How about we tie minimum wages to a rental price ceiling?

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Question: 

Since the high cost of rent has become a problem, I've been wondering what the outcome(s) would be if the price of rent was determined by a percentage of minimum wage after taxes? What would happen if 30 or 40 percent of someone's take home was the maximum that could be charged as rent?

I've tried to find any information that relates to this question but have been unable to find any due to my limited grasp on complicated economic systems and how they interact with one another. My main hope is that exploring this line of thought might lead to a solution of being able to pay rent and have the ability for upward mobility no matter what your income is.

Answer: 

Traditional economics tells us that price ceilings lead to shortages.  A lower price encourages sellers to reduce the quantity they supply to the market.  A lower price also encourages buyers to increase the quantity they demand.  As a result, quantity demanded exceeds quantity supplied, and many potential buyers miss out.

Rental housing is a special case where the supply often cannot adjust very quickly, so a price-ceiling induced shortage may be small initially but grow over time.  When the supply does adjust quickly, it is often because of conversion, e.g., from rental housing to owner-occupied housing.  If we suppress rents, fewer landlords will want to rent out their properties.  Many will sell and some of those sales will be to owner-occupants.  This is easy to do for single-family properties.  It takes longer to convert multi-family housing from apartments to condos, but it does happen and increasingly so when the incentives increase.  Rent restrictions also limit incentives to build new rental housing, so fewer new rental housing units will be built and this adds up over time.  Property maintenance will also decrease, and some landlords may quit paying property taxes. 

The above is all generally true, but there are some additional issues with tying rents to incomes.  First, setting rents based on a tenant’s actual income only works if shortfalls are made up for with housing vouchers funded by government and paid to the landlord.  If we impose such a restriction and don’t compensate landlords, they will have strong incentives to avoid low-income tenants.  Housing vouchers are a potentially effective housing policy to help low-income renters, but they are expensive and underfunded.  In practice, housing vouchers in the U.S. are given to only a relatively small percentage of households who qualify.  This actually hurts low-income households who don’t get a voucher because they are now outbid for housing by those with vouchers.  Tying rents to actual income also reduces incentives to work.  Many people also argue that a universal basic income (UBI) is better than a housing voucher because it allows people to choose how to spend their government subsidy however they want.  Many low-income individuals need/want food, medicine, etc. much more than better housing.  Of course, a UBI is even more expensive and may decrease incentives to work depending on how it is structured. 

You also suggest tying rents to the minimum wage.  Most workers make more than the minimum wage, and many households have no workers.  I am not sure your proposed policy would help them, and it might hurt them by increasing housing competition from minimum wage workers.  For example, let’s consider a place like San Diego, California.  Rents in San Diego are very high, in part because of the excellent weather and recreational opportunities.  Suppose that apartment rents in San Diego are capped at a percentage of the minimum wage for minimum wage workers and suppose this is about $600 per month.  What will happen?  The likely outcome is many low-wage workers will move to San Diego for the great deal they think they will get there.  Unfortunately, they are likely to find severe housing shortages due the decreased supply and increased demand.

So what to do?  First, we have to admit that addressing the needs of the poor is complicated and expensive and housing is only part of the story.  Do we have the political will and resources for a UBI or some other massive extension of entitlement programs?  My impression is that we will not have the political will for a UBI in the near future.  Well then, what about rent relief for low-income households?  Mobility and migration make this a national problem that I don’t think can be fully addressed with local solutions alone.  Housing vouchers are largely funded by the federal government, and there is an argument for increased federal support for disadvantaged individuals and prioritizing those with documented disadvantages over those with no documented disadvantage.  The most important role that local government can play is to reduce zoning and other regulations that limit the local housing supply.  Increasing the housing supply is the best way to bring down housing rents.  Admittedly, these and other policy responses will inevitably not address all the needs of low-income households.

Answered by:
Dr. John Winters
Associate Professor
Last updated on October 14, 2020