Introduction
Rent controls emerged for the first time in Canada in the city of Ontario following several years of intense agitation. Their entry was ushered by the enactment of the national Housing Act. The enactment was as a result of a sharp increase in rental prices by landlords, relentless lobbying by unions, and a dramatic rise in demand after the Second World War (Anonymous 1). However several years later, following agitation by business interests the government bowed to their demands and the rent controls were withdrawn. In 1975 the construction of apartments was slowing down and the landlords were outraged by the idea of the government plan to reintroduce rental controls following a spate of sharp rent increases in the country. The landlords responded by ceasing construction of houses all together leading to a serious housing crisis. Many of the city mayors by mid 1975 seemed intent to implement the proposal if passed to save the tenants who were being exploited by the landlords.
Advantages of rental controls
Protection of tenants from exploitation
Rental controls are argued to be the ultimate cure for the exploitation of the tenants by landlords. According to Friedman, Block, & Hayek (273), rental controls were instituted to curb the trend of profiteering by the landlords. Early in the Second World War, landlords had taken to evicting victims of the war who were moving where houses were becoming scarce (Bothwell, Drumond & English 54-55). Following continued lobbying by interest groups and a call for the politicians to implement their election campaign pledges made during the 1975 election, rental controls were reintroduced in 1986.
Flexibility to inflationary pressures
One of the major strengths of the rental controls is the ability to adjust to various inflationary pressures. By setting the rental cap at 3.8% which is composed of the consumer price index plus 2%, it gave room to cushion investors against economic shocks resulting from inflation. This was a very positive move considering that it was a major concern to the investors which became a major deterrent to investment in housing. This has contributed to the recent explosion in the construction industry with vacancy rates shooting up drastically to levels of about 7 to 12% and some markets recording up to 15%. This empowered the tenants as landlords scrambled for them leading to better quality housing and services. Major renovations and refurbishments were also carried out by property owners to attract the hard to get customers.
Stabilization of the rental prices
Proponents of the control have argued that they serve as stabilizers against market fluctuations of the rental rates. For example, tenants in Ontario have hailed the policy as an important stabilizer to cushion them against price hikes and the consequent evictions by landlords (Herald 3). This policy however does not disadvantage the landlord as he is allowed to adjust rent for a new tenant but not for an existing one. This protects the tenant from the unwarranted excesses of the landlords.
Shelter is a basic need
Unlike many other commodities, housing is a basic commodity that can not be left entirely to be determined by the market forces as that would lead to immense suffering of the public as has been observed before. Housing decisions present tenants with very limited choices at their disposal which makes rental controls reasonable. The forces of demand and supply sometimes lead to uncontrollable increase in prices especially when there is excess demand which is unhealthy to the welfare of tenants.
Increasing affordability
Rental controls have an effect of increasing affordability of housing by preventing fluctuations in rental prices of housing. They make housing more affordable to the tenants at no extra cost according to Turner (2). The sporadic rise in the housing sector is checked hence enhancing the ability of tenants to retain their houses. In the absence of controls, proponents argue that landlords tend to increase rates at their own will leading to frequent evictions which has adverse effects especially to the poor population. Price controls hence shield tenants from price increases that result from spurts in demand resulting from the changes in migratory patterns and other factors. These have been known for a long time to cause homelessness in several states when such tendencies are not controlled.
Rampant homelessness
Proponents of this debate have argued that there is a biting housing shortage in the US rendering homelessness to national prominence. Vagrants and beggars are becoming a common sight in many of the American cities. The situation has partly been contributed by the release of thousands of mental patents, high rate of unemployment and a rise of illegal immigrants to Florida, Detroit, and Houston. This caused a serious human crisis given that the rental prices have been skyrocketing drastically due to increasing demand in the absence of rental control policies. This has thus been advanced to campaign for price controls to militate against this problem.
Disadvantages of Rental controls
Irregular application of the rental controls
Critics of the controls have directed an accusing finger at the non-uniform approach used by various states to implement these controls. For example, the Manitoba and Ontario city authorities pegged theirs at one percent less than other cities, a move that had an effect of discouraging the efforts of investors due to the unfair practices. As a result investment in the two cities was depressed leading to a biting housing crisis. Many companies resulted in canceling and postponement of improvement and construction projects dealing a cropper to an already ailing industry. Related to this was an unchecked increase in inflation rates above the rent ceiling.
Disincentive to housing investments
Opponents of the controls argue that the ceilings on the interest rates create disincentive to investors who respond by cutting back on their housing investments as a result of lower returns relative to other industries. The ceilings usually depress the profit margins discouraging any housing construction and improvements on housing. As a result it leads to shortage of housing and poor quality of housing as landlords and property managers tend to neglect them. For example in Saskatchewan which removed rental controls, the private enterprise in the housing sector has been very robust leading to the high supply of housing which acts as a control for the prices by itself. Furthermore, increases in the cost of housing are largely out of control of the landlords but are rather a factor of changes in utility costs and maintenance costs. It was observed that removal of rental controls in the city did not result in mass eviction and economic hardships as had been advanced by proponents of the policy.
Distortions in the market
When a government policy interferes with the forces of supply and demand in the market, distortions in the market result. Any economy operates efficiently and is able to optimize its gains when the market is left to the forces of demand and supply. Any interference of pricing of housing by the government by placing a ceiling on the rental prices affects supply negatively leading to a shortage as was witnessed in Ontario. In normal circumstances where there are no controls, an increase in demand for housing gives incentives for investors to construct new houses to tap on the rising demand. At such a time prices tend to be high and increasing till they reach a point where demand of houses is equal to supply and investors have no incentive to supply more. This is the optimal level where the marginal cost of constructing any additional unit of housing is equal to the marginal benefits. If more investors enter the market, there is excess supply and the existing landlords are forced to adjust their prices downwards. According to Moreton (12) leaving the market forces to regulate the sector leads to competitiveness which offers incentives to property managers and landlords to restore their houses into better standards.
Reversed benefit to the poor
Rental controls are meant to cause relief to the poor but they have been known to be more detrimental than beneficial to the same people they are targeted at. For example the low rents encourage the more affluent people to hang on to their houses longer even when they no longer require them leading to shortage in housing (Moreton 8). From this it is evident that those who benefit from such a policy are not those intended but those who can afford good housing. This leads to gross misplacement of the original objectives of the authorities.
Deterioration of tax collection
As a result of adverse effects that result from tax controls to the revenue base of the property owners, government revenue collection from property taxes reduces. This impacts negatively to the government operations further compounding the misery of the poor in the long run. A lull in the construction industry reduces the incomes of households due to loss of employment leading to the reduction of the tax base of the government. This is further worsened by reduction in expenditure as people cut on their spending which in turn results in poor standards of living.
Promotion of homelessness
Due to their tendency to discourage new investments in housing, rent controls along with zoning leads to homelessness. They ate a big impediment in low income housing in many major cities. Developers in the housing industry have no incentives to respond to the rising demand in the low class housing due to the low pay offs in the long run. The investors opt to invest in other areas with fewer controls and with better returns. Studies carried out in the American cities revealed that rental controls were to blame for the rising prevalence of homelessness in the United States cities (William 18).
Experiments carried out in the major cities revealed that the use of rent stumps in a normal market without rental controls led to an upsurge of low income housing as developers scrambled to take advantage of the rising demand in housing. The supply of housing in such cities was seen to respond positively to changes in demand. These findings were in contrast to those found in rent controlled cities where rental stamps were observed to have minimal effect on housing levels. This thus questions the viability of rental controls which have been observed to be a big impediment to housing supply. Thus it can be concluded that in a normal market, an increase in the buying power of the poor leads to an upward increase in the rental price as a result of the corresponding rise in demand which in turn acts as an incentive for the suppliers to provide more low income housing and even to convert more houses to residential use.
Wastefulness of space
Rental controls also lead to increasing unattractiveness to economize on space due to lack of incentives to build on the wasted space. This is caused by under pricing of the houses which reduces the profit margins. Further under pricing encourages some tenants to acquire excess capacity by occupying unutilized space. They tend to keep more space unto themselves even when they don’t need it leading to housing scarcity. Some even move away leaving the houses idle and occupying them only occasionally during the year (Cobb& Giacalone 67-68). This has an effect of benefiting only a few able tenants at the expense of the poorly endowed.
Conflicts between tenants and landlords
Critics of rental controls have also argued that it leads to emergence of a new class of society. Tenants developed a privileged class of their own with such powers as they could not be controlled by the landlords. This led to frequent confrontations between the two parties as landlords tried to enforce their regulations. This has caused frequent clashes as property owners try to repossess their own building from the powerful tenants (Cobb & Giacalone 67-68).
Conclusion
Rental controls have not been beneficial in solving the problem of homelessness and have only been detrimental to the supply of housing. Their application has only been counterproductive alienating the same purpose for which they were meant to serve. Their disadvantages have largely exceeded their benefits as has been evident in the rise of homelessness in many states. Though a number of isolated benefits can be pointed out, they remain a far cry when measured against the many disadvantages.
Works cited
Anonymous. “Rent Controls in Ontario”. Ontario Tenant. Web.
Bothwell, Robert, Drummond, Ian, English, John. “Canada since 1945”. Power, politics, and provincialism, 2nd edition. Manitoba, Bu1981: Bumsted University, 1989.
Cobb Clifford & Giacalone Joseph. “The path to justice: following in the footsteps of Henry George”, Studies in economic reform and social justice. Oxford: Wiley-Blackwell publishers, 2001.
Friedman, Milton; Block, Walter & Hayek, Friedrich August. “Rent control, myths & realities”. International evidence of the effects of rental controls. New York: Fraiser institute, 1981.
Herald Calgary. “Rent control effects debated”. Canwest Publishing Inc. 2007. Web.
Moreton, Tonya. “Rent Control Reform looked at across Canada”. Professional Property Management Association. Web.
Turner, Margery Austin. “Housing market impacts of rent control: the Washington, D.C. experience”, The Urban Institute, 1990.
William Tucker. “America’s Homeless: Victims of Rent Control”. The Heritage Foundation. Web.