Friedrich Hayek wrote of a road paved with good intentions that ultimately undermines society and enslaves its citizens. Yet, it remains irresistible to deploy the State to solve perceived failures of the market and society, using measures that are often worse than the ailment itself. The measures in the Affordable Rent Act (Wet betaalbare huur) are a form of central economic planning in which the State determines the price at which mid-sector homes can be rented, ultimately causing supply to decrease even further.
The Problem of Knowledge
In his essay “The Use of Knowledge in Society” (1945) and his Nobel Prize lecture “The Pretense of Knowledge” (1975), Hayek describes the so-called knowledge problem: it is often dispersed, partial, fleeting, and frequently incorrect. Hayek reasons that no single person or institution could ever possess all the information necessary to make economic decisions for an entire society.
It was this centralisation of the economy that previously led to empty shelves in the Soviet Union and its eventual collapse, and the same strategy is now causing increasing problems in our own society. A government that acts “decisively” against slumlords is merely dealing with symptom of scarcity instead of addressing the root cause of scarcity.
Market Distortion by Government Policy
Through the Affordable Rent Act, the State arrogates to itself a role it cannot possibly fulfil: the universal determination of prices by reducing characteristics and underlying financing of 400,000 homes into an abstract points system, through which it presumes to be able to determine what a “reasonable” price is. It is a rigid systematisation of a dynamic that varies greatly by region, locality, and even by individual property.
The consequence is market distortion. When the price is set too low, it is no longer viable to rent out a property at that rate because the points system has undervalued it. Hence, supply decreases. Eighteen months later, these well-intentioned measures have produced exactly what you would expect. Landlords are either renovating mid-sector homes to rent them out in the “free” sector or selling them off, causing the rental market to worsen and reducing choice of rental properties even more.
It is an example of market failure caused by policymakers who believe the housing crisis is a market failure, while the market is actually functioning in a completely predictable manner. The lack of supply of affordable housing is not a result of market failure. The market signals scarcity by higher prices and abundance by lower prices.
The reason “real estate cowboys” charge “outrageous prices” is the result of scarcity caused by population growth due to migration and lagging housing construction—both partially caused by well-intentioned government policy. Migration is not being restricted, while laws, regulations, and slow permitting procedures continue to slow down construction. This has led to market exit by smaller private landlords on one hand, and on the other, it limits market entry to the much-loathed large investors who can make the financial numbers work through sheer scale. A similar dynamic is occurring in new construction: fewer developers and contractors are willing to build, leaving only a few (medium) large contractors, resulting in diminished competition and higher prices.
Conclusion
The upcoming Housing Management Reinforcement Act (Wet versterking regie op de volkshuisvesting) aims to reduce the housing shortage by “taking back control.” But nothing could be further from the truth. More rules and conditions for housing construction will be added, further disrupting market dynamics. The chairman of Bouwend Nederland, Arno Visser, rightly questioned in his conversation with EW Magazine whether this is a case of market failure, stating: “It is the government that decides where, what, and how things are built. So, why market failure?”
If the fundamental problems of migration, regulatory pressure, and permitting procedures are not addressed, every intervention is doomed to lead to more market distortion and exacerbate the housing crisis.