Rent Regulation and the Theories of Regulation

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Alternative Solutions

An alternative to establishing laws regarding rent regulations is a voluntary agreement between landlords and tenants, as recommended by Scanlon and Whitehead (2014); they suggested longer term tenancies with index-linked rent increases along with improvements in transparency and contractual enforcements. Aside from regulating private rents, other solutions include stimulating the supply side, in either public and private housing units, or both. Government can encourage firms to invest in new constructions, through lowering corporate tax in real estate sectors or otherwise. Social housing and other publicly funded housing programmes can be employed, such as UK’s “Affordable Homes Programme”, which includes affordable rented and ownership schemes (Nanda 2012). The downside of such schemes are high costs, diverting public expenditure away from other sectors. Government xan also provide direct financial assistance, either to potential tenants or landlords. The former provides a more effective outcome as financial aid will go directly to targeted groups, while landlords receiving subsidies still retain the choice of tenants. For those who are renting solely due to a marginal inability to buy a property, loan schemes such as the “Help to Buy” programme launched by the UK government aims to help first-time buyers, despite the widespread criticism it has received about being overly complex(Wallis 2015) and it's inability to increase new constructions, pushing up home values further (Chu 2015). Implications for loan schemes are not as straightforward, since a shift from renters to buyers will increase demand in housing while decreasing demand for renting; this shift, however may be counterbalanced by the decrease in demand for housing as investment, for they expect demand for rentals to decrease. I have excluded direct government provision i.e. public housing from this particular chapter assuming that potential tenants who demand to rent private housing units do not qualify for them; in the case where they do qualify for public housing but choose to rent privately, an increase in public housing supply will have little or no effect on the demand of such individual as they have self-selected themselves into private housing.

When evaluating between options, policymakers should keep in mind possible crowding out effects, as increases in publicly provided housing will capture demand and may deter investment and construction in private housing. While both outcomes may lead to the increase in housing supply, costs incurred by public and private provision are different, with the latter being lower due to profit-driven incentives.

Conclusion

Policymakers and governments often base their decisions on economic welfare outcomes which sometimes neglect social aspects including inequity and human rights; this is where regulators intervene. Regulators must balance amongst economic, social and even legal objectives in both long run and short run in the face of constraints. These objectives often conflict with one another and require trade-offs. While rent control can reduce social inequity to some extent, the improvement is short-lived and is often accompanied by economic inefficiencies. In the long run, even social objectives can be undermined when shortages increase further, since landlords can choose tenants based on other factors other than price. While protecting the more vulnerable public is important, regulators must be aware of the costs such as social unrest, that result from the landlords’ view that rent control is an unfair treatment - an example of conflicting legal objectives between property rights and renter’s rights. Other external costs, such as those incurred from uncertainty, including the mentioned investment deterrence, also need to be taken into account. All of the aforementioned costs will be borne by society and ultimately may fall on those the regulators intended to protect. While short-lived rent control regulations may be effective, paradoxically, a short rent control period may not justify the costs to implement and to reverse such policies. Regulators who intend to implement rent control policies must be aware of the inefficiencies and externalities they will bring to the society, and should weigh between other market or non-market solutions before reaching a decision. While regulating rent may be a voter-driven outcome, politicians aware of the adverse effects rent control may bring and thus imposes a limited term control may achieve a positive welfare impact. The difficulties in reversing such policies may however, turn a temporary policy into a permanent one.

Moving from rigid rent regulations such as a rent ceiling, to modern modifications to include adjustable elements can reduce costs associated; for example, to minimise disinvestment in new housing units, the Rent Stabilisation Ordinance of San Francisco exempts housing units built after 1979. A well-designed set of regulations is therefore possible in achieving desired social goals (Micheli & Schmidt, 2014). High transparency is also a mandatory component to combat favouritism in allocating controlled rental units.

A fundamental factor for determining long term effectiveness of such policy is the underlying problem of high rents - whether rents are too high in the case of a housing bubble or whether rental unit supply is too low to match rising demand. To sustain affordable rents, however, the supply side must be tackled by increase housing units for the rental market.

It is difficult to make an overarching conclusion about whether regulating private sector rent is more superior than other solutions in the face of much ambiguity; it is a game of push and pull between elements. Policies in various forms have been implemented in different countries to varying degrees of success depending on different constraints. Yet a general economists’ consensus points to the claim that long term rent control has perverse effects compared to limited term rent control.

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References

Hill, David. (2015). 'Beware fine talk of 'rent controls'', The Guardian, 10 July, Accessed at: http://www.theguardian.com/uk-news/davehillblog/2015/jul/10/beware-fine-talk-of-rent-controls

Friedman, Milton and George J. Stigler, (1946). ‘Roofs or Ceilings? The Current Housing Problem,’ Irvingtonon-Hudson: Foundation for Economic Education.

Gyourko, J. and R. Molloy (2014). ‘Regulation and Housing Supply’, NBER Working

Paper No. 20536, Issued Oct. 2014.