Have there been any experiments in legislating ceilings for housing prices? If so, what has been the effect?
The effect of a price ceiling is often just to shrink the supply of any units whose price would be above the price ceiling, while consumer queue themselves. It would be the same as rationing. And since the opportunity cost of time of richer folks is lower, not to mention that they're more likely to be socially connected, they end up displacing poorer consumers.
Your conclusion is correct, but this should say "since the opportunity cost of time for richer folks is higher".
People who earn more have a higher opportunity cost of time, which means (all things equal) that they will have fewer children and choose residences with lower commute times than those who make less money.
It seems somewhat counter-intuitive, because the high income worker might be much more highly paid than a low income worker, and thus gives up much more in monetary terms than the low income worker. But the value of an additional dollar isn't the same for these two workers, since it's also a function of their present income. An hour work missed could mean a low income worker this week's lunch or his kid's medicine, whereas for a high income worker it often means just a little less money in his savings account.
I won't touch the issue of having children, because I don't think anyone has quite yet successfully tackled human reproduction. But when it comes to commuting, all workers in an would be interested in reducing their commutes. Richer workers can afford higher rents because their wages are higher. But that still doesn't mean that their marginal utility of income is higher than thay of lower paid workers.
It's somewhat unintuitive, because often people go through Econ 101 without trying to understand what a decreasing marginal utility of income means. But in Urban Economics, the falling opportunity cost of time is the mechanism which allows cities to form, first from cottage industries, as the agricultural productivity grows. So it's a standard argument.
The whole overall effect is that queues benefit the richer among the eligible for whatever they're queueing for.
In a two-good, work-leisure market, the opportunity cost of non-work time is the foregone income. It's not (just) equal at equilibrium; it's equal by definition. The two things that are equal at equilibrium (and only at equilibrium) are the marginal utility of the income and the opportunity cost of working (that is, the marginal value of an extra unit of non-work time). That's not the opportunity cost of the non-work time, which is what we're talking about when we refer to the opportunity cost of time.
> But the value of an additional dollar isn't the same for these two workers, since it's also a function of their present income.
You're confusing the marginal utility with the opportunity cost. There's a function that relates these two concepts, yes, but they're not the same thing, as you can see here:
> Richer workers can afford higher rents because their wages are higher. But that still doesn't mean that their marginal utility of income is higher than thay of lower paid workers.
Nobody said that the marginal utility of income for the higher-paid workers is greater than the marginal utility of income for lower-paid workers. In fact, that's a comparison that can't really be made - utility is explicitly not comparable between two individuals (that's a fairly fundamental axiom of microeconomics). We can say that, as an individual's income increases, the marginal impact of further increases in income decreases, but the comparison you're trying to imply here is a value judgment between two individuals.
However, we can say that the opportunity cost is higher for the higher-paid workers, because that is something that is comparable across individuals - it's dollar-denominated. The opportunity cost of non-work time for both sets of workers is the foregone income, and that will be higher for higher-paid workers (by definition). That does not diminish the importance of what either set of worker might choose to do with an additional $50 (or any fixed lump sum of money), but that's a value judgment and is not the same as the opportunity cost of the work-leisure trade-off (which is an objective measure).
> I won't touch the issue of having children, because I don't think anyone has quite yet successfully tackled human reproduction.
It's pretty well-established that children are inferior goods (in the economic sense - the income-elasticity of demand is less than zero).
> It's somewhat unintuitive, because often people go through Econ 101 without trying to understand what a decreasing marginal utility of income means
I have a degree in economics. I know how diminishing marginal utility works.
As Assar Lindbeck put it, "next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities." For instance, in 1970s when the Bronx was burning, a major contributing factor was New York City rent control. In some neighborhoods of the Bronx and in Harlem, fully a third of the housing stock was literally abandoned by its owners: it was easier to just walk away and let the building rot than to take any action to repair it and continue to collect rent-controlled rents.
Even notoriously planned-economy San Francisco has backpedalled from the price-ceiling approach, favoring instead a mandatory "right to lease at the same inflation-adjusted price forever" in all its housing contracts.
My parents and I lived in a rent-controlled apt in Manhattan in the early 1970s. Rent was $80/month. The 1973 oil embargo happened and heating oil prices went up. Oh, did I forget to mention that the $80 rent included heat?!!!!
Basically things were so bad for the landlord that it cost as much to heat the average apt in the building as that apt paid in rent. Clearly not a sustainable situation.
We moved out of the city the next year. But in retrospect we should have bought our apt (for about $7,000) when the building went coop/condo.
So the tenants not only enjoyed below market rents for decades, but after the landlord was bled dry they were able buy their apts for a pittance.
Hmmm ... 12 apts, maybe two voters each, vs an older couple, the landlords, only two votes. I wonder why rent control existed for so long? (that was sarcasm, I know exactly why it existed!).
As Maggie Thatcher said, the problem with socialism is that eventually you run out of other people's money. I'm sure the tenants saw some large cost increases once they went coop, because now they had to pay 100% of all the building costs. But that only moved them into fair value territory. All the money they "stole" from the old landlord in the previous decades would never be paid back.
If you were a landlord, you couldn't afford to pay enough to buy your tenants out of their apartments. But massively wealthy investors and big banks could - and they did. They bought the rent-controlled apartments that were money pits for small landlords, and then paid large sums of cash (under the table) to the tenants to get them to leave. Once the tenants had left, the apartments could be easily converted back to unregulated, market-rate apartments.
Small landlords literally couldn't afford to own the buildings, because they had to spend money to operate them and received next-to-nothing in rent. So, they had no choice but to sell them to the investors and banks who were well-capitalized enough to negotiate these buyouts, resulting in the mass consolidation of real-estate by a relatively small number of owners.
And of course, the original goal of rent control (ensuring that long-time residents would continue living in the same neighborhoods) went completely out the window, because it was in their best financial interest at that point to move. And the secondary goal (providing "affordable" housing) was gone long before that
> We moved out of the city the next year. But in retrospect we should have bought our apt (for about $7,000) when the building went coop/condo.
In retrospect, you should probably have kept living there as tenants. If you were there in the early 1970s, you'd have been grandfathered into rent control, and rent control in New York (as opposed to rent stabilization) is insanely profitable for the tenants, even if you weren't offered the type of buyout that I described above.
It'd have taken you 7 years just to break even on the savings in rent by itself, but between maintenance costs (which your landlord was required to give you for free) and property taxes (easily more than you were paying in rent), you'd probably still come out ahead today if you'd just stayed on as tenants.
Of course, you'd have to live there continuously and never move, and the apartment wouldn't be yours to pass on in inheritance. But the money you'd save would be worth way more than that.
This is why rent-controlled apartments should never be allowed to go back to "market rates". They should remain rent controlled in perpetuity. Problem solved.
Doesn't seem to have had much success in destroying Swiss cities. Maybe the neutrality helps prevent bombing-like effects?
https://sites.tufts.edu/uep284chsustainabilities/files/2015/... for some discussion...
When talking about policies like price floors and ceilings (ie, rent control), scale is critical.
The city of New York has a population roughly equal to the entire country of Switzerland. The largest Swiss city (Zurich) is smaller than the smallest borough of New York City (Staten Island), and about one-fifth the size of the Bronx (the borough mentioned in fennecfoxen's comment).
So comparing the effect of rent regulation in New York City to the effect of rent regulation in various cities in Switzerland isn't really meaningful, because the economies of cities in a country whose total population is roughly 8 million can't be compared with the economy of a city whose metropolitan region is two and a half times that size (20 million).
It's absolutely scandolous that landlords would be allowed to get away with doing that.
They should be taxed severely if they don't rent out the property within a certain amount of time, or perhaps just have the government take over ownership in that case.
I'm not some anti-government zealot, but think about what you are saying/asking for here.
Ceilings on property sales prices are very rare. Probably the most common example is resale price caps on government sponsored housing for lower income buyers.
Price ceilings on rent are more common but still rare. This is commonly known as rent control.
Like all price caps the result is shortages in varying degrees depending on how binding the ceiling is. If the rent/price is set below operating/construction costs you will see very little avalabilty/construction. On the other hand if the ceiling is set well above the "natural" rent/price there will be little if any impact. In between you will see increasing shortages as the ceiling decreases.
This is generally basic economics but can get pretty complex depending on the details of the specific policy. Taking thsee details into account as well as the unusual nature or real estate (durability, immobility, etc.) the actual results have lined up very well with the theoretical predictions.
When I hear rent control, I hear controlled increase in rent over time for existing rental units. You make sure all rental units are profitable, but you protect existing tenants from being able to afford their rent to not being able to in a year, simply because a neighborhood has increased in desirability. So you force the market to either build new construction to profit from the boom, or to make remodeling to old buildings to justify rent increase.
Take a look at Venezuela. Any sort of artificial price ceiling leads to black markets and insufficient supply.
Same thing in San Francisco.