INVESTORS’ CORNER: When you take away Free Markets, you create Black Markets

The above is a quote from Winston Churchill, and is every bit as true today as it was well over half a century ago when he said it.  Please allow me to explain specifically why in terms of real estate:

Government intervention into the free-market economy of Real Estate is nothing new, and to my (admittedly limited) knowledge, has never, ever, had a positive effect.

The major problem tends to revolve around the availability of a sufficient amount of affordable housing.

Being an amateur on legislation, my idea for fixing the problem may be wholly ridiculous- provide increasingly attractive tax incentives so that private individuals will be motivated, under the principles of good ‘ole fashioned capitalism, to provide more low to middle income housing.

Many readers will remember when, in the 1980s, the government attempted to solve the problem by going into the affordable housing business for themselves, and that in an alarmingly short time, a “government housing project” became a very poor place to visit without a bullet-proof vest.

Here’s a more common solution, still used today (particularly in the State of California), that some people have inexplicably, and contrary to all available evidence, continued to give positive lip-service to- rent controls.

It sounds great on paper.  If houses cost so much that to rent them out at a profit produces rents so high that the majority of lower to middle income individuals cannot afford them, we simply make it illegal to charge more than X for rent.  Sadly, in the real world, it works nowhere near as well.

Why not?  You have inherently violated the law of supply and demand.  If I, as a landlord, am limited in what I can charge for rent, am I likely to buy more houses to rent out, thus increasing supply?  Unlikely.

And now we reach the essence of Churchill’s quote: by toying with supply and demand, we now have less rental properties, but the same number of people needing to rent them.  It does not take an MBA to predict the result of this: “Hi, I’m calling about your house for rent for $700 per month”.  “Oh, I’m sorry, I’ve already shown it to 75 people, and I’m pretty sure one of them is going to take it”.  “Oh, really.  Well, what if in addition to the $700 per month, I give you an additional $300 per month ‘under the table?’”  Say hello to black markets, and this happens on a daily basis in areas that have enacted rent controls.

Lou Gimbutis is director of education at the Metrolina Real Estate Investors Association, which provides education, mentoring, and networking for real estate investing in the Charlotte region.  He can be contacted at [email protected].  For more information, visit www.MetrolinaREIA.org.