Nova workboard

a blog from young economists at Nova SBE

Fighting the increase of housing rents: why do governments face a tricky issue ?

The starting point of this article if a strange comparison: in 2012, Portugal has reformed its old tenancy law to give more freedom to landlords on fixing rents and evicting tenants, on the other hand, France has increased the control on rents to avoid inflation, especially in the region of Paris. The subject is highly controversial in both countries: why?

Here, we will not discuss the sociological aspect of controlling rents, but only the economical aspect.

The main economic argument for rents controlling policies is that governments usually spend a lot of money supporting the supplying side (by subsidizing tenants for example) but these kinds of policies cost a lot of money and the capital gain is eventually captured by the owner of the land. On the opposite, controlling rents is much less expensive for governments (it’s mainly administrative costs) and the effect on the tenants’ budget is direct.

The second economic argument is that it takes time for real estate developers and State policies to adjust the supply to the increasing demand and landlords take advantage of this as an opportunity: as a consequence, rents and real estate in general capture a huge amount of the total wealth of the economy, a wealth that is not productive.

However, most of the economic theory on rents control focuses on the downside of such policies:

First, rent control can contribute to corruption and huge inequalities between tenants since having access to a protected lease has a huge value.

But the main critic is that landlords underinvest in their property:  for example, there is evidence of buildings that are in bad shape in city centers in Lisbon. On the long-term, rent control depresses supply: no one wants to invest in new buildings for rent since controlled rent provide poor revenue, therefore, it is increasingly difficult for people to find flats to rent. Some economists have shown quantitatively that such policies can really dry the market on the long-term and lead to a severe shortage of available houses to rent.

Finally, there are indirect effects of rent control, such as a negative effect on the construction sector, and a reduced mobility of labor force since people want to keep their lease.

So, can States really have an efficient and predictable policy to reduce high rents increases ?

The answer probably lies among all the factors that play a role in the level of rents : first, the judicial system has to be efficient and fast to enforce any policy, second, if rent control exists, it should take global inflation and salaries into account (finally, what matters is the difference between rent increases and inflation), landlords should be able to increase rents if they renovate a building.

But maybe most importantly, governments should focus on the reasons why rent increases become unaffordable. First, when economic activity is too concentrated, the place become expensive (Germany has low rents and the repartition of economic activity on its territory may play a role in it): finding incentives for company not to concentrate geographically might be a start. Second, the quality of the transportation system is a key: the worst it is, the more valuable living in the center is. Finally, if density laws allow developers to build higher building in prime areas, the supply will be higher.

To conclude, rent controls exist all over the world and it is one of the most popular policies: to be able to implement a rent control system that does not handicap the supply side of the market, government have to be very cautious with designing tenant laws and might focus on other urban aspects that influence rents levels.

Elise Saunier

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Author: studentnovasbe

Master student in Nova Sbe

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