Rent Control and the Airplane Metaphor

Abundance dems should support rent control on existing buildings in exchange for policies that allow new buildings to get built cheaply and without “affordable housing” mandates.

Market rate rents are much higher than rent-stabilized rents because so many units are rent-stabilized.

Metaphor

Let’s assume that right now, the average price of an economy airline ticket is $300.

Imagine if the government required that half the seats on every airplane flight were sold for $100.

This would introduce a lot of inefficiency into the system.

Obviously, frequent fliers would figure this out, and all the $100 seats would be booked way in advance such that if you for some reason needed to travel somewhere in a few weeks and wanted to buy a ticket, none would be available at that price.

The average person would never see $100 tickets for sale, since the airlines would not bother to advertise them. Instead, they would advertise the market-rate tickets.

In order to make running the flight affordable, airlines would raise the prices on everyone else until they could cover the cost of fuel and operations. Airlines are a brutally competitive business with zero-to-negative long-term margins, so they likely can't raise prices more than that. Let’s say the price of a market-rate ticket rose to $500. People might start decrying that only rich people can afford to fly anymore.

There would be all manner of shenanigans by both the airlines and the passengers to get around this: airlines would try to charge huge fees on $100 passengers and degrade the quality of the service to the cheapest possible level (even more than they do already). If it were possible to pull off, $100 tickets would be bought up by shady middlemen and resold to willing customers at unseemly margins.

Since there are marginal buyers of plane tickets, and the marginal price is $500 rather than $300, the total amount of flying that people do would go down. Since flying is critical to the modern economy, this state of affairs would slow economic growth, especially in e.g. the tourism sector.

Now suppose that there were one exception: this rule only applies to flights on existing planes.

What happens to the demand for new airplanes flying on new routes?

It would soar! Each new plane can now earn $500/seat/flight, rather than $300.

Assuming the world had an economically optimal quantity of planes beforehand, now the world has all those existing planes plus all the extra new planes that get built to capture the above-average prices for the new planes.

Eventually, if you build enough planes and run enough new routes, that gets competed down, but in the meantime, it makes a lot of sense to invest in new airplanes. Let's say that investment in planes increases the total fleet size by 50% and drives the market price of a ticket down to $350. The equilibrium here is bad for the airlines, because now it is likely impossible to run the existing planes at a profit, since one can no longer charge $500/seat/flight, and half the seats are still fixed at $100. However, it's great for the consumer, on average. Market rate tickets are still available and only $50 more expensive than their original price, but now a third of them cost only $100.

Therefore, the existence of rent control on existing buildings could boost construction of new housing, but only if a) financing is actually a bottleneck, and b) property rights are credibly secure in the future.

Affordable housing mandates are the exact opposite of this, where, in the metaphor, new planes have to reserve a bunch of seats at $100. It's no wonder we don't build enough housing, while existing planes are relatively untouched.