Rent Control Legislations and Its Impact on Economies

affordable housingAccommodation Times Archives

By Yashashree Kulkarni

Not all of us can afford to buy a home as this means a huge investment. Thus, one opts to rent accommodation in one”s place of employment. Many of us live in rented apartments and pay a regular fixed amount of money every month to a person, who owns the apartment. 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”.

We would do well to consider the issue of rent control for a fuller understanding of rent as a whole. The great impact of rent control can be seen in the fact that 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.

Now, what exactly is meant by Rent Control?

Rents, in general, not only impact the retail sector, but the economy of the country as a whole as they compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers. In the national arena, rents provide the economic incentives that are so essential 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. The objective is to ensure 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.

Various Rent Control Legislations

In India, we have examples of rent control laws like the Maharashtra Rent Control Act Delhi Rent Control Act, Karnataka Rent Control Act, also there are various other rent acts in the country.

In India, rent control really emerged in a big way in the years following the First World War when the accommodation scarcity in Bombay was very high. India is a socialistic secular republic. The preamble and the directive principles of the Indian Constitution emphasize on social equity. In order to achieve this goal there has been certain restrictions on the rent legislations. For the larger benefit of the tenant the landlords could not increase the rent. Also the courts while interpreting the rent legislations were always inclined to give decisions favoring the tenants. According to these restrictions, landlords could not exploit their tenants and only predetermined rents were to be paid. Unfortunately, these rent restrictions continued for over sixty years before they could be reformed. Rent control hit other parts of the Country after partition. Rehabilitation colonies were set up in Delhi. Further, the migration of people from various rural areas in search of jobs led to a growing housing shortage in the big cities. It was to accommodate this influx that rent control was imposed. But now in the past decade the position of rent legislations has changed to a large extent. Now the legislation and the courts both are inclined to protect the rights of the land lord more than the tenants. The trend of the change attitude of the courts can be observed in the various judgments given by the Bombay High Court and the Supreme Court.

In Maharashtra earlier there were three Rent Control legislations in the various parts of the state. But in 1999 all the earlier rent legislations were abolished and it was consolidated in to a single rent legislation that is the Maharashtra Rent Control Act. After this Act now more weight age has been given to the personal requirement of the landlord on a rented property as compared to that of the tenant. The High Court and the Supreme Court have been very strict in interpreting all the clauses relating to personal requirement. Also the landlord has been given the right to increase the rent up to 4% every year. This was not the position prior to the amendment in the said legislation.

Position in America

It is interesting to note that there have been two major rent control regimes in New York, ”Rent Control” and ”Rent Stabilisation.” Rent Control, started in 1947, has declined substantially in New York City as a result of vacancy decontrol and shifts to stabilisation. The regime of Rent Stabilisation is currently more common. This system is a less stringent form of rent regulation where periodic rent increases are allowed as approved by a rent regulatory board.

We can see the adverse impact of rent control in New York when one looks at the destruction of entire sections on housing in the South Bronx area. These housing complexes are in a state of disrepair as landlords are not interested in improving or even simply maintaining these properties. Consequently, there has been a definite move away from rent control. And in 1997, Boston, Cambridge, and Brookline became the first major American cities to abandon rent controls. However, New York has not been able to move away from rent control.

Impact of Rent control on economy

As mentioned earlier, rent control is not desirable for the overall development of the economy of a country. Let us now consider how exactly rent control impacts the economy:

(i) As rents have been forced below the market price, rent control reduces the profitability of rental housing. Investment capital is thus diverted from the rental market into other more profitable markets. Consequently, construction activity decreases and existing rental housing is converted to other uses. Thus, rent control essentially reduces the supply of housing instead of increasing it. Without the increased rents required to attract new investment, new housing construction would be sharply limited and there would be no long-term solution to the housing shortage. Conversely, a fall in rents sends the message to the market that there is no room for new investments.

(ii) Consumer “mobility” is substantially reduced by the reluctance of many consumers to part with the rent control subsidy. Consumers who would otherwise move to smaller or larger homes or closer to their jobs do not do so because they do not want to lose the subsidy. This loss of mobility can be particularly costly to families whose job opportunities are geographically or otherwise limited and who may have to travel long distances to reach those jobs available to them. This, in turn, has an adverse impact as there is a much greater demand for public services as well as increased traffic congestion etc.

(iii) As the return on investments in rental housing is low, rent control also can lead to a drop in the quality and quantity of existing rental stock. This may take the form of cooperative conversions or, in some cases, abandonment of unprofitable property. It can also lead to a deterioration of the quality of housing stock as providers, faced with declining revenues, may be forced to substantially reduce maintenance and repair of existing housing.

(iv) Rent control reduces the market value of controlled rental property, both in absolute terms and relative to the increase in property values in unregulated markets. The tax implications of this reduction can be significant, as taxable assessed rental property values decline relative to unregulated property.

(v) Administrative expenses increase as rent controls require the creation of elaborate bureaucratic systems. Rental property must be registered; detailed information on the rental property must be collected; and elaborate systems for determining rents and hearing complaints and appeals must be established.

(vi) Key players in real estate are of the opinion that prices in the unregulated portion of the market will be forced higher than their normal market value by rental restrictions. Since prices are pushed too low in the regulated sector, they are forced above what would otherwise be the market price in the unregulated sector.The social implications of rent control

(vii) It is sad but true that though rent control was envisaged as an anti-poverty strategy, it actually benefits the higher income sections of society. For example, rent control had the greatest effect on rents in Manhattan, which has an exceptionally high average income. Closer home in India, in Mumbai, prosperous businessmen occupy entire apartment blocks in posh areas but pay rents that have scarcely changed over the past six decades.

(viii) Rent control legislations are often lie at the root of the animosity between landlords and their tenants as it involves considerable loss to one side in the transaction.

The negative consequences of rent legislation are many. 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.

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.

The single biggest concern with abolishing rent control is the perception that all landlords will increase their rents in an unreasonable manner. Another fear is that vacancy decontrol will be used as a method of deregulation. Under this system, apartments are deregulated only when the current tenant leaves or dies. This may well be quite alarming for the tenant as landlords may resort to unlawful methods to pressurise their tenants to vacate.

The best solution to rent control would be the pro-active role of the government. It must 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. 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. Moreover, the construction or rehabilitation of affordable housing must be subsidised to ensure that new tenants will not have to pay high rents.

It would be much more practical to undertake step-by-step deregulation in stead of a blanket ban on 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. 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.

It is heartening to note that fresh rent control regulations have been implemented in Maharashtra, Karnataka and Madhya Pradesh in efforts to deregulate rent laws. It is clear that earlier rent control laws promoted gross inequality and were also against the established legal principles of justice, equity and fair play. But now we can all look forward to a time when rent control is a thing of the past, when there will be a major urban regeneration in India– when cities, commercial establishments and industries will be able to grow and flourish in a proper and controlled manner.

 

Courtesy : Legalpundits International Services Pvt Ltd.

 





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