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Insights 14: 30 April 2021
Newsroom: Eric Crampton says public health agency needs to prioritise pandemic preparedness
Podcast: Oliver Hartwich on becoming a New Zealander
Research Note: Rent controls. The next mistake in housing policy in New Zealand

Howard’s lesson
Dr Oliver Hartwich | Executive Director |
Shortly after he lost his Australian premiership, I attended a small, private dinner with John Howard in London. We talked about his nearly 12 years in office and the lessons he had learnt.

Howard shared a story about a visit of the Dalai Lama to Australia in 2007. The Chinese leadership had made fierce threats about the visit, demanding that no Australian official meet him.

The result was the opposite. Precisely because of China’s strong public demands, Howard said he had to meet the Dalai Lama – even though he would not have otherwise.

I keep thinking of this incident. Not just because it contains a gem of foreign policy wisdom. It also applies to some foreign policy conundrums today.

Take Turkey, for example. The Armenian genocide of 1915–1917 is well-documented. About a million Armenians were killed by the Ottoman Empire.

Turkey has always denied this chapter of its pre-history. Under its nationalist President Recep Tayyip Erdoğan, this denial has strengthened and resulted in threats against anyone prepared to recognise the genocide.

The result brought more attention to the genocide. Just as in Howard’s case, the louder Erdoğan’s warnings, the more nations had to show their colours. The latest country to join those 32 states now acknowledging the genocide was the US last week.

It made sense for US President Joe Biden to do so, not only because the Armenian genocide is a historical fact. Biden also had to respond to Erdoğan’s pressure to retain his credibility. The US cannot be seen to give in to intimidators – especially those who cry loudest.

With China, it ought to be the same. Howard retained the Chinese Government’s respect by refusing to back down. The Chinese leadership, meanwhile, might have learnt that it was futile to pressure Howard. They would not have tried again for future visits of the Dalai Lama under Howard’s leadership.

Howard’s present successor, Prime Minister Scott Morrison, has learnt that lesson. His government has taken a clear-cut line on China, which is Australia’s best chance to prevent future intimidation.

Other governments, including our own, are more equivocating. Yet a vigorous defence of one’s own interests and values seems to be the language best understood by countries outspoken about their own positions.

For example, Australia and New Zealand could invite Taiwan to join their travel bubble. A Taiwanese presence would subject our border arrangements to external scrutiny by one of the countries that has best handled the Covid-19 pandemic. Of course, Beijing would object to that move – but that does not mean that such a bubble extension would not be in Australia and New Zealand’s interest.

China’s President Xi Jinping once said that Soviet Communism collapsed because its ideals and beliefs had been shaken. Would he not expect the same of countries unwilling to stand up for their own ideals and beliefs?

Bomb bay doors open
Dr David Law | Senior Fellow |
The government’s new housing package, announced in March, will increase rents, and reduce the supply of rental accommodation to the detriment of many.

Pressure to intervene in the rental market is already mounting. Green Party MP Chloe Swarbrick recently suggested that rent controls should be considered. Having previously been an advocate the Finance Minister is not ruling them out.

This is one of those rare instances where economists agree – rent controls are a terrible idea. In a 2012 survey of top economists, 95% either disagreed or strongly disagreed with the assertion that rent controls have had a positive impact on the amount and quality of rental housing.

A new report from The New Zealand Initiative surveys the evidence and outlines the reasons why rent controls must be avoided. Theory and empirics overwhelmingly agree.

Rent controls reduce the supply of rental accommodation, create shortages and queues. Rental accommodation is sold off or converted to alternative uses.

The problem is exacerbated if new supply of rental accommodation is also reduced. Developers may be less inclined to build new housing, even when new buildings are not subject to existing regulation, as the possibility of future profit-curbing legislation makes building new residences less appealing.

Rent controls can also lead to a decline in the quality of rental accommodation.  If landlords cannot recoup their costs by raising rents, they may not invest in maintenance.

Mobility is reduced and a mismatch between tenants and rental accommodation ensues. Once a tenant has been able to secure rent-controlled accommodation, they may not want to move in the future, even if their housing needs change, since they would need to give up their rent control and pay more. Families end up in small apartments while empty-nesters live in large homes they do not need, and people do not move to take up better employment opportunities.

Also, they destroy the value of properties that are rent-controlled and that of neighbouring housing. Affected neighbourhoods become less desirable places to live.

On top of that, rent controls do not even help those who need it the most. Evidence suggests that it is older and higher income tenants who benefit the most from rent controls.

Economist Assar Lindbeck famously said “In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing." Let us make sure we do not prove him right – again.

Read the Research Note: Rent controls - The next mistake in housing policy here.

Oh good. Rent control
Matt Burgess | Senior Economist |
It is now clear the government’s housing package was not a joke.

The government released the policy shortly before April Fools’ Day. At the time it seemed funny in a Rob Muldoon so-bad-it’s-good kind of way.

But Ministers have since clarified they are not making this up. The government’s housing affordability strategy really is to raise taxes on landlords.

The main item in the package took away landlords’ right to treat interest as a deductible tax expense. The government says these deductions are a loophole.

It turns out this loophole is a massive problem. For centuries, businesses everywhere have been exploiting this loophole by deducting expenses to avoid paying taxes. Something had to be done, obviously.

And landlords have no right to complain. They can still deduct other costs, like stationery.

But, eventually, some landlords are bound to notice they can no longer afford food. Selfishly, some of them will decide not to be a landlord and leave for more profitable activities, like welfare. Rentals will turn owner-occupied, new investment will disappear. Rents will rise.

Right on cue, yesterday we learned the Housing Minister has asked for advice on “temporary rent controls.”

Rent controls? Strewth.

Roughly no economists think rent control is a good idea. It is famously bad, like stamp duty, tariffs, quotas, or having central banks solve climate change.

In his book Basic Economics, US economist Thomas Sowell looked into rent control and found one or two issues.

Minor things. Like in Melbourne, where rent control stopped apartment construction dead for nine years. Or in New York, where it halved the turnover of apartments. Sowell found rent control led to high vacancy rates in housing shortages; produced slums and black markets; led to a boom in luxury apartments, which raised average rents; some owners abandoned their buildings entirely; and migrants suffered most from the policy.

Apart from this, rent control is great.

Especially when it is “temporary.” Sweden had temporary rent controls. They lasted 30 years, which was long enough for Sweden to work out why it had a severe housing shortage.

Even communists don’t like rent control, it is so awful. In 1989, the foreign minister of Vietnam gave a speech which included this assessment of rent control:

"The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents”.

Rent control is weapons-grade bad policy.

On The Record

Other Initiative activity:
All Things Considered
  • Graph of the week: It’s a tight vaccination race between Azerbaijan, Suriname, Tonga and New Zealand – but we’re still not too far behind
  • Who benefits from rent control? Socio-economic determinants of the rent subsidy
  • US $ devaluation against gold since Nixon dropped the $35 per ounce parity as a 'temporary' measure'
  • IP and right to repair: Hacking McDonald's ice cream machines
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