The removal of rent control and its impact on search and mismatching costs: evidence from Oslo

Rent control, found the world over, is an arrangement under which a governmental agency prescribes the maximum rents private landlords may charge for accommodation, as the control is intended to benefit tenants. In Section I it is argued that rent control can help existing tenants, but only if it is accompanied by additional legal measures. Since the details of these legal measures change over time, and vary across areas, only examples can be provided to illustrate the argument. Yet, whatever these legal measures, rent control can not help potential tenants (except in unusual circumstances, e.g. when landlords expect it to be temporary). In Section II we examine why rent control leads to inefficiency.KeywordsHousing PolicyLegal ProvisionMarket RentLegal MeasureRent ControlThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Rent control, found the world over, is an arrangement under which a governmental agency prescribes the maximum rents private landlords may charge for accommodation, as the control is intended to benefit tenants. In Section I it is argued that rent control can help existing tenants, but only if it is accompanied by additional legal measures. Since the details of these legal measures change over time, and vary across areas, only examples can be provided to illustrate the argument. Yet, whatever these legal measures, rent control can not help potential tenants (except in unusual circumstances, e.g. when landlords expect it to be temporary). In Section II we examine why rent control leads to inefficiency.KeywordsHousing PolicyLegal ProvisionMarket RentLegal MeasureMarket Clearing PriceThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Rent control, found the world over, is an arrangement under which a governmental agency prescribes the maximum rents private landlords may charge for accommodation, as the control is intended to benefit tenants. In section I it is argued that rent control can help existing tenants, but only if it is accompanied by additional legal measures. Since the details of these legal measures change over time, and vary across areas, only examples can be provided to illustrate the argument. Yet, whatever these legal measures, rent control can not help potential tenants (except in unusual circumstances, e.g. when landlords expect it to be temporary). In section II we examine why rent control leads to inefficiency.

What stirs most people against rent control laws in the United States and elsewhere are stories of people who have held apartments for many years and now pay absurdly low rents for them. There are important reasons for removing rent controls, but the shock value of a low rent is not one of them. Basu and Emerson construct a model of second-generation rent control, describing a regime that does not permit rent increases for sitting tenants - or their eviction. When an apartment becomes vacant, however, the landlord is free to negotiate a new contract with a higher rent. They argue that this stylized system is a good (though polar) approximation of rent control regimes that exist in many cities in India, the United States, and elsewhere. Under such a regime, if inflation exists, landlords prefer to rent to tenants who plan to stay only a short time. The authors assume that there are different types of tenants (where type refers to the amount of time tenants stay in an apartment) and that landlords are unable to determine types before they rent to a tenant. Contracts contingent on departure date are forbidden, so a problem of adverse selection arises. Short stayers are harmed by rent control while long-term tenants benefit. In addition, the equilibrium is Pareto inefficient. Basu and Emerson show that when tenant types are determined endogenously (when a tenant decides how long to stay in one place based on market signals) in the presence of rent control, there may be multiple equilibria, with one equilibrium Pareto-dominated by another. In other words, many lifestyle choices are made based on conditions in the rental housing market. One thing rent control may do is decrease the mobility of the labor force, because tenants may choose to remain in a city where they occupy rent-controlled apartments rather than accept a higher-paying job in another city. Basu and Emerson show that abolishing the rent control regime can do two things: Shift the equilibrium to a better outcome and result in lower rents, across the board. A version of this paper - a product of the Office of the Senior Vice President and Chief Economist, Development Economics - was presented at an Applied Microeconomics Workshop at Cornell University.

The Law of Unintended Consequences

During the past decade, over 200 cities in the United States have imposed rent control [Baird, t980, pp. 54-7]. Although most likely a response to the accelerating inflation of the 1970's, this second generation of rent control has been justified on the grounds of the existence of a housing crisis. In different locales the crises are described variously as arising from a housing shortage, low vacancy rates, rent increases, tenant hardship, housing deterioration, lack of new construction, or environmental necessity [Baar and Keating, 1975, p. 490]. Invariably, newly enacted rent control ordinances are presented as temporary measures. Presumably, policymakers view the imposition of rent control and its concomitant effects as reversible after the housing crisis, however defined, has passed. But is this assumption correct? Does decontrol restore market rents, maintenance levels, optimal crowding, and tenant mobility? Or are housing units permanently altered by virtue of their having been under rent controls? These are important issues in evaluating rent control as a feature of local housing policy. Surprisingly little empirical work has been done on the relationship between rent control and housing quality, crowding, and tenant turnover. Furthermore, the authors have found no empirical studies dealing with decontrol. The purpose of this paper is to make a modest contribution to understanding the efficacy of decontrol by exploring the effects of selective decontrol in New York City (NYC). The data used in this study are taken from the 1968 Special NYC Housing

PurposeThe purpose of this paper is to analyze the effects of Swedish rent controls on observed vacancy rates for rental housing.Design/methodology/approachHousing vacancy rates are unevenly distributed among Swedish municipalities. In large expansive municipalities, such as Malmö, Göteborg and Stockholm, vacancy rates are very low, while in declining or smaller municipalities such as those in the northern and interior parts of Sweden, vacancy rates are considerably higher. This implies welfare losses not only in growing municipalities with queues for rental apartments but also in municipalities that are shrinking since the controlled rents there are higher than market rents and cause higher vacancy rates than with market rents. The authors estimate the influences of various determining factors, such as population growth, population size, rent levels, construction, demolition and market orientation of rents, on the observed vacancy rates.FindingsThe authors find that that these factors affect the vacancy rates differently depending on whether a municipality is large or small, growing or shrinking. Population growth, in percent per year, plays an important role in explaining the observed vacancy rates in declining regions.Research limitations/implicationsA research task that remains to be done is to calculate the welfare losses due to rent higher than the market rent for municipalities in contraction.Practical implicationsTo reduce the welfare losses of rent control, both in expanding and contracting municipalities, economists' straightforward recommendation to deregulate the rent control should, in principle, be carried out.Originality/valueIn many countries, rent control regulations are limited to cities, such as New York City. The paper shows that the Swedish rent control system however, applies nationwide, except for annual rent increases, which are set locally through negotiation.

Rent control provides substantial in-kind benefits to tenants of social housing. In the Netherlands these benefits equal almost 40% of the market rent on average. We show that rent control benefits for the 10% tenants with highest income are 5% points higher than the benefits for the 10% with lowest incomes. Next we provide evidence that rent control influences the housing tenure choice decision. We find that on average rent control reduces transitions within the social housing sector, but not transitions from the social housing sector. Only the 20% tenants with highest incomes postpone moves out of social housing in response to rent control. This suggests that the inequitable distribution of rent control benefits is prolonged by the reduction in transition rates out of social housing. It also suggests that recent policy in the Netherlands that reduces rent control benefits for high income households can increase the mobility of those affected.

Abolishment of rent control in residential market is seen as one of the solution to Swedish housing shortage. Politicians believe that it will provide higher incentives for investors and property companies to construct more rental housing and to stabilize property prices in the long-run.The aim of the study is to find out if the abolishment of rent control in housing market leads to more residential investments and more stable returns on it in the long run.The method is a comparative analysis of returns on residential investments in two case countries - with and without rent control - Sweden and Finland. Data covers the time period of 2000-2015 and include total, capital and income return on residential investments from Property databank in Sweden and Finland. The study considers the effects of abolishment of rental regulations on residential market with control for changes in fundamental variables like GDP, income, population growth, dwelling stock and interest rate.The results of the study demonstrate that abolishment of rent control leads to more stable total returns on residential investments in the long run. It also leads to higher level of income return and less fluctuation in capital return in the long run.

After World War II, the whole of Europe faced a severe housing crisis, both quantitative and qualitative. This shortage was the consequence of building destruction during the war, but also of inadequate new construction between 1918 and 1940 due to the economic recession and the low return on income property (Lefevre, Mouillart et Occhipinti, 1991). From the very start of World War I, most of the belligerent countries introduced a system of rent controls to protect tenants during wartime'1). And this situation persisted once peace was restored, notably due to the spiralling inflation caused by the economic crisis of the 1920s (Louvot, 2001). World War II simply aggravated the housing shortage, especially in countries that had suffered massive destruction(2). The housing problem after 1945 was so critical that state intervention became legitimate and indispensable. All governments were obliged to implement reconstruction policies. Some relied on private initiative (North America, Switzerland), while others focused on the construction of social housing (Netherlands), or granted numerous state subsidies in favour of the most disadvantaged populations (Germany, France, Belgium). These policies aimed to stimulate new construction by encouraging households to buy their own homes and by favouring investment in income property. But to achieve this second goal, the first task was to restore the confidence of private investors who had turned away from income property due to dissuasive rent controls and regulations covering rented accommodation.It was against this European post-war backdrop that the housing law of 1 September 1948 was passed in France. Its purpose was to free up the private rental market by deregulating rents charged on newly constructed dwellings in order to encourage private investors back into the sector (Merlin 1988). First, we will present the content of the 1948 law and the characteristics of the dwellings and their occupants covered by its provisions. Then, using data from the Biographies et entourage (event histories and contact circle) survey conducted by INED in 2001, we will examine the impact of the 1948 law on the residential trajectories of Paris region inhabitants and, more generally, its role in the Paris region housing market over the last fifty years(3).I. A legendary billContrary to what is sometimes claimed, the law of 1 September 1948 marks a turning point with respect to the successive rent control regulations in force prior to that date. Liberal in intent, it provided a framework for lifting rent controls on dwellings built before 1949 and deregulating rents on new dwellings to encourage investors back into the sector (Prost 1982). The aim was to find a compromise between the interests of tenants and those of the owners (Fribourg, 1988). In this context, rent controls were used as an emergency measure, applied in municipalities where the housing shortage was most severe. The scope of the law was limited to urban areas, districts destroyed by the war and expansion zones, i.e. centres of industrial and urban development.With the 1948 law, the notion of tenant protection appears for the first time in French housing history. The law introduces the to remain in the for tenants, whatever the starting date of tenancy. It nevertheless provides for certain exceptions, notably if the tenant does not live permanently in the dwelling (less then eight months per year). If a tenant is legally evicted (after renovation work for example), he/she is not rehoused unless the eviction is in the public interest. The right to stay in the premises, an exceptional advantage for the tenant, is limited however by the owners' right to recover the premises if they wish to house themselves or members of their family or to replace the premises with new dwellings. In this case, the owner must rehouse the tenants in premises of a similar nature.Though liberal in intent, the law of 1 September 1948 has practically frozen the rents charged in old private sector dwellings, since the tenants' right to remain in the premises prevents owners from recovering their property. …

Rent control is still an important type of government regulation of housing markets in many countries and numerous researchers have studied its implications for allocation, welfare and investments in housing. The present paper aims to improve our understanding of the effect of second-generation rent control when it is applied only to one sector of the rental market. It is diagrammatically shown that the welfare effects are very different between a universal and a limited application of rent control. Studying the Danish case of second-generation rent control, lower rents are found in controlled sectors and a minor increase of the rent in the uncontrolled sector. Using the area of living space in the dwelling as a measure for housing consumption, evidence is also produced of both overallocation and underallocation of housing in the rent-controlled sectors; as envisaged by economic theory.

The (re-)introduction of tenancy regulation in the form of rent controls, tenant protection or supply rationing is back on the agenda of policymakers in light of rent inflation in many global cities. While rent controls promise short-term relief, economists point to their negative long-run effects on new construction. This study presents new long-run data on both rent regulation and housing construction for 16 developed countries (1910–2016) and finds that more restrictive rental market legislation generally has a negative impact on both new housing construction and residential investment. This is especially true for strict rent controls and housing rationing measures in the post-1960 period. Tenancy security can on average also dampen construction activity. The negative effect is overall less significant and strong in magnitude than expected and may have been offset by exemptions for new construction, by compensating social housing construction and by a flight of new construction into the owner-occupied sector. Still, on average, rent controls came at the cost of less construction activity.

Rent controls are probably the best researched and understood form of price control in economics. Their consequences are widely regarded as being extremely damaging and UK experience confirms this. In Britain, the period of rent controls between 1915 and 1989 was associated with the private rental sector collapsing from close to nine-tenths of the housing stock at the start of the 20th century to close to one-tenth by the late 1980s and early 1990s. When rents are held below market rates, outcomes can be expected to deteriorate over time. There is a substantial literature outlining the negative effects on the quality of rentable property, as well as substantial economic efficiency costs arising due to misallocation and lower labour mobility. Interest groups and politicians are now advocating what are known as ‘second generation’ rent controls, which entail rules governing increases in rents within a tenancy together with regulation of the length of tenancies. In the UK, the Labour Party has advocated such controls. Whilst there would be complete freedom for landlords to set rents between tenancies, rents within tenancies would be benchmarked so that increases are linked to average increases within a locality, some measure of inflation, or both during a three-year contract. Furthermore, tenants would have great security of tenure. Since rents can alter between tenancies, tenancy rent controls cannot improve affordability for any group other than in the very short term. It is most likely to simply change the timing of rent costs over a tenancy by raising initial rents. Indeed, the existence of these controls may even increase market rents overall as a result of greater regulatory uncertainty and the business risk of increased security of tenure raising the returns that landlords require. It is likely that these so-called tenancy rent controls will improve security for some tenants. However, this will come at a cost to other tenants. Experience suggests that landlords are more likely to treat tenants badly and lower their quality of service in other ways if security of tenure is enforced by law. Furthermore, there is no evidence that existing ‘secure’ contracts are unavailable in the UK when tenants are willing to pay for them. Some claim that these tenancy rent controls will not be damaging because they exist in Germany, where the market is regarded as a tenant-friendly environment. However, there are huge structural differences between Germany and the UK – not least that there is significantly more development of new dwellings in Germany, making rent levels much lower in general. Planning liberalisation would clearly be a welfare enhancing policy and would reduce the cost of living. Tenancy rent controls would not be welfare enhancing and are, if anything, likely to increase the cost of living. Tenancy rent controls would therefore be treating the symptoms of high rental costs to appease a particular interest group. The fact that the beneficiaries are obvious and well-organised whilst those who suffer are dispersed would make this is a potentially damaging policy, which could be very difficult to reverse.

The importance of safe and stable housing for individual and community wellbeing is widely acknowledged. However, for the one third of Americans who rent their homes, housing-related stress and precarity (residential alienation) may undermine stability and a sense of home. Rent control is perhaps the most well-known tenant protection policy in the United States, but it remains highly controversial and its efficacy has been debated for decades. This research is the first academic inquiry to examine the policy through the experience of residents of rent-controlled housing. In academic discourse dominated by quantitative inquiry from the discipline of economics, this study contributes a qualitative, micro-level perspective that is critically missing from our understanding of the policy. Santa Monica, California is known nationally as an exemplar of strong rent control and a pro-tenant local government. Over forty years after the implementation of rent control it also has some of the highest market rents in the region. This case study draws on a number of theoretical constructs to explore the extent to which residents of rent-controlled housing in Santa Monica experience dwelling/at-homeness in their home environments, and the nexus between these experiences and tenant protections like rent control. I synthesize findings from 30 in-depth, semi-structured interviews with Santa Monica renters with archival media articles, interviews with tenant lawyers and City staff, City documents and multifamily housing industry materials. My findings confirm many of the positive policy outcomes that renters have described for decades, while simultaneously illustrating the detrimental effects of state-level legal loopholes on participants' ontological security. Along with several other policy recommendations, this study points to the urgent need to close these loopholes by repealing Costa Hawkins and the Ellis Act. On a larger scale, it articulates the irreconcilable tension between housing as home and as a commodity investment vehicle, pointing toward a need for a de-commodified housing system.

Housing affordability and domestic violence: The case of San Francisco's rent control policies.