Rent control revisited: effects on property management

Abstract

PurposeThe purpose of this paper is to show how an optimization model previously published by the authors is employed to study the effects of rent control on income optimization for the owner and the manager, as well as on the principal‐agent relationship. The model explains effects on management, maintenance and housing quality observed under rent control.Design/methodology/approachThe optimization model is developed by applying a transaction cost framework to the context of income structures in investment properties and their management. Rent control is introduced into the model as a rent maximum.FindingsUnder rent control, the manager is forced to optimize income solely through cost control, without motivation to provide above minimum services. The owner is unable to optimize income. Income and funds available for management and maintenance are reduced by costs uncontrollable by the owner. Consequently, management and maintenance are reduced, if not eliminated, resulting in deterioration of the housing stock, notwithstanding minimum habitability standards imposed by regulators. This dilemma argues against dropping management entirely and interferes with the owner's quest to find the right incentive structure for the agent.Research limitations/implicationsRent control is modeled as a cap on rents. Many rent control policies employ a maximum in rent increase instead, with the maximum often linked to inflation. As the results of the model are in line with real‐world observations, this simplification seems to be non‐critical.Practical implicationsRent control was implemented with the intent to provide affordable housing to the less fortunate in society. Economic and social effects of rent control have since been heatedly discussed, in the public arena and in academia. This paper supports the view that rent control has unintended, negative consequences not only for the property owner, but also for the property manager (who is at the brink of elimination) and for the tenant (as housing quality deteriorates). This paper therefore encourages a renewed discussion and review of rent control policies.Originality/valueThe paper expands existing literature by analyzing the effects of rent control on property management. By using an optimization model, theory‐based results are provided that supplements real‐word observations, which is interesting for both academics and practitioners. Furthermore, the applicability of the previously developed optimization model is strengthened.