Rent Control

Rent control is a government policy that limits the rent that landlords may charge for residential property. Rent control is a form of price ceiling, and its effects are analysed using the standard framework of supply and demand.

Forms

Rent control takes several forms. The strictest form is a freeze on rents, which prohibits any increase. A more common form is a limit on the rate at which rents may increase, often linked to the rate of inflation.

The controls may apply to all rental housing or only to certain categories, and they may apply to existing tenancies or to new ones. The design of the controls determines their effects.

Effects

The effects of rent control are analysed using the framework of a price ceiling set below the equilibrium. The ceiling reduces the quantity of housing supplied and increases the quantity demanded, creating a shortage.

The shortage manifests in several ways. The number of rental units may decline, as landlords convert the property to other uses or allow it to deteriorate. The quality of the housing may decline, since the landlords have less incentive to maintain it.

The shortage also leads to non-price rationing, in which the housing is allocated by means other than price. The allocation may be by queuing, by personal connections, or by other criteria, which can be inefficient and inequitable.

Arguments For and Against

The arguments for rent control emphasise the protection of tenants from rapid increases in rents, which can cause hardship and displacement. The controls are also argued to preserve the diversity of the community and to protect the most vulnerable.

The arguments against rent control emphasise the reduction in the supply of housing and the deterioration in its quality. The controls are argued to reduce the incentive to build and to maintain rental housing, and to create a mismatch between the demand and the supply.

The evidence on the effects of rent control is mixed, and it depends on the design of the controls and on the context. The strictest forms are associated with larger reductions in supply and quality, while the more moderate forms have smaller effects.

Alternatives

Alternatives to rent control include the provision of subsidies to tenants, which raise their ability to pay without reducing the supply, and the provision of public housing.

The design of the policy must balance the objective of protecting tenants against the objective of maintaining the supply of rental housing. The choice of the instrument depends on the objectives and on the constraints.

The Second-Generation Controls

The second-generation rent controls, also known as the moderate controls, limit the rate at which the rents may increase rather than freezing them. The controls are linked to the rate of the inflation or to the other index.

The moderate controls are argued to have the smaller effects on the supply and the quality of the housing, since the landlords can adjust the rents over time. The controls are more common than the strict freeze, and they are the subject of the analysis.

The design of the controls affects their effects. The coverage, the indexing, and the treatment of the new tenancies all affect the impact on the market.

The Housing Market

The analysis of the rent control must consider the housing market as a whole, including the owner-occupied sector and the new construction.

The controls reduce the return to the rental housing, which reduces the incentive to build and to maintain it. The reduction in the supply may raise the rents in the uncontrolled sector and may increase the price of the owner-occupied housing.

The analysis must also consider the mobility of the tenants, since the controls may discourage the tenants from moving, which can lead to the misallocation of the housing.

The Alternatives

The alternatives to the rent control include the housing subsidies and the public housing.

The subsidies to the tenants raise their ability to pay without reducing the supply, and they can be targeted to the most vulnerable. The public housing provides the housing directly, and it can be targeted to the groups with the greatest needs.

The design of the alternatives must consider the cost and the incentives. The subsidies and the public housing involve the public expenditure, and their design affects the behavior of the recipients and of the providers.

The Political Economy

Rent control is a subject of the political economy, since it involves the interests of the tenants and of the landlords, which differ.

The tenants, who are numerous and who benefit from the lower rents, tend to support the controls, while the landlords, who are fewer and who bear the costs, tend to oppose them. The asymmetry in the numbers helps to explain the political durability of the controls.

The controls are also supported by the concern about the affordability of the housing in the cities with the high rents. The design of the policy must consider the political and the economic dimensions.

Summary

Rent control is a form of the price ceiling, and its effects are analysed using the framework of the supply and the demand. The design of the controls, the effects on the housing market, the alternatives, and the political economy inform the analysis of the policy.

See also

• Market Failure
• Public Economics
• Institutional Economics