Rent control refers to laws or ordinances that regulate how much landlords can legally charge for their property. In its simplest form, there are two approaches to rent control. The first approach is that a “fair rent” is fixed for every unit and that an enforcement mechanism is established to ensure that these rents are in fact charged. The second form of rent control is a “control on rent increases,” regardless of the current rent level. Rent control was established to protect renters from excessive rent increases, especially if such an increase could lead to renters being forced out of the premises. As such, rent control was intended to help renters, especially indigent ones, by allowing them to continue living in areas which otherwise would be too expensive for them to afford since rents would be too high for their level of income. In fact, rent control is often enacted in times of severe housing shortages and steep rent increases, for example, due to war or hyperinflation. Rent control is an international phenomenon and exists in both developed and developing countries.
In a free market, rent is the result of supply and demand for a rental property. However, rent control fixes this outcome at an artificial level, thus creating an imbalance between supply and demand. Even so-called second-generation rent control, which is when landlords are allowed to escalate rent in certain situations, will lead to such an imbalance. For rent control to achieve its desired outcome of creating more affordable housing for lower-income renters, the market rent in equilibrium would have to be higher in the absence of rent control than it is in its presence.
Factors of supply and demand along with the lack of income constraints often limit the effective matching of lower-income families with restricted income properties. Because of the reduced prices landlords must accept for their investment, new investment in rental properties is discouraged. This resistance to investing in rental property creates a shortage of these properties. Since there are fewer rental properties than the market demands, the landlord has more renters from which to choose.
On the other hand, rent control can create an excess demand for rental properties. This excess demand comes from two groups of renters. The first group consists of those renters who prefer renting over buying since rents are kept artificially low. In some situations, these renters have been known to use their financial resources to buy other property while continuing to live in rent-controlled apartments. The individuals then rent out the purchased property, generating personal income, while maintaining residence in the rent-controlled apartment.
The second group consists of those renters who are attracted to the area with the low rent-controlled prices and are willing to commute. Even with the added expense of commuting, it could be more costeffective to live in the rent-controlled area. Together, these two groups create an artificial shortage, as shown in Figure 1.
However well-intended the concept of rent control may be, empirical studies indicate that it seems to have failed its intended objectives. While some lowerincome tenants have enjoyed the intended benefits of rent control, much benefit has gone to those less in need. Instead of creating a fair and equitable opportunity for lower-income renters, there are data that show that rent control has created greater hardships and inequities for all involved. In many cases, it is not the low-income renter who occupies the rental property but someone in a more financially secure position who is profiting from the situation. Since rent control in general does not place constraints on the income levels of prospective renters from which landlords may choose their tenants, they will be drawn to choose those tenants who are more likely able to meet their rent payments on a consistent and timely basis. These renters tend to be those in the higher-income brackets.
This often leads to renters occupying too much space for their needs. For example, an elderly couple, whose children have left their home, keep a large apartment, seeing that their costs are low and could go up if they were to move to a smaller apartment. On the other hand, a young couple with children is unable to find a bigger apartment because people enjoying rent control benefits are occupying them. This can lead to another unintended outcome of rent control—namely, it limits the exchange opportunity to the one who values the property rights the most. By definition, the use of a resource is economically efficient when the property rights associated with the resource are held by the one who values them the most.
In addition, rent control may lead to reduced maintenance. Landlords of rent-controlled apartments often delay or even completely avoid maintenance in an attempt to reduce costs and increase their returns to compensate for lost rental income. While the landlord may attempt to withhold maintenance on all rentcontrolled properties, those occupied by higherincome individuals will be in a better position to fight this lack of services. They may be able to hire an attorney to sue the landlord to force him or her to do the required maintenance, or they may have the financial ability to make the necessary repairs themselves. However, lower-income individuals will often be at the mercy of the landlord, unable to take the legal action often necessary to force the landlord to comply and make necessary repairs.
Property and Property Rights; Rents, Economic
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