In his ascent to Argentina’s presidency, Javier Milei was distinguished not just by his libertarian ideology but also for his pedagogic approach towards economics. On the campaign trail, he would regularly articulate the basic principles of market economics.
Now in government, the fiery libertarian’s ‘shock therapy’ is turning those lessons into hard case studies. Within executive Decree 70/2023, translated as ‘Foundations for the Reconstruction of the Argentine Economy,’ Milei took his chainsaw to rent control and other tenancy regulations. The result has vindicated economic theory: the supply of rental accommodation is surging and rents have tumbled.
A form of tenancy rent control was introduced in Argentina in 2020 – and many British and American progressives would like to do the same. Tenancies were mandated to a minimum length of three years and permissible annual rent increases were capped at a weighted average of inflation and wage growth. Both measures aimed to provide tenants with more economic ‘security’. Landlords were still free to adjust rates between contracts, but ending tenancies prematurely was basically impossible. Deposits were capped, while rents themselves had to be paid in pesos.
Economic theory grants us predictions about these regulations. Tenancy rent control and contract length regulations burden landlords with more risk of obtaining submarket rents within tenancies and being stuck for three years with troublesome renters. On the margin, this makes it more lucrative to sell properties for owner occupation, list on excluded short-term rental sites like AirBnB, or even just leave properties empty. By reducing the supply of traditional rental homes, this raises the average level of rent, even if the growth of rent is capped within minimum length tenancy contracts.
An environment of high inflation worsens these risks for landlords. With surging prices, it makes sense to change rent levels more regularly. This allows tenants and landlords to find contract provisions to make sure rents both reflect market realities and tenants’ ability to pay (as wage growth often lags inflation). Yet these regulations only allowed rent adjustments once per year (or twice from October 2023). High and volatile inflation thus interacts with these regulations to raise rent risk and vacancy risk (given the sharp jumps in rents). Landlords might therefore like to hedge against inflation by charging in another currency, like dollars. But this was prohibited too.
The results of all this were predictable. Around the policy’s introduction, it’s estimated that 45% of landlords stopped renting to instead sell their properties, not least because most home sales were made in dollars. A lot of landlords shifted to short-term rentals on AirBnB too. In 2019, Buenos Aires had 10,000 properties listed on AirBnB; now it’s over 29,500. There have thus been no end of stories about a rental housing crisis, with tenants unable to find rental accommodation, despite the Financial Times reporting late last year that energy use implies ‘one in seven homes’ in Buenos Aires, the capital, laid empty.
This supply crunch led to soaring rents. Bloomberg reported that rents jumped sharply after tenancy rent controls were announced, as landlords opted out of the market or front-loaded rent increases to protect against inflation. Having been falling in real terms through 2018 and 2019, and tracking inflation for most of the previous decade, rents in Buenos Aires grew at 1.7 times the pace of inflation in 2020, broadly tracked inflation in 2021 and 2022, and then accelerated much faster than inflation again in 2023 as the rate which rents could be increased within tenancies was tightened further to the lower of wage growth or inflation.
As a result, the average rent for a two bedroom apartment in Buenos Aires has surged from 18,000 pesos per month at the end of 2019 to 334,000 pesos today, far above the 210,000 pesos if prices had merely tracked broader inflation, as used to happen. This relative price hike obviously hurts the poor most, because they cannot easily afford deposits to buy homes, or more expensive shorter-term dollar rentals.
Controls on rents within tenancies also soured landlord-tenant relations, incentivising landlords to forgo expensive maintenance (thus allowing the value of the property to fall towards its regulated price or to encourage tenants to leave). Misallocation of properties was rife. Reports in Buenos Aires described friends having to share apartments further out of the city centre, meaning cramped conditions and longer commutes. Under such controls, people enjoying sub-market rents are incentivized to stay in properties ill-suited for them, while others must leave properties they can afford prematurely when rents adjust sharply before their wages rise.
One of Milei’s first acts in his decree scrapped these damaging regulations for all new contracts. Rents will now be decided in free contract negotiation, meaning no more central bank indices capping rent increases. He’s also scrapped the three-year minimum contract length while making it legal for rents to be paid in foreign currency (i.e. dollars), providing landlords a hedge against inflation.
Already the reduced risks to landlords is leading a rebound in the rental supply. Broker Soledad Balayan has shown a 50% rise in notices for traditional rentals since the decree. A host of other sources, including the Argentine Real Estate Chamber, have confirmed large supply jumps. Perhaps unsurprisingly, reports show new rental prices falling, by between 20 and 30% so far.
Economists have frequently cautioned against traditional rent controls that apply caps on rents within and between tenancies. But in recent years there’s been a new drumbeat for providing more security for tenants by controlling rents within longer, secure tenancies. Argentina’s experience provides a textbook warning of how this policy can backfire, and more grist to Milei’s educational mill.
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