Rent Control

First-Generation Rent Controls

Early rent control programs were designed to prevent landlords from exploiting the opportunity to charge excessively high rents because of a temporary shortage of rental accommodation. This was achieved by imposing a “binding” rent ceiling, or a maximum legal rent, set below the market equilibrium rate.

Though introduced as a temporary measure, rent control programs proved popular among tenants, or at least some groups of tenants, and were found in many instances politically difficult to remove.

Economists were uniformly critical of such hard rent control regimes for restricting rents well below what the market would dictate. In his analysis of New York City in 1968, for instance, Edgar O. Olsen found that rents on controlled apartments were 40% lower than they were for uncontrolled units. While some tenants benefit by paying a lower rent, a shortage of rental accommodation results: More potential tenants are encouraged to seek an apartment while some landlords are induced to withdraw units from the market because the rent that can be obtained is below their operating costs. This leads to a long queue of potential tenants unable to find accommodation and to a low vacancy rate.

Other undesirable effects are also predicted to occur. In an effort to evade rent control, “key money” and other side payments may become prevalent since there are tenants and landlords willing to enter into a rental contract above the legal rent. Tenant mobility is also reduced because households are encouraged to remain in a rent-protected unit long past the time that the services it provides are ideally suited to their needs, while the shortage of accommodation forces other households to remain in equally ill-suited apartments. This mismatching of tenants to rental units is often depicted in the image of the elderly widower living in a rent-protected four-bedroom apartment, while a family of five is crowded into a two-bedroom unit.

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