The Downside Of Tenancy Rent Control

Tenancy rent control policies aimed at protecting tenants actually end up dividing tenants into winners and losers based on how long they are able to stay in one apartment. That is the conclusion of new research by Professors Kaushik Basu and Patrick Emerson published in the latest issue of the Economic Journal. What is more, landlords do no worse under tenancy rent control than in its absence. It also leads to higher initial rents and lower rents for tenants who occupy the same apartment for an extended period of time, encouraging them to stay longer and reducing their mobility.

Rent control debates in which tenants and landlords take opposite sides demonstrate the widespread misunderstanding of the effects of tenancy rent controls. This misunderstanding comes from the fact that economists have generally viewed rent control through the perspective of what is known as the ''price-ceiling model''. This model is wrong for most tenancy rent controls and can lead to erroneous conclusions about the effects of rent control laws. Basu and Emerson''s new model of rent control aims to provide a clear and accurate understanding of the effects of tenancy rent control and to identify precisely who is helped by such a policy and who is hurt.

Tenancy rent control laws are characterised by three things: the freedom for landlords to set rents as they see fit when leasing out to a new tenant; restrictions on the landlord''s ability to raise rents on sitting tenants; and prohibitions on evictions and fixed departure dates.

The key results of this study come from the fact that restrictions on rental increases often make it impossible for landlords to keep up with inflation. This is bad for landlords who see their incomes eroded by inflation and good for tenants who see their rent payments eroded by inflation. But the outcome is that landlords want to charge initial rents that are high enough to make up for the erosion in real rent they will suffer during the tenancy. Though it would be best to calculate the precise initial rent that makes up for this erosion for each individual tenant, it is impossible to do so because landlord do not know nor can they control how long tenants will stay. Tenants will always claim to intend to stay a short period to try and get the landlord to charge a small premium. As landlords are not able to determine how long a prospective tenant will stay by other means, they charge initial rents based on the average length of stay in the economy.

The end result is that tenants who stay longer than the average end up paying ''too little'' in rent premium and tenants who stay shorter than the average pay ''too much''. The latter may even be prevented from leasing because the rent is too high even though they are the most desirable types of tenant from the landlord''s perspective – a phenomenon known in economics as ''adverse selection''. On average, landlords will break even and therefore do just as well under tenancy rent control as they would have done without it.

If tenants decide how long they are going to stay in an apartment based on the conditions of the rental housing market, an undesirable circular situation can arise. Landlords charge high initial rents because tenants are deciding to stay for long periods; and tenants decide to stay for long periods because landlords are charging such high rents. This is a bad situation for tenants who are forced to remain less mobile in the job market and no better for landlords as the erosion of rents due to inflation wipes out the gains from the high initial rents.

Allowing landlords to raise rents to keep up with inflation or allowing them to write departure date contingent contracts would prevent this situation from occurring. Neither of these policy suggestions undermine the tenant''s right not to be evicted at will nor to be subject to absurd rental increases, which are the key tenant protection aspects of tenancy rent control.

''The Economics of Tenancy Rent Control'' by Kaushik Basu and Patrick M. Emerson is published in the October 2000 issue of the Economic Journal. Basu is at Cornell University; Emerson is at the University of Colorado in Denver.