Rent controls can be broadly defined as governmental regulations that limit landlords’ ability to set and increase rents freely on residential properties. Rent controls often coincide with a host of other regulations concerning landlords’ responsibilities and tenants’ rights in a rental arrangement. Most rent controls are one of two types: rent ceilings, which place hard limits on the amount of money a landlord can charge for a rental unit that is based on the unit itself; and tenancy rent control, which is a set of regulations that limit the actions a landlord can take during the tenure of a sitting tenant, including limitations on landlords’ ability to increase rents.
Rent ceilings (or first-generation rent controls) are the most commonly studied type of rent control, but have become quite uncommon in practice. Most rental ceilings came into being at the end of World War II (1939-1945) to help mitigate expected disruptions in the rental housing market due to the demand shock of veterans returning from overseas service in the war. The most well-known example is in New York City, where a number of rental properties are still controlled under a rent ceiling. Tenancy rent controls (also known as second-generation rent controls) are much more common in the contemporary world. Most tenancy rent control laws were enacted in the wake of the global economic downturn of the mid-1970s that brought high inflation, and many were then abolished in the 1980s and 1990s. Tenancy rent controls are still relatively common in North America and Europe and elsewhere. Tenancy rent controls are typically one component of a host of policies that strengthen tenants’ rights in the rental housing market. In addition to limiting the amount of rent increases a landlord can impose on a sitting tenant, they often regulate or prohibit the practice of collecting nonrefundable deposits, limit the ability of landlords to evict sitting tenants, and restrict the use of fixed-term contracts.
One particular aspect of tenancy rent controls that differs considerably from rent ceilings is the “vacancy decontrol” provision most employ. This provision frees landlords to set rents freely once a rental unit becomes vacant. The common justification for tenancy rent control is the shift to the landlord in the balance of power once a tenant has taken up occupancy in a rental unit due to the expense to the tenant (both financial and emotional) of vacating the unit and moving elsewhere. As arbitrary evictions are generally prohibited, it is necessary to limit the landlords’ ability to increase rents on sitting tenants so that they are not deliberately priced out of the unit to affect the same result as an eviction.
Rent ceilings are fairly straightforward to analyze and have thus secured a place in almost every basic textbook on economics. The artificially low rents created by these laws create excess demand for apartments. This excess demand would normally drive prices up, but the regulation prevents this, leaving a group of potential tenants unable to find housing. Those who do secure housing are better off as they are paying less than they would in the absence of the policy. Landlords receive less than they would in the free market, which serves to limit the supply of apartments. So there are fewer units available under rent control than without, and there are winners and losers among those who want housing at the rent ceiling price: the winners are those that are able to find a rental unit and who pay the depressed rent, and the losers are those that cannot find housing.
Tenancy rent controls are less straightforward to analyze. Since initial rents are generally set to market clearing rates, the problem of excess demand is not realized. However, as rental increases on sitting tenants are limited, it creates a situation where apartments are more valuable for those that are able to remain in them for a long time as they get the benefit of diminishing real rents, and these types will therefore bid up initial rents. Those that are more peripatetic are likely to find initial rents too high as they will not be able to realize the full benefit of decreasing real rents. The result in this situation is a different type of winner and loser. The winners under tenancy rent control are those that can remain in an apartment for a long time (perhaps older, more established individuals) and the losers are those that need to move more frequently (perhaps younger, less established individuals). In the end, landlords are able, through the setting of high initial rents, to do just as well under tenancy rent control as in an unregulated market and therefore supply is not affected.
SEE ALSO Regulation; Wage and Price Controls
Arnott, Richard. 1995. Time for Revisionism on Rent Control? Journal of Economic Perspectives 9 (1): 99-120.
Basu, Kaushik, and Patrick M. Emerson. 2000. The Economics of Tenancy Rent Control. The Economic Journal 110 (466): 939-962.
Niebanck, Paul L., ed. 1985. The Rent Control Debate. Chapel Hill: University of North Carolina Press.
Patrick M. Emerson