Prices Are a Miracle

What prices convey are miraculous. The price mechanism communicates information to billions of people across the entire world. Politicians must remember this when they meddle with it.

Prices upset a lot of people. We often feel as though prices are unfair, perhaps because we feel we are being paid too little at work, or paying too much for the things we buy.

But what prices convey are miraculous. The price mechanism communicates information to billions of people across the entire world, making commerce, exchange, and specialisation possible. Every time policymakers try to meddle with this magical price system, there are always unintended consequences.

Zohran Mamdami, the Democratic candidate for the New York Mayoral elections, has failed to understand why prices are so important, and why meddling with the price mechanism is such a bad idea.

In one particular case, the effects could be disastrous for those very supporters he claims to protect - renters.

There are countless examples across the world where controls on the price of housing have exacerbated the problem. Rent controls perpetuate housing shortages by driving landlords out of the rental market and encouraging immobility by increasing incentives to stay in properties for longer. These controls also reduce the quality of housing, distort the allocation of housing, and prevent areas that could be developed from being developed.

In Stockholm, where rent controls had been particularly rigid, the consequences have been dire. Stockholm has an estimated shortfall of 27,000 apartments. As of 2019, some 670,000 people were listed in the housing queue. The housing market is, by all accounts, completely and utterly broken.

New York already has a form of price control on rents. “Rent stabilisation” covers almost a million apartments, and each year, the Rent Guidelines Board sets the allowable annual rent increases for those apartments. The median rent for these tenants was $1,500 a month, which is lower than the median market rent contract, $2,000.

The Mayor of New York City appoints members to the Rent Guidelines Board. Mamdami has already pledged to press his Rent Guidelines Board members for a complete freeze on rents for those properties for four-years.

Legally speaking, this campaign promise may not even be possible. Whilst the board members may, in general, share the Mamdami’s outlook, the law requires that they consider whether regulated rents should be adjusted on an annual basis. They must examine a series of factors - the costs of taxes, charges, vacancy rates, and “other data as may be available”. All members must consider the data and other information, and their decisions must be justified by this evidence.

So, Mamdami’s four-year rent-freeze pledge disregards the legal framework entirely. How can the Rent Guidelines Board reach a predetermined outcome before reviewing any of the evidence?

Legal issues aside, the entire proposal is rooted in a fundamental misunderstanding of the way prices are created.

The value of something exists in the minds of individual decision-makers and no one else. Prices are an exchange ratio that provides buyers and sellers with a common method of communication - the communication of value. The give-and-take of the market process is only possible because prices provide that information.

As argued by F.A Hayek in The Fatal Conceit, prices convey information and value judgments from millions of people across an economy:

The creation of wealth is not simply a physical process and cannot be explained by a chain of cause and effect. It is determined not by objective physical facts known to any one mind but by the separate, differing, information of millions, which is precipitated in prices that serve to guide further decisions… For these prices inform market participants of crucial momentary conditions on which the whole division of labour depends: the actual rate of convertibility (or `substitutability') of different resources for one another, whether as means to produce other goods or to satisfy particular human needs.

Prices are vital economic signals and incentives that coordinate with supply and demand. They are not arbitrary. They communicate scarcity, guide investment, and help allocate resources in the most efficient way possible. Prices allow for the efficient allocation of resources, and Government intervention in prices results in the misallocation of those resources.

This is also the case in the housing market. The price of rents is determined by supply and demand, and rents rise when demand grows faster than supply. When more people want to live in an area and housing supply keeps pace, new construction drives forward competition and has a downward pressure on prices.

Planning restrictions, zoning limits, and other regulatory barriers prevent this natural adjustment, meaning demand rises faster than supply and rents are bid up. High rents are not caused by greedy landlords, but usually by artificial constraints on housing supply.

The solution to high rents is to loosen planning rules and allow more homes to be built, so that competition among landlords increases, shortages can ease, and rents become more affordable.

In New York, there was already a net estimated loss of 4,170 rent-stabilised units in 2023, despite the extremely narrow pathways available to a landlord wishing to regain possession of their property. Restricting prices further for these rent-stabilised properties would reduce the rent-stabilised supply further, exacerbating existing shortages. When these landlords are faced with a decline in income in real terms as a result of the price freeze, they would have little incentive to ensure that the properties remain in good condition.

In the medium term, messing with these prices will probably result in the misallocation of resources. People would end up in homes that do not align with their specific needs. Families would be less likely to upsize, and older tenants would occupy space they no longer require for longer, all because price signals are broken.

With a regulated housing supply almost fixed in the short term, the excess demand will spill over into the unregulated market, increasing rents for market-rate properties. This would hurt newcomers, younger renters, and anyone renting in non-rent-stabilised properties, worsening the cost of living for millions of New Yorkers.

It’s understandable that tenants fear being priced out of their homes due to increasing housing costs, but rent freezes worsen the very problem they aim to solve. If politicians like Mamdami want rents to be more affordable, they should focus on making it easier for the supply of housing to increase. Otherwise, these interventions will likely hurt the very people they claim to protect.

Reem Ibrahim is Head of Media & Linda Whetstone Scholar at the Institute of Economic Affairs. She can be followed on X through Reem Ibrahim ahim.