Rent control is a type of price control or law placing a maximum price on what landlords may charge tenants. Price controls refer to government-mandated prices for goods rather than allowing prices to be determined organically by supply and demand. It manifests as a horizontal price cap below the equilibrium, which induces a shortage.
Short-run supply is perfectly inelastic, wherein regardless of price changes consumers' buying habits do not change, thus the supply line is steep. Intuitively, the short-run supply slope is steeper (more inelastic) than the long-run, as houses cannot be built within a limited time frame. Referring to Qd and Qs, the quantity demanded (Qd) exceeds the quantity supplied (Qs), therefore a housing shortage is induced. As the long-run supply shifts, the area between quantity demanded and quantity supplied (Qs) increases and consequently worsens the shortage.
Pros:
Reduce displacement + limit gentrification
Increase housing supply – though, largely attributed to landlords dividing larger units into smaller ones
Equitable Distribution of Economic Rents: As areas become more desirable, landlords can raise rents as pure economic rent without making additional investments. Rent control limits the amount landlords can extract from tenants
Tenants in rent-controlled units pay significantly lower rent compared to those in non-controlled units of similar size and quality.
Preserve existing affordable housing and produce more units explicitly intended to be cheap, and to house people who are currently homeless.
Cons:
A type of price control which artificially distorts well-functioning markets
Reduce housing quality
Limitations on rental income disincentivize property owners from making necessary investments (cutting costs)
Long-run shortage of housing increase
Since the price is already set, sellers can discriminate without cost
Misallocation of resources
Discourages tenants from moving out of rent-controlled housing (eg. old couple who stay in their large rent-controlled apartment that is occasionally used)
The graph above depicts the number of new housing units built over 10 years in Ontario, Canada. The number of new units declined even before rent control was implemented. An apartment must pay for itself over decades; they are durable, long-lived assets. Developers will opt to cut down on constructing new units as they are relatively unprofitable. Conversely, the number of non-rent controlled housing remained stable. This illustrates that it was the rent control itself, and not other factors such as the state of the economy, which reduced the number of housing units.
To conclude, rent control is a negative-impact government policy. While the protection of renters is important, its implementation hampers economic development and reduces developers' incentives to construct new housing, which is crucial to addressing the existing housing shortage.
Long-run solution
Incentivise landowners to sustain proper maintenance and land development despite diminishing profits via, perhaps, lowering the price of construction materials to aid production processes
Reference List
Investopedia. (2024). Rent Control: Definition, How It Works, Vs. Rent Stabilization. [online] Available at: https://www.investopedia.com/terms/r/rent-control.asp [Accessed 31 Jul. 2024].
Marginal Revolution University (2015). Price Ceilings: Rent Controls. YouTube. Available at: https://www.youtube.com/watch?v=hMkvmZK3AJ4&ab_channel=MarginalRevolutionUniversity [Accessed 27 Jul. 2024].
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