Dr. Konstantin A. Kholodilin is the author of Rent Control: Does it work? from the Institute of Economic Affairs and Senior Researcher at the German Institute for Economic Research (DIW Berlin).
Housing plays an important role in our lives: it provides shelter, a store of value, and a matter of prestige. Costs related to housing represent by far the largest item of household expenditure.
In urban areas, tenants make up a large proportion of population. In some cities, like Berlin and Vienna, more than 80 per cent of households live in rental premises. Rising rents deteriorate the financial situation of such households leading to demands to impose rent control, which implies restrictions on the level and/or increases of housing rents.
housi The economic textbooks also warn from using any type of price control, since far from solving the problem, it treats the symptoms and creates additional issues.
However, what are the findings of the researchers who focused on the effects of rent control? Do they agree or there is no consensus among them? To answer this question, I carried out an overview of the empirical literature investigating the effects of rent control which includes over 200 studies. These studies cover almost 60 years of research, starting in 1967, and almost 100 countries in all inhabited continents.
I identified 26 housing market, socioeconomic, and demographic effects of rent control found in the literature. When ordered by the number of studies and, thus, by their prominence from the perspective of researchers, the first five effects are controlled rents, mobility, homeownership, construction, and housing quality.
The most prominent effect of rent control is, unsurprisingly, its impact on controlled rents; that is, on rents paid by the tenants of those dwellings subject to rent control. The picture is rather unambiguous: 56 out of 65 studies point to a statistically significant negative effect. Thus, rent control is quite effective in capping rents.
By contrast, rent control appears to lead to higher rents for uncontrolled dwellings. The imposition of rent ceilings amplifies the shortage of housing. Therefore, the waiting queues become longer and would-be tenants must spend more time looking for a dwelling.
If they are impatient or have no place to stay (such as in the houses of their friends or relatives) while looking for their dwelling, they turn to the segment that is not subject to regulations. The demand for unregulated housing increases and so do the rents.
The impact of rent control on residential mobility is also clear-cut: nearly all studies indicate a negative effect of rent control on mobility. Two potential reasons for this phenomenon are put forward. Initially, residents living in controlled dwellings have limited motivation to relocate. They possess concerns that finding a residence of similar quality at such a low rental cost might be challenging.
This situation can yield unfavorable outcomes for the job market, as reduced residential mobility translates to less adaptable responses to shifts in the labor market. When economic conditions worsen in their city, tenants in controlled dwellings are less inclined to move to areas with more promising employment prospects.
Secondly, diminished residential mobility could be attributed to heightened tenure stability. Through rent regulation, this policy alleviates the financial strain of tenant households, consequently reducing the likelihood of eviction.
Most empirical studies find a negative influence of rent control on new residential construction: the stronger the rent control the fewer new housing units are built. Approximately two-thirds of the studies indicate a negative impact, while several studies discover no statistically significant effect whatsoever.
The vast majority of empirical studies indicate that rent control leads to a deterioration in the quality of those dwellings subject to regulations. The landlords, whose revenues are eroded by rent control, have reduced incentives to invest in maintenance and refurbishment, thus they let their properties wear out until the real value of the dwellings decreases and becomes equal to the low real rent.
In the case of homeownership effects, the picture is a bit less clear-cut: multiple studies are pointing in different directions. Nevertheless, the majority of studies predict an increase in the homeownership rate due to rent control. This can be explained by the desire of landlords to get rid of those properties that bring them insufficient rental revenues. Therefore, the landlords sell their dwellings or convert them into condominium ownership.
Another explanation is that the newcomer households find no vacant dwellings in the market due to reduced residential mobility of the tenants occupying rent-controlled housing and are forced to buy property, even if this requires a large financial effort. Thus, rent control while aimed at the protection of tenants may end up in the erosion of the private rental sector.
While studies included in my overview focus exclusively on the private rental sector, social housing obeys the same supply and demand logic. Keeping rents low is likely to lead to the same negative consequences (less construction, lower quality, and lower residential mobility) in both private and social rental housing.
