Should Markets be Left Alone?

Should Markets be Left Alone? - Consequences of Governmental Interference

 

John Maynard Keynes economic theory states that government interference can actually help to improve the market or if there is an existing crisis, the government is able to provide a better economic situation through fiscal policy. The question is in which way Keynes theory is applicable to the situation in today's economic world. Will a price ceiling that was set by the government actually help the consumer?

 

California's housing market is a great example to analyze this issue. Especially, since the November 2018 midterm elections just passed. The highest average rents can be found in California. According to the federal government, the average rent for a one-bedroom apartment is about 1500 dollars. Even though, the suggested amount for rent should not be more than thirty percent of your monthly income. In the beginning of November 2018, people eligible to vote in California have voted against Proposition 10. But what would have happened if Proposition 10 actually became a law? Proposition 10 is basically a vote for or against rent control. Basically, rent control is a price control technique that limits the amount a property owner can charge for renting out a home, apartment or other type of real estate. Rent control acts as a price ceiling by preventing rents either from being charged above a certain level or from increasing at a rate higher than a predetermined percentage (Thurn, Ted. Rent Control legislation in 2018, Journal of Property Management. vol. 83, no 3, 2018, pp 38-39. Vocational Studies Complete.). Concluding, California renters and landlords are in fear of an even bigger housing crisis. The opinions on how to fix the issue of high renting prices and low supply on rental properties are split.

 

Proponents see the solution in Proposition 10 since it would repeal the Costa-Hawkins Rental Housing Act which got enacted in 1995. The reporter David Dayen talks about the housing crisis in California. He defines the "Costa Hawkins-Act" by stating, "The Act prevents cities and counties from establishing new rent control laws for most apartments and all single-family homes or condo rentals. Costa-Hawkins also incentivizes evictions, allowing landlords to raise rents to market rates when units become vacant" (Dayen, David. "Socialists Versus Landlords." In These Times, vol. 42, no. 11, Nov.2018, p. 6. Academic OneFile.).

 

Proposition 10 opponents claim that rent control is not the answer for the critical housing shortage in California. The idea behind Proposition 10 is that rent control is supposed to help California residents by keeping the rental prices low. However, in reality the complete opposite will be achieved if Proposition 10 gets enacted. One main issue is that the average income is too low compared to the price for renting a unit or a house. On average residents spent over thirty-three-percent which is over 1/3 of their income for housing. The State News Service states, Proposition 10 will reduce availability of affordable and middle-class housing. Academic experts from the University of Southern California, U.C. Berkeley and Stanford agree that it would drive up rents, while discouraging new construction and reduce the availability of affordable and middle-class housing ( "CALIFORNIA VOTERS SHOULD SAY YES TO PROP 5 AND NO TO PROP 10." States News Service, 31 Aug. 2018. Academic OneFile. Accessed 28 Nov. 2018.).

 

Additionally, homeowner values for their properties will be decreased through proposition 10.According to a researcher for the Massachusetts institute for technology the loss is estimated by 60000 US Dollars (about 10 percent) per homeowner. In addition, opponent's state seniors, homeowners, veterans and homeless people are impacted the most. For example, many seniors are living on a small fixed income . In the past, they have invested into property hoping they could gain a profit once they achieve retirement. Those seniors depent on the income through their rental property and are having a negative attitude towards proposition 10. Furthermore, seniors who are retired are considered descendants of the Baby Boomer Generation. This shows, that by the end of 2030, there will be an increase two times as many seniors as there are today. The most significant effect can be found in the economy itself. Due to economic stagnation, California is predicted to lose enormous amounts of available jobs and wealth. This is followed by low property values and a stagnation in the construction industry.To be exact, the estimations show that California will lose 38000 jobs with an increasing deficit of annually 1.3 billion US dollars. (Californians for Responsible Housing. No on Prop 10. https://www.noprop10.org.)

 

Many economists agree, that there are negative long term effects of a rent controlled neighborhood. First off all, many rent controlled neighborhoods are communities with low income families. In addition, many minorities tend to live in rent controlled cities. In the long run, the quality of life will decrease, leaving tenants to be responsible to fix simple things like plumbing or AC in their unit since the landlords simply do not take care of his or her unit anymore. If landlords start making losses in a price regulated market, they might look out for alternatives or even abandon their units since it is not attractive anymore. (Jenkins, Blair. Rent Control: Do Economists Agree? Econ Journal Watch, vol. 6, no. 1, Jan. 2009, pp. 73“112. EBSCOhost.)

 

The California Newspaper states that Proposition 10 will have a massive impact in businesses. It does not matter how attractive the job offer is if a business is hiring new employees that are not from the area where the business is located. The reason behind that is that the rents are rising enormously and there is not enough supply on the housing market. This causes the company to increase the wages so that their new employees are able to pay their rent. One negative aspect for businesses and workers is if businesses have to increase the wages for their workers, they will most likely have to fire some of their employees. Business owners do not have more money just because their employees are in need of higher salaries. (California Newspapers: Vote No on Proposition 10. States News Service, 2018. EBSCOhost.).

 

On the other side, proponents of Proposition 10 argue that enacting the law will cause positive benefits for California's society. The most important argument is the repeal of the Costa-Hawkins Rental Housing Act. This prohibits landlords to raise the rent after a tenant moves out of the unit. The main argument from the campaign vote yes on prop 10 is that rental prices have climbed to a price where most people are not able to afford their rent anymore which dramatically increases homelessness. According to UWIRE, a 5 percent increase in rent would cause homelessness in thousands of people in California since they are already paying a large portion of their salary on rent.

 

Furthermore, other bad consequences if nothing changes in the market situation are for example, that too many people live in an single apartment or house at once. An overcrowded living situation is not very profitable since the living quality decreases. In addition there is a clear shift in the millennial generation. Back in the day, young adults used to move out of their parents' house much earlier, today they stay longer since they cannot afford to live on their own.  Many young adults work in minimum wage jobs. According to the college news and press distribution service UWIRE, "The average California resident, earning minimum wage, would have to work "92 hours per week in order to afford to rent an average one bedroom apartment," according to the National Low Income Housing Coalition (Hidalgo, Miguel. California's Long Rent Control Battle Culminates with Proposition 10. UWIRE Text, 2018. EBSCOhost,). A 92 hour week would mean at least a 13 hour work day, 7 days a week.  The labor unions state, that many people are forced to move outside the cities to the countryside which results in very long commutes to and from work. The effect is worse than having an uncomfortable long commute. A longer commute increases the traffic situations in the cities since people spent more time driving to and from work. This causes a significant increase in pollution. The more traffic there is in California, the more pollution is released, which could, in the long term, cause health issues for the residents. Which reduces the quality of life in the long run.

 

Nobody can deny that the rental housing market is getting out of control. People are paying more than half of their income for rent. Housing is not only ridiculously expensive but also very hard to fine. There is no doubt. California needs a plan to improve the housing market and a strategy to lower the price for rent. California's inhabitants should be able to draw their own conclusion on whether Proposition 10 will be the answer to our contemporary issue, after analyzing the advantages and disadvantages of Proposition 10. In my opinion, Proposition 10 is not the solution for California's housing crisis. A better recommendation is to find an alternative solution like a governmental subsidy.

 

Many people only take a brief look on the issue. All they see is that rental prices should be going down since landlords are now restricted to market orientated prices. Unfortunately, in today's society people are not interested in political topics anymore causing them to judge propositions on their first impression. The first impression on Proposition 10 is great. Tenants see that they will be able to save money on rent since landlords are not able to randomly increase what they charge their renters.

 

One primary issue is that the government interferes in the market when an issue occurs. It is a try to fix it or make the situation more acceptable for one of the parties since it is very hard to please both sides of an issue. The example of Proposition 10 shows that renters are in favor of passing the law but landlords do not want the government to tell them how much to charge for their properties. In the worst case landlords will be forced to rent out their property way under what they are worth causing it to be not profitable anymore. In the end Proposition 10 did not pass which most likely saved renters as well as landlords a lot of money. Currently, only four states”California, Maryland, New Jersey and New York”and the District of Columbia explicitly authorize local rent regulation. In general, the laws in these four states identify the jurisdictions that are permitted to adopt rent controls, the method to be used to calculate rent, and the properties that are exempt (Thurn, Ted. Rent Control legislation in 2018, Journal of Property Management. vol. 83, no 3, 2018, pp 38-39. Vocational Studies Complete.). Ted Thurn mentions that only 4 states nationwide apply rent control. All 4 states are heavily populated states. This example shows that the trend goes towards rent control. These states will hopefully act as an example for the population of the United States of America on how rent control actually misleads the consumers trust by causing higher rents and expanding the housing shortage that is already existent.

 

Another significant aspect that shows that Proposition 10 should never become enacted is the anticipated losses in jobs and profit for the state. Where is the benefit of lower rents if people lose their jobs in order to achieve the low rental prices? In the end they won't be able to afford housing at all. In addition, the main idea of enacting a law such as rent control is to make housing available; Proposition 10 will cause the opposite. It will create a shortage on the housing market, which will increase the rental price drastically. Moreover, the statement of the LA TIMES reporter The root of California's housing crisis is the lack of supply. The state needs to build 1.8 million more homes by 2025 just to keep pace with population growth; it would need 1.7 million new homes on top of that to satisfy pent-up demand and stabilize prices (The Times Editorial Board. Rent control isn't the answer to California's housing crisis, but it could help. Yes on Prop 10. LA Times, SEP 15, 2018.), shows that Proposition 10 would actually achieve the complete opposite of what should be done. The state of California needs to somehow increase the supply in rental properties, which means they need to build new apartment complexes. However, Proposition 10 will cause a decrease in construction.

 

The example of proposition 10 illustrates that the government is trying to fix an issue by setting a price ceiling. The concept is nice. The consumer is protected by laws and therefore the producer in our case the landlord can only charge the consumer a certain price. In other industries this might work but on the housing market the government will have to come up with other solutions to improve the situation. In my opinion, the biggest issue of increasing rents are overpopulated cities.

 

Work cited

1. Californians for Responsible Housing. No on Prop 10. https://www.noprop10.org
2. California Newspapers: Vote No on Proposition 10. States News Service, 2018. EBSCOhost.
3. Hidalgo, Miguel. California's Long Rent Control Battle Culminates with Proposition 10. UWIRE Text, 2018. EBSCOhost.
4. "CALIFORNIA VOTERS SHOULD SAY YES TO PROP 5 AND NO TO PROP 10." StatesNews Service, 31 Aug. 2018. Academic OneFile. Accessed 28 Nov. 2018.
5. Dayen, David. "Socialists Versus Landlords." In These Times, vol. 42, no. 11, Nov.2018, p. 6.Academic OneFile.
6. Jenkins, Blair. Rent Control: Do Economists Agree? Econ Journal Watch, vol. 6, no. 1, Jan.2009, pp.73“112. EBSCOhost.
7. The Times Editorial Board. Rent control isn't the answer to California's housing crisis, but it could help. www.latimes.com/opinion/endorsements/la-ed-endorsement-proposition-10-20180915-story.html
8. Thurn, Ted. Rent Control legislation in 2018, Journal of Property Management. vol. 83, no 3,2018, pp 38-39. Vocational Studies Complete.
9. Yes on 10. Civil Rights Icon Dolores Huerta: ?Proposition 10 Will Restore Independence &Economic Justice to Millions of Californians.' Business Wire (English), 2018 10AD.

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