Rent Control

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.