Tuesday, June 5, 2012

The Rent Control Decision

I commented earlier on Cécile Duflot's announcement of a new rent control measure as a political ploy. In that sense it may be successful as an appeal to the left of the Left. As economic policy, however, it is more questionable. France unquestionably suffers from a shortage of housing. It also has a very high unemployment rate. The obvious thing to do would seem to be to put unemployed workers to work building houses, no? So why not try that instead of controlling rents?

Well, one reason is that "the coffers are empty," as Sarkozy used to say. But this is not entirely persuasive, given Hollande's pledge to stimulate new investment via some kind of public investment bank. New housing would be an obvious choice, since the demand is known to exist. To be sure, there would be a lag before the pressure on rents was alleviated, but a lag is better than an imposed rent control that is likely to choke off any new supply of housing.

Another reason is the current credit squeeze, as investors fly to safety. But it would be better to put some of this capital to work building houses than parking it in sovereign debt yielding close to zero. A better use of the government's prerogatives would be to devise incentives to funnel this money where it's most needed.

Perhaps, after the legislative elections, France can debate this issue rather than rely on executive orders to impose rent control. One hopes that the turn to rent control as a sop to the left of the Left is not a sign of the direction that Hollande intends to go in economic policy. This is a bad decision, but it is not yet set in stone. There is still time to revise it after the elections. Matt Yglesias offers a similar analysis here.


Anonymous said...

Actually, there are tons of apartments in France 'thanks to' the De Robien law. Unfortunately, they sit empty. Most of the new apartment buildings are made of 1 and 2-bedrooms unfit for families: there are countless such buildings all over provincial towns and cities. An example I heard about on Europe 1 was a building of studios and 1-bedrooms "perfect for college or graduate students" built in a town without a university.
Sometimes they sit empty because rent is astronomical : in Paris, where a single room without kitchen or any amenities, can cost $650 a month, or in Montpellier, where the population's swollen like Las Vegas' before the housing bubble burst, it's impossible to rent, let alone buy, unless you're in the top 10-15% earners, whereas apartments sit empty.
The De Robien buildings also tend to be out of sync with local needs and local prices, thus can't be rented.
In my area, where you can find a nice apartment for $400/month and an okay bedsit for $280, the "de robien" studios went for $600 and the one-bedroom for $750 a month. This, of course, is quite low compared to many areas, which is how the financers were duped into thinking they'd make a nice profit from rent; the same process happened everywhere: people of above average means but not wealthy invested their savings without a proper market study into an apartment in a medium town where they were supposed to get a good return on investment and now face the choice of either renting below cost or letting the apartment sit empty.
Borloo tried your solution and it didn't work. Out of the 10,000 houses that were supposed to be built, only 40 were, and most are ridden with defects - not to mention that the people were able to pay for the construction but not the actual land the house was constructed upon, leading to countless legal problems.
So the problem is not "not enough buildings", it's #1 how to convert existing building into apartments that fit local needs and #2 how can rent or purchase price be within the means of the local population?

FrédéricLN said...

Answering to the post : yes, "New housing would be an obvious choice, since the demand is known to exist. To be sure, there would be a lag before the pressure on rents was alleviated, but a lag is better than an imposed rent control that is likely to choke off any new supply of housing." But fostering new housing and the building sector would have been "une politique de droite", you know…

Answering to Anonymous: yes, the Robien system suffered a major flaw; it pushed to building in areas where demand was low (land prices there were low, therefore, building up the deals that would enforce Robien tax advantages for subscribers was easier there). Secondary effect: the building capacities (workforce,…) was attracted towards these low-demand areas. And prices were boosted in high-demand areas. I wonder if any economists did evaluate the Robien contribution to the real estate bubble in France (which is the bigger bubble among rich countries, according to the Credit Suisse figures).

Anonymous said...

I don't know whether rent control would work, but building more sure hasn't. Some kind of control is thus necessary.