Rent Control Doesn’t Work
The solution to the rental crisis isn’t some heavy-handed policy that tears away the incentive to rent out property in the first place. The solution is basic economics.
Calls for the City of Cape Town to implement rent controls are based in kneejerk emotion, not in any understanding of economics or reality. There is only one way to sustainably reduce the price of housing and rents. And that is raising the supply of houses.
Despite calls by the aptly named “Rent Control” group, published on GroundUp, for Cape Town to address its rent and housing crisis through rent control, such a policy will only exacerbate the problem.
The root cause of Cape Town’s rental crisis isn’t some nefarious plot by short-term letters, the tourism industry or an artefact of racialised spatial planning. The simple truth is that Cape Town is a desirable city due not only to its beautiful scenery and tolerable climate, but because it is governed well and provides plenty of opportunities for income and a pleasant life. That generates demand, which raises prices.
A lot of people want to live in the land wedged between the sea and Table Mountain – two unassailable obstacles. This constrains supply. But there is a solution to this as well. Not everyone can or should expect to live in Sea Point, Camp’s Bay or the CBD. Thinking that everyone is entitled to have a house or apartment in a single, minute area is not just unfair to those who worked hard to pay to live in such a desired area but is frankly based in brainless naivete.
As Cape Town Mayor Geordin Hill-Lewis aptly puts it in his response to Rent Control, there are only two solutions to the rental crisis. Either, Cape Town must become an undesirable place to live, or we must build more houses.
Rent control doesn’t work
Before discussing the solution, let’s address the proposed idea that would make matters far worse.
Rent control, as in capping the price of rent, doesn’t work. Landlords charge rent for a reason. It isn’t just some baseless greed. Landlords have spent their money on an asset that they need to return a profit – or else there is no point in keeping it, maintaining it or even building it in the first place.
Capping the price of rent to an arbitrary rate, and a presumably low rate, will not allow landlords to price their property, or their investments, accordingly. It will disincentivise landlords from wanting to rent out property altogether.
Maintaining rental property is expensive. Rates, utilities, taxes, maintenance, and the hassle of vetting tenants and keeping them happy. If rent is capped, landlords won’t necessarily feel it is worth keeping the property on the market.
This happened in Berlin, when rent controls were introduced in 2020 and 2021. There was a 50% drop in available rental housing. Developers slowed construction of new rental units or ceased altogether. And the price of rent in uncontrolled areas skyrocketed as tenants flocked to wherever they could find a place to live.
In the United States, rent-controlled areas saw a 15% drop in available rental units. And in Argentina, strict rent controls saw the rising of a housing crisis where vacant properties skyrocketed alongside homelessness.
Argentinian President Javier Milei struck down the rent control policies, and overnight rental properties were put back on the market, with prices stabilising as supply met demand.
When rent is capped, it doesn’t keep housing cheap. It just ensures that landlords have little incentive to keep their properties on the market. And those that do will have little incentive to keep them maintained. The result is vacant properties and slums.
Ironically, the only beneficiaries of rent control are tenants already locked into a lease – further entrenching inequality between the haves and have nots.
How to lower rent
The solution to the rental crisis isn’t some heavy-handed policy that tears away the incentive to rent out property in the first place. The solution is basic economics. Raise the supply of houses to meet demand and prices will stabilise as landlords naturally lower their prices to as low as they can afford to compete for tenants.
To build more houses, we need to cut the red tape that holds developers back from constructing new houses and apartments. With thousands needing access to homes, we shouldn’t be dallying with bureaucratic nonsense and corruption enabling government busywork.
On top of that, the construction mafia that uses policies like BEE and local quotas to hijack developments must be destroyed. First, by eliminating these enabling policies, and then by prosecuting these extortionists with the full extent of the law.
Zoning needs to made more flexible, to allow for more high-density residential buildings throughout the city. Land that has been held back from development due to historical baggage needs to be allowed to move on to benefit a new generation.
And most of all, if we want to provide a lasting solution to not just Cape Town’s housing crisis, but South Africa as a whole, then it is of tantamount importance that the rest of South Africa is made to be governed as well as Cape Town.
There is a reason that South Africans flock to the Mother City, and it isn’t the beaches. It’s because Cape Town is the only truly functioning city in the country. If the other metros were to become liveable and prosperous, and if opportunities were available throughout the country, then many people would not be forced by economic necessity to come to Cape Town.
Cape Town does not need rent caps. It needs the freedom to build. Every successful city in the world that has solved a housing crisis has done so by unleashing development and enforcing the rule of law, not by suffocating investors and landlords. If Cape Town wants cheaper rent, it must be allowed to grow upward and outward. It must remove the bureaucratic chains that protect incumbents and punish builders. The choice is simple: Either we strangle supply and watch prices spiral, or we build and let affordability return through competition. The future of housing in Cape Town rests on supply, not slogans.
Nicholas Woode-Smith is the Managing Editor of the Rational Standard and a senior associate for the Free Market Foundation. He writes in his personal capacity.
The older I get the more certain I am that Bastiat's 'That which is seen and that which is unseen' is the one economic text we can be sure will always be relevant, the insights are so simple and yet they trip up even the smartest people. Bastiat brilliantly illustrates why the best policymaker is the hesitant policymaker, and if a policy is made, in most cases it must be a policy that undoes some previous policy. This should cover 99% of a policymakers work. The 1% should be temporary policies responding to emergencies like wars or natural disasters.
Capetown is effectively an Island of somewhat better governance (not good by any means), not just in SA but on the sub-continent (south of the Sahara). We know that all such Islands have expensive property and rents (Mauritius, Singapore, Hong Kong etc) so while the measures you propose will help, there's a limit. The only way Capetown could compensate is if it controlled it's own economic policies plus safety and security so it can pursue policies that rapidly increase wages. Absent that, it will have to suffer first world property prices with 3rd world wages and unemployment.
That's the hard truth.