Unit 1 Micro: Revision on Maximum Rents in Housing

Geoff Riley

1st April 2012

The housing sectors of many towns and cities around the world have often been the target for different forms of government intervention including planning regulations, subsidies and direct price controls.

Price controls are legal restrictions on how high or low a market price may go. They can take two forms: a price ceiling, a maximum that price sellers are allowed to charge for a good, or a price floor, a minimum price buyers are required to pay for a good.

Our focus in this blog is the decision by the authorities in New York to extend arrangement for rent controls for a million rent-regulated units in the Big Apple. This provides an opportunity to look at the basic supply and demand analysis for housing rent controls and build a critical evaluation of some of their effects.

Maximum rents have been in place in New York City since 1969, and restrict either the price of a rented apartment or limit the annual increases in rent. A decision in March 2012 means that New York Rent Controls have been extended for another three years.

The economic and social case for rent and landlord regulation

The fundamental aim of controlling rents for a sizeable part of the rented property market is to improve affordability of rental apartments especially for vulnerable groups on lower incomes including large working families on low wages and the elderly who rely on pensions and state welfare assistance. Maximum prices are often justified on grounds of equity and fairness.

Just recently the left-wing Labour MP Jeremy Corbyn was campaigning for maximum rents in his constituency of Coventry arguing that the rapid rise of private sector rents and cuts in housing benefits were causing misery and huge inconvenience for many of his constituents. Lower rents in the city ought - in theory at least - to allow more people to live closer to work or to their extended families, and give them more flexibility about where they can live and find a job. Rent controls are often accompanied by laws offering tenants security of tenure, something that are important when people are trying to settle into a new area and build some roots.

Regulations are also need to protect tenants against landlords who are very reluctant to repair or improve the properties and who in some cases allow their properties to worsen into a dangerous, life-threatening state.

The next set of analysis slides takes us through what can happen when maximum rents are introduced.

Key analysis point: To be effective a maximum price has to be set below the free market price.

If landlords decide that they cannot make a satisfactory rate of return by selling rented properties in the market because of the maximum price, they might decide to withdraw some properties from the market. At the maximum rent, the long run supply curve shows a smaller quantity of rented properties available for tenants – which with a given level of market demand cause the excess demand (shortage) in the market to increase

Critical Evaluation:
Here are some of the key criticisms of rent controls as an intervention policy:

1. Rent regulations can create larger shortages on rented property in the longer term
2. Landlords get a smaller return from upgrading and maintaining their houses - they spend less on their properties
3. There are negative externalities (external costs) from the deterioration in the quality of the rented housing stock
4. Rent caps increase the incentive to build luxury apartments only - developers can build luxury housing that doesn’t come under rent control
5. Caps encourages people the live alone which increases the shortage of properties
6. People spend more time searching for the dwindling supply of properties available - an opportunity cost of lost time
7. People in capped apartments have an incentive to stay - limiting supply for people moving into the city
8. Caps are often ineffective - in New York City, lots of people living in rent-regulated apartments have a second home in the suburbs
9. The maximum rent does not address the fundamental problem which is a lack of good quality supply of rented apartments

The general consensus would seem to be that rent controls / maximum rents generate problems of

(i) Allocative inefficiency

(ii) Equity issues especially when there are rich families in New York living for decades in rent-capped apartments

(iii) Unintended consequences - for example the possible stifling of new building for rent

The result is government failure all of which can make the shortage of affordable apartments worse in the long term. For example, the share of free-market rented properties in New York has grown over the years and must be set to continue.

Video Resources

Wall Street Journal: Who are Rent Control’s Biggest Beneficiaries?

Guardian (April 2012): Newham housing situation is a legacy of Margaret Thatcher’s policy on rent

Will The Supreme Court End New York’s Rent Control Laws?

UK Rented Housing Market (August 2012)

UK private rental sector must grow, says Montague report

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Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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