Rent Control: an Introduction

1- INTRODUCTION
Rent and rent control are factors that often influence our lives in a major way. Many of us live in rented apartments and pay a regular fixed amount of money every month to a person who owns the apartment that we call home. Those of us lucky [and rich] enough to own several houses often rent them out for a pre-determined amount of money which the occupants of these houses pay us every month. Thus every month, a certain amount of money changes hands in this manner. This process is repeated across the world by hundreds of millions of people. The people who are not the actual owners of the premises which they occupy and who pay money to guarantee their right of residence are called tenants while the real owner who is compensated for renting out his premises is known as the landlord. The money that is paid every month by the tenant to the landlord is called ‘rent’. Rent can take several forms but in this paper I am restricting the definition to include only the payment of money by the tenant to the landlord in consideration for a allowing the former to occupy a house or a portion of a land or building which can then be used for commercial purposes.

It would an understatement to state that the issue of rent control has generated a passionate discussion amongst economists. This is one topic that is seen to be distinct from ‘dry’ economic theories, and infact, the twin issues of rent control and governmental interference in the determining of rent rates have been responsible for establishing or bringing down governments, both at the local and at the national level. First of all I would like to arrive at a basic understanding of the functions of rent and the meaning of ‘rent control’. Rents serve two functions essential to the efficient operation of housing markets and to the economy as a whole:

• They compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers; and
• They provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock.

Rent control, like all other government-mandated price controls, is a law placing a maximum price, or a “rent ceiling,” on what landlords may charge tenants. If it is to have any effect, the rent level must be set at a rate below that which would otherwise have prevailed. To put it simply, rent control relates to the fixing by the government of rent rates at a particular level, so that all tenants across the board who fall in a particular category pay the same amount of money to their landlords. Governments seek to enforce these controls through instruments of law by means of ‘rent control legislations’. These rent control legislations lay down the basic framework within which the government can enforce its strictures. They are seen to be weapons in the hands of the tenants against the profit minded tendencies of the landlords. The State steps in to ensure that by standardising rates at which properties are rented out, it ensures that a large number of its citizens have access to housing at affordable rates, something which a de-regulated market would have made impossible for them. It is a common misconception that rent control is the invention of communists and is followed only in socialist countries, but many will be surprised to note that it is prevalent across the world. Even to this day, rent control legislations flourish in the heart of free market capitalism-the United States of America.

The best-known example of rent control in action would be the rent control regime in place in New York City. Rent control in this city enslaves two million tenants and landowners to a control mechanism that has done more harm than good. In North America, economists are virtually unanimous in their condemnation of rent control. It is interesting to note that in a survey of economists of the American Economic Association, fully 93 percent agreed, “a ceiling on rents reduces the quality and quantity of housing available. “In India, the best examples of rent control would be the situation prevailing in Mumbai and Delhi. Rent control is a major election issue and political parties tend to procrastinate and prevent reforms in the archaic rent control laws in order to please their vote banks. The pathetic situation of the housing sector in the nation’s capital New Delhi serves as a perfect illustration of the politicization of rent control. In this context it is worth noting that fresh rent control regulations have been implemented in Maharashtra, Karnataka and Madhya Pradesh though Delhi is still stuck with an antique piece of a legislation that has led to a great deal of discontent and frustration amongst all sections of society. This paper will devote space to the arguments for and against rent control from both the American perspective and the Indian perspective.

There are some fundamental points that this paper will seek to address. First of all, I will advance the argument that the abolition of the rent control regime can result in an across-the-board lowering of rents. In doing so this paper shall prove how rent control results in actually driving out affordable housing from the areas that are under the regulation. To support this argument, examples of the experiences of American cities in the pre and post regulation scenario will be quoted. Secondly, the paper would like to explode the myth that rent control has benefited the poor and the vulnerable sections of society by providing them with affordable housing options. Thirdly emphasis will be placed on the government’s interference in a nation’s housing markets, which has lead to stagnation in the urban sector of the economy and has lead to profound economic and social consequences. This is because ultimately, the issue of rent control needs to be viewed in the larger perspective of urban development, rather than as a mere conflict of interest between tenant and landlord. Though these issues tend to overlap, they have been dealt with it in a concise yet cogent manner.