Rent control

The idea was floated by Prime Minister Patrick Manning three weeks ago through his party’s mouthpiece, PNM chairman John Donaldson. No details were given as to how this was to be executed, which may be why no concerned parties have seen fit to comment. However, this may not be a wise attitude with an administration which has a tendency to present policies as a virtual fait accompli, and then dismiss all critical analyses as irrelevant or politically motivated.

In the case of rent control, moreover, details aren’t really needed. Economic experience shows that no system of rent control has ever benefited the very persons that politicians claim they are trying to help. Rent control only sounds good. Politicians usually institute it on the basis that they are helping prevent avaricious landlords taking advantage of renters. But what effects does such a policy have in practice?

Let us first be clear about what rent control really is: a tax on landlords. Instead of letting the market set the price of rents, the Government keeps it at a supposedly affordable level. But, since they do not make the expected profits, landlords are discouraged from new construction or even proper maintenance of their existing property. This is not least because governments often institute rent controls at a time when construction costs are rising. But that very rise, in tandem with rent control, means that landlords have less capital for new investment in property.

When this happens, a government often tweaks its policy by removing rent controls from upper-end apartments while retaining them on low — or middle-grade ones. The argument is that the rich can afford high rents while the poor cannot. But the actual result of this policy is that well-off persons have access to quality apartments, which continue to be built and maintained, while there is no incentive to build low-cost housing or repair that which exists.

The long-term result is a shortage of private sector-built low-cost housing — which thus increases the pressure on Government’s housing programmes. And, if those State-built houses are rented or sold at a rate that does not repay the costs of construction and operation, the rents are now paid for by the taxpayer.

So rent control does not really benefit the persons who most need it. If the Government is really serious about tackling rising rents, it needs to examine the causes. One is the highest price individuals are willing to pay for rental properties. This is constrained by the price of buying property, since beyond a certain point it becomes more sensible to purchase than to rent. So, as property values rise, so too will rents at the upper scale, and that rise in turn forces a rise in rents at lower levels. However, the lowest-priced rents are also influenced at the other end by the price of the cheapest alternative to those persons who do not have their own homes. In the case of squatters, the price of rents is zero. So as the number of squatters decreases, lower-income rents should also go up. It is therefore possible that the drop in unemployment is a causative factor of rising rents.

Does imposing rent control negate any of these factors? The short answer is, No. Can the Government do anything? Perhaps. But, whatever policy it adopts, it should not interfere with normal market mechanisms.

That strategy is almost always counter-productive.