The negative consequences of rent legislation have become so massive and perverse that even many of its former supporters have spoken out against it. Existing rental units fare poorly under rent control. Even with the best will in the world, the landlord cannot afford to pay his escalating fuel, labor, and materials bills, to say nothing of refinancing his mortgage, out of the rent increase he can legally charge. The sitting tenant is, in a sense, protected by rent control but, in many cases, receives no real rental bargain because of improper maintenance, poor repairs and painting, and grudging provision of services. The enjoyment he can derive out of his dwelling space ultimately tends to be reduced to a level commensurate with his controlled rent. Apart from these factors, there also exists significant ‘consumer entry’ costs that exist in the rent control market and which tend to add vastly to the expenses of the potential tenant. Whenever a person wishes to obtain housing in a rent-controlled city, a considerable amount of time and money is spent in locating a suitable apartment. Invariably, consumers find it next to impossible to penetrate the closed market and are then forced to rely on the shadow market to fulfill their needs. Today, what is known as the “old lady effect” is sweeping through those countries that still retain rent control legislations. An American economist Walter Block has explained this by giving the example of a two-parent, four-child family that has occupied a ten-room rental dwelling. One by one the children grow up, marry, and move elsewhere. The husband dies and the lady is left with a gigantic apartment. She uses only two or three of the rooms and, to save on heating and cleaning, closes off the remainder. Without rent control she would move to a smaller accommodation. However, rent control makes that option unattractive. Economists say that these practices further exacerbate the housing crisis and that the repeal of rent control would free up thousands of apartments very quickly.
Some people wish to be a bit more cautious on this count and feel that a blanket ban on rent control would tear apart the social and cultural fabric that exists in cities. According to this school of thought, landlords must buy tenants out of their controlled dwellings. However, it is submitted that making property owners pay to escape a law that has victimized many of them for years is not an effective way to make them confident that rent controls will be absent in the future. The only thing that can be achieved by the ‘buy back’ alternative is that landlords can silence the opposition, or literally ‘buy them off’ and freeze rent control in the short run. One argument in favour of abolition of rent control will be that it will put an end to the withdrawal of apartments from the markets and make them accessible to a lot more people. New York in 1997 had only 3 percent of its apartments for sale falling in the regulated sector. The vast majority of the market for apartments was therefore fulfilled by the expensive and unreliable unregulated sector, and this was in a city where regulated housing makes up 63 percent of the market. In effect what the true situation in rent control housing markets today is that with the regulated portion market locked away, all new demand is funneled into the unregulated sector-the shadow market. Eventually the competition for these limited numbers of apartments creates highly inflated prices. It is like squeezing a balloon at one end–the pressure will simply create a bulge at the other end.
Normally, when people cannot find accommodation in the rent control areas, they will then be at the mercy of the shadow market where the costs of houses are considerably higher. It must be clarified at this juncture that prices in the deregulated section of the market do not represent the actual value of property in those areas under rent control. Shadow market prices are not the actual prices, yet this huge differential between the regulated market and the shadow market strikes terror into the hearts of a rent-controlled population and fuels the fires against deregulation. The American experience with deregulation has proven that an abolition of rental laws will not enable landlords to double and triple rents; on the contrary, the overall effect would be far more modest. The single biggest concern with abolishing rent control is the perception that all landlords will increase their rents in an unreasonable manner, leaving many former tenants in the lurch, and forced to seek out other alternatives. One solution that definitely cannot be used as a method of deregulation is vacancy decontrol. Under this system, apartments are deregulated only when the current tenant leaves or dies. The truth is that tenants in regulated apartments never move, since leaving an apartment means being thrown into the shadow market, therefore, it may take 20 to 50 years before the market resumes its normal shape. What is even worse is the prospect of landlords taking advantage of vacancy decontrol and thus using unlawful methods to pressurise their tenants from vacating. This system gives an incentive to the owners to do everything from hiring thugs to setting fire to their buildings to get rid of low-rent tenants.
By compiling relevant statistics and comparing cities that have regulated rent control environments with those that do not, economists have successfully proven that abolition of rent control will lead to an across-the-board lowering of rents and that this would lead to a Pareto optimal solution. Basu and Emerson in their paper visualise reform in the area of “tenancy rent control” or “second-generation rent control”- a model best exemplified by the rent control laws in New York. The model allows landlords to freely choose a nominal rent when taking on a new tenant (the tenant is of course free to reject the offer), but places restriction on raising rents on, or evicting, a sitting tenant. This causes erosion in the real value of rent if a tenant stays on for too long, whenever there is positive inflation in the economy, which for most economies is true most of the time. This means that landlords will prefer short-staying tenants to long-staying tenants. Under such a regime, if inflation exists, landlords prefer to rent to short-staying tenants. Since departure-date-contingent contracts are forbidden and a landlord cannot tell whether a tenant is a short-stayer, an adverse selection problem arises. In this case, the equilibrium is Pareto inefficient. Since a tenant’s type will be better known to the tenant than the landlord, the tenancy market will be characterized by asymmetric information. In most cases, the tenants stay on for very long periods of time and if at all they vacate, the house is passes on to friends or relatives. The latter pay what is known as ‘key costs’- the value of the property in the market at that point of time. Only rarely does the rent control market allow for mobility amongst the tenants. What Basu and Emerson state is that it can be shown that the presence of tenancy rent control will, in general, result in a Pareto sub-optimal equilibrium, whereas a system of free contract will be Pareto optimal. Free contract will lead to overcoming the problem of asymmetric information and will contribute to efficiency in the rental market; resulting in lower rents and that makes all tenants better off.
Thus while free contract will produce a Pareto optimal solution, Basu and Emerson believe that such a system would entail certain responsibilities on the part of the government. The government needs to provide a broad framework within which the contracts can be enforced. In addition to this, commonsense must be exercised to limit the terrain of permitted contracts to ensure that no party commits a breach of trust. If the government chooses to play an active role in bringing about deregulation, it could smoothen the process to a large extent. Increased construction of housing is the only proper remedy to the living space shortages in cities today. One way of stimulating the supply of affordable housing is through direct financial assistance to needy renters, whose increased purchasing power will lead to expansion of the quantity and quality of housing in the local market. Federal and State programs to this effect are in place in the United States. In addition, targeted programs to subsidize the construction or rehabilitation of affordable housing can be an effective complement to direct renter assistance and to ensure that new tenants will not be asked to pay a very high amount in order secure an affordable house of their liking.
A step-by-step deregulation can be considered an effective alternative to a complete ban on rent control. This has already been tested successfully in America where in 1994; the State of Massachusetts lifted rent controls immediately in the three cities, but a two-year extension was allowed for tenants qualifying for the federal definition of “low income”-less than 60 percent of the median for the region or 80 percent for the elderly and handicapped. These groups were finally deregulated on January 1997. Though such a program would take a longer amount of time, there does not appear to be any reason why it cannot work in India. Even then, a ten or fifteen year step-by-step phase out would be sufficient to root out rent control. Of course this would entail a great deal of co-operation and mutual trust between the government, landlords and the tenants, a situation which one cannot safely foresee any time in the near future. In Boston, at around the time when deregulation was coming into force, the landlords had helped their cause enormously by setting up the reserve bank of 200 apartments for emergency relocations. This was to provide a kind of a ‘safety net’ to those tenants who had been recently evicted and who were now seeking alternative accommodation.
A similar project in India in a city like Mumbai would need a thousand times the number of apartments, which could be used by former tenants, who would be on the lookout for accommodation in a deregulated market environment. Inspite of these disadvantages, an unhurried but well planned approach towards abolishing rent control should be sufficient to work in Indian cities. The only way to encourage private investment [which would boost new housing construction activity] is for the government to give an assurance that there will be no going back to the restrictive provisions of rent control legislations, which act as a severe deterrent to those wishing to consider the business opportunities in the housing sector. Obviously, until and unless a clear policy in favour of a phased withdrawal of rent control emerges, no real estate owner would be willing to spend enormous sums of money in constructing housing estates and then leasing them out to tenants at rates twenty times lower than the prevailing market rates.
Rented Building Owners Association Kerala 
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