Smart Rent Control is a must!

Kebour Ghenna

Rent control is back in the news. It’s is one of the key issues of concern to many residents of Addis Ababa. Paradoxically, this issue has attracted a certain amount of controversy. In reality, there are very few countries where the rental market is completely free; similarly, there are very few places where a wholesale rent freeze is in force.
Last week we read about the minister of urban development who favoured tenants against the Prime Minister who cheered for the landlords! I suppose both have a case. But I like the minister who is willing to impose rent control so that tenants may not face sticker-shock increases. Indeed, what’s wrong to prevent landlords from acting opportunistically? Nothing radical here, but basic common sense!
Now, I suppose the Prime Minister has aligned himself with most economists, who argue that rent control creates many more problems than it solves. The fact is that economists have been notoriously thorough in convincing themselves of the destructive effects of rent control and notoriously inept at convincing anyone else. Better understanding of the issue might help correct the error, prevent governments from falling into it, and promote an understanding among more than just economists. Also, better understanding is an end in itself.
We thought we should reprint this 2014 article by Kebour Ghenna which remains timely and very informative, as it raises the same concerns that are present today!
Reprint of the 2014 article
Landlords Have the Best Lives!
I was taken aback to learn that a friend of the family was forced to give up his home after 8 years of residence, the victim of yet another ridiculous rent hike. The family couldn’t afford the rents on its income. My own rent has gone up by over 20% last year, and I just received a notice that it will go up by another 20% this year. I really don’t understand how landlords can get away hiking monthly rates by percentages of over 20% or more every year, just like that? How does one expect households to make instant adjustment in family economy? Isn’t such sudden sharp hike in rental rates tantamount to eviction without cause? Shouldn’t government do something to prohibit such action on the part of landlords?
I’ll tell you nothing is more infuriating than watching your rent go up and up, and up… unless of course you’re the landlord or his mother in law.
For Addis residents and small business tenants rents have been shooting up for several years now. Landlords not only do not give you any added amenities in return, they continue to insist in taking an advance collection of one year (six months is a must). When you ask them why they keep raising the rents so much, the manager in the office always says it’s because we have to keep up with the ‘devaluation’, or maintain the ‘standard’ (of what?), or simply that’s how it is! BEKA!!
At the rate things are going, Addis will host nothing but banks and insurance and upscale houses and apartments. I don’t know about you, but Addis is becoming a tough place to live.
Can the city afford to close its eyes on this problem? I think not.
The obvious solution is for the government to develop credible plan to boost supply and take the pressure off the rental market. This government has some experience of it. All the housing constructions of the last decades, including private ones, would probably not have happened without its support and direct intervention. But more, much more needs to be done for those on middle and low income. There are many innovative schemes that the government can look into to ease housing shortages. We’ll come back to them some other time.
“What else can we do now to lessen the problem?” Mayor Deriba Kuma may ask. Well, here is one stop gap measure known as rent control. It’s used by governments to stop greedy landlords from keeping increasing rents.
The problem with rent control is that landlords don’t like to hear about rent control, economists by and large are against it, neo-libertarians will argue torture is better than rent control.
Rent regulations achieve four desirable outcomes: (i) provide tenants security of tenure, by preventing huge rent increases that force tenants to move; (ii) offer affordability, by allowing only fair increases in rents; (iii) prevent regressive redistribution of income (from the have-nots to the haves); (iv) promote a fair and balanced process to mediate landlord-tenant conflicts.
Now, different forms of rent control or stabilization exist at different points in time and in different places. For this reason, generalizations with regard to rent regulation are not particularly relevant. For example in NY rents could be increased during the lease period, say, (i) with the written consent of the tenant in occupancy, if the owner increases services or equipment, or makes improvements to an apartment; (ii) with the approval of the agency supervising the rent stabilization scheme, if the owner installs a building-wide major capital improvement; or (iii) in cases of hardship, with the approval of the supervising agency. In Germany for example, tenants can turn to the courts if they feel that the rent imposed is usurious, i.e. more than 20% higher than rents for equivalent accommodation. Rent increases are also regulated, but with a decidedly light touch, with rises of up to 20% over three years authorized.
Opponents of rent control insist the free market is the best arbiter of rents and should be allowed to work without government interference. Economic theory teaches that by holding down by law the price of a product below the free-market price, the result is a lowering of the profitability of producing that product. This brings about less of the product being produced – a shortage. If the product is rental housing, then under rent control we can expect fewer rental units being built or put on the market.
This is a commonly made argument against rent control; that it would take away incentives and development would slow or halt. In reality, in cities where rent control has been implemented there has been no such stagnation of development. Real estate development will not cease to be viable because of the creation of a cap on rental rates, any more than the creation of a minimum wage or an eight hour day devastated overall economic development, as was once predicted.
Now, we all know we cannot solve the problem of affordable housing simply by implementing rent control. That’s why supply needs to be addressed. But then again, the primary question is not supply per se, but supply of units that are priced at an affordable rate for the majority of households. Increasing the quantity of building does not guarantee affordability of housing units. Despite thousands of new units being built in the past ten years in Addis Ababa affordable housing stock continue to decline. This is the case where the market fails to solve the housing problem, as it will not solve the French farmers’ survival, or the UK’s automakers recovery.
In short, a market fails when there is mismatch in demand and supply. In this case there is high demand for housing but little supply. High demand should lead to more production. If it doesn’t, the fortunate owners of the existing stock just increase their prices. The price increase is not caused by inflation or due to the quality of the building. Owners of a scarce commodity are simply taking advantage of the situation by price gouging. This is not the market at work. It is greed at work. A few landlords gouge tenants because circumstances, and the lack of protective legislation, let them. That’s why market failure necessitates government intervention – in the form of public policies or rules and legislation. Rent regulations are simply a form of consumer protection that kicks in when the market fails to regulate anti-social behaviour.
So will rent control work in Addis Ababa where both the formal and the informal rental businesses interact and overlap?
Good question, dear reader. We don’t know.
What we know is that rent control is a vitally needed program that helps the entire community.
That’s why someone has to make sound judgments to protect, at least those with fixed income, from the wild whims of landlords, because the market that was supposed to do it, failed.