New York Democratic House Representative Alexandria Ocasio-Cortez is incensed by housing prices and affordability. She claims that middle-class and lower-income residents are fleeing the city because they cannot afford it. She’s right.

Her solution to housing affordability is to impose rent control. On policy, she’s wrong.

History and economics tell us that imposing rent control in the city will inevitably shrink the supply of rental housing.

Rent control is a retro idea that failed before and will fail again. Yet, AOC and some liberal activists are intent on ignoring economics and historical evidence to resurrect a policy best left in the dustbin of history. 

What Happened

Recently, during a town hall meeting, AOC ranted about the costs of living in the city and questioned Mayor Eric Adams’ plans for across-the-board cuts to critical public services such as policing due to the strain on public resources from illegal migrants living in the city.

Rep. Ocasio-Cortez asked why raising taxes on millionaires and billionaires wasn’t on the table and dismissed concerns that the wealthy would flee the city if taxes were raised.

In her words, “The people who are moving out of the city are not by and large the wealthiest people. They’re the working class. They can’t afford to live here any more.”

Migration data from the state of New York invalidates her claim. The percentage of millionaires who left the state in 2020 was double that of all taxpayers. In 2021, the percentage was higher as well.

AOC is at least correct that the cost of living for the working class is unaffordable. One out of three New Yorkers spent half their income on rent.

The problem for AOC is that the policies she champions including raising taxes on higher earners, massive (federal) spending, and introducing costly regulations (such as to advance her climate agenda) make matters worse not better. Her solutions on housing are no better.

AOC is extreme on housing. In 2019, as part of her economic agenda, she proposed a national rent control, or limits on the rent increases that landlords can charge. The Place to Prosper Act would limit annual rent increases to 3 percent of the average rent or the percentage increase of the Consumer Price Index, whichever is larger, for landlords with five or more units.

Inflation on shelter was 6.7% last month with steady rent prices keeping prices overall high. The left is increasingly jumping on the rent control bandwagon now that housing costs are the leading driver of high inflation.

Earlier this year, President Biden rolled out a new set of principles the White House is calling a “Renters Bill of Rights” that includes a proposed backdoor rent control. He directed the Federal Housing Finance Agency (FHFA) to examine limits on rent increases for future investments.

Rent Control is the Wrong Solution

Rent controls are a well-intentioned, but ill-advised policy that triggers negative unintended consequences for renters and owners. Most concerningly, rent control limits the housing supply leading to fewer available units for rent.

It’s simply a matter of economics. Landlords rent spaces at a rate that allows them to make a profit after all of their expenses (such as mortgage payments, insurance, and maintenance) are covered. Setting rents at market levels ensures fair rates all around.

Rent controls limit how much landlords can charge and if it’s too low, they may be unable to cover their costs much more to make a profit. In that case, they remove their properties from the market and in the extreme sell them.

As I wrote about recently, 

The profit must outweigh the opportunity cost of owners’ time, operational costs, and investments; otherwise they will sell their properties. This occurred in the Boston area in 1970 when rent-controlled units were expanded nearby in Cambridge, MA. A tenth of rent-controlled units ended up being converted to for-sale condominiums. Meanwhile, uncontrolled rent prices surged.

Rent control also discourages the building of new rental housing. Although price control policies may exempt new construction, property investors reasonably fear that future policy changes could diminish their financial incentives. It’s not a coincidence that, following the lifting of rent control in Cambridge, residential property investment spiked. Building permits for improvements and new construction rose 20%, and permitted expenditures doubled.

Bottom Line

Housing is unaffordable for too many, but policies like rent control will make apartments scarce. That’s an outcome no one should want.