni presented their bill today for rent controls. According to the bill, starting at the beginning of next year until the end of 2019, landlords will be prohibited from raising their rents. A landlord can freely decide what rent he will charge once every three years, and after that he can only raise it in accordance with the consumer price index.
Before I tear this apart, a short little thing on the harmfulness of price controls in general. A price is set by supply and demand. The price point is the point at which the number of sellers for a good equals the number of buyers. It is not set by greed, nor by luck, nor by generosity. Rents do not go higher because suddenly human nature changes and landlords get greedier than they once were. Landlords do not raise rents because they get greedier. They raise rents because that’s the price that buyers are willing to pay. It’s what they can get. Rents go higher because the amount of buyers at a lower price are greater than the number of sellers at that price. So the price goes up in order to equal out the buyers and sellers.
If your goal is to bring rents down, you can do one of two things. Lower demand, or increase supply. In order to lower demand, you would either have to kill people, expel people, or else convince them that they don’t really want a place to live and they should go forage in the Jerusalem forest instead. You’d need a really good Zen public education system to get that done.
So really, the only thing that can be done to lower rents is to increase supply. But this is the ONLY THING that the Israeli government DOES NOT WANT TO DO. They love building freezes instead.
So in their genius, loathsome Lapid and Livni propose a rent control law. What this means is that now, by arbitrary decree, the price of housing could end up being lower, by law, than the market price. What will then happen is that the number of buyers will be greater than the number of sellers at that price, and you will end up with a shortage, meaning people willing to rent at that price but unable to do so because there is no more supply.
Or even worse, in the Bronx in the 1980’s, the rent that landlords were allowed by politicians to charge renters was lower than the taxes that the politicians insisted that the landlords pay THEM. As a result, guaranteed a loss if they rented out a place, they simply abandoned their buildings and entire neighborhoods were destroyed and turned into crack houses. The picture below is of rent-controlled Bronx circa 1980.
As for the technical stupidity of this law, to base rent on the CPI index is entirely circular. The CPI depends on housing rents.
The more effective this law is, meaning the wider the spread between the price allowed and the free market price for rents, the more devastating the consequences will be. If landlords are not allowed to raise prices for three years but allowed to ask whatever price they think they can get now, they won’t take a risk of renting it out for anything below what they think they would need 3 years from now to cover their costs and maintain a profit. In other words, this law will push up rents even faster to where they would be 3 years from now assuming constant price inflation.
Batten down the hatches guys, it’s gonna get rough. How rough could it get? See below for more 1980’s Bronx.