Introduction
In a free market structure, the price of commodities is determined by the market forces of demand and supply. Price determination, which is either a reduction or an increment, is determined by the availability of goods and services and the availability of demand in the market. When the commodities supplied are higher than the quantity demanded, prices are likely to be lower whereas when the demand is greater than supply, the prices of goods are likely to be higher. An equilibrium price was attained when the rate of quantity required is equal to the amount provided in the market. On the contrary, price controls are mechanisms employed by governments or price control agencies to determine the market rates of commodities. In such a market, the forces of demand and supply do not dictate much the market prices of the products. Such bodies come into cushion consumers from exploitation from greedy and capitalize suppliers and retailers. This paper would, therefore, look at the economic implications of rent controls in the housing market.
Rent control, like any other government-mandated price control agencies, is a law that places a maximum price for houses in a market. Usually called a rent ceiling, on what home owners or landlords may charge their tenants. If rent control has to be effective, the amount of rent chargeable must be set at a rate that is below that which would otherwise be been chargeable. For example, the amount must be reasonably lower so that no one would feel hurt in this market. But if the amounts chargeable are established at below their equilibrium prices, the quantity demanded will undoubtedly exceed the available houses or the quantity supplied. Rent control in this case would lead to a shortage of available rental houses. Like we mentioned above, in a competitive market where there is no price controls. If the quantity of a commodity or service demanded is higher than the amount supplied, prices would rise. To eliminate the deficiency by an increase in the amount supplied and consequently a reduction in the amount demanded. Rent control mechanisms can affect both the consumers in this case the tenants and the suppliers in this case the landlords.
Economists have demonstrated that rent control diverts investments that would have otherwise gone to the housing market to other fields that would be considered greener and profitable. Greener and beneficial in the sense that the market controls itself, and that price determination is in the hands of the market forces of demand and supply. They have demonstrated that rent control leads to deterioration in the rental houses as landlords shy away due to non-profitability. Where the market was controlled, there have also been witnessed fewer repairs and less maintenance in the rooms because of the imminent non-profitable venture in this industry. The reasoning here is that no one would want to invest in an industry that would have no returns on their investments. In a market that has several hurdles from the construction to the actual building, no one would wish to put their money in an investment where rent ceilings would still be imminent against the market forces. Rent controls, therefore, tend to drive away potential investors in the housing market to other fields for fear of non-returns on their investments.
Where potential investors have shied away from the housing market, there would be a shortage of rental houses. The shortage of rental houses would arise since landlords would become less interested in investing in a rental market at below-market rates. Consequently, the owners may choose to live in the units by themselves, rent them to their friends or relatives, or sell them to anyone who would be interested in maintaining them. This shortage would lead to a myriad of other imbalances in the housing market. For example, there would be a queue of people willing to rent the houses. Since the landlords are not allowed to discriminate the prospective tenants based on price. The owners may find other suitable ways in which they could discriminate against these prospective tenants. Landlords may also seek bribes from the tenants or require them to make payments of the initial deposit so that they may sign a lease. In addition, landlords would have little incentive to improve or maintain their premises. Since it would be harder to regain the cost of improvements through the rent control agency established price despite the presence of high demand for the houses at the established prices.
Consequently, the quality of houses in the market would decline, and the areas in which these houses stand may come to attract lower class tenants as opposed to the plans of the investors. The presence of quality change in tenancy would have other effects like hurting the neighborhood businesses. New housing units would, therefore, be less profitable to construct if the government would control the rental prices. Therefore, fewer investors will engage in that industry consequently slowing the pace of economic development.
Like mentioned above, different classes of people have different tastes and preference of houses. Some tenants choose where to live based on the neighboring environment. There are people who would prefer leafy suburbs as their residential places based on their social status and class in the society. The people that they associate with were mostly found in such areas. Contrarily, there are those who prefer cheaper housing units and, as a result, would wish to stay in more inferior ends of the market. Where the market dynamics of rent control had been imposed on the market, like we mentioned, would lead to non-maintenance of these units. Where the units would go for years without proper maintenance because the landlords no longer find the businesses profitable as a result of rent controls, the houses are likely to depreciate in value. When the values of the homes have depreciated, they would no longer be able to attract high-end clients that they were purposefully designed. The leafy neighborhood would as a consequence die literally because the area would not be able to attract the class of customers it was accustomed to. With the value of housing units depreciating because of non-improvement, the groups will begin to attract small class tenants as the high-end customers would look for alternative high end units that would still be in better living conditions. The new lower class residents that would be attracted to an area that was once inhabited by high-end tenants would come with their category of the society. The leafy suburb would undoubtedly die as a result of non-maintained housing units. Rent control, therefore, does not only affect the tenants and the landlords but also has adverse implications on nearby businesses as well as neighborhood influences.
Rent control denies the consumers and suppliers the right to participate in a free and a competitive market. Like we aforementioned, a competitive market where the forces of demand and supply control the market prices is very healthy for both the consumers, tenants and the suppliers in this case the landlords. The forces of demand and supply in fixing the market pricing of commodities allow both the customers and the suppliers a chance to participate, negotiate and agree on a reasonable price that neither hurts the consumers nor hurts the providers. Factors like bargaining or haggling in a free market are swept away by the imposition of price controls in this case rent control. There are landlords who would make unreasonable demands in terms of rent to their tenants even in a free market. Contrarily, in an open market as opposed to a price-controlled market, the tenants would be able to negotiate with the landlord and come to an agreeable rate that the landlord would be comfortable with and so will the lessee. The ability to negotiate the best market prices between the landlord and their tenant would not only be an advantage to both of them, but it would also have an impact on the market structure. A free market would, consequently, attract more and new investors in this industry. Investors would be more willing to invest in the rentals industry because of the prevailing market conditions.
Controlling the prices of rent that landlords are supposed to charge could kill a developed town or city. It is a fact known that the greatest killer of towns is the non-improvement of existing structures. Better yet, like we mentioned earlier, rent control prohibits new investments in the housing market. Where the current housing units are never improved, the face of that town depreciates. Potential investors are more likely to shun coming to that area for investment purposes. The fear of constructing new houses based on the fear of the imposed rent rates would also turn away potential investors in the housing market. All these two factors put together have the capacity to turn away likely investors in that area. Where new investors are never attracted to the existing town, and old investors are also not improving the existing houses, the town is likely to die. Business people who had invested in such an area would likely move to other cities with better housing units as nobody would want pay rent for houses that were never maintained. The likelihood of business people moving to other cities would most likely kill all the business activities in that area. When there are fewer commercial activities going on in a zone, and there are no measures put in place to attract new investors, it would be more likely that the town would diminish in stature and size. More and more people would probably move away from such an area thanks to rent control mechanisms that were imposed on such an area. Rent control would consequently lead to the death of such a town either in its totality or in part. Those who might remain in such an area would otherwise not be able to resuscitate the city physically until the imposed rent rates are reviewed and market friendly rates that could attract more and new investors imposed or until the market structure is liberalized.
Rent control also has adverse economic consequences on the economy of the country. Economic growth depends on a number of factors, key among them, and the ability of the market to have free-flowing cash. Regulated flow of money in an economy destabilizes the economic growth. For the economy to prosper, investment rates need to be stimulated to create employment opportunities. Such job opportunities will hardly come by if there are no investors investing in the economy. Rent regulation, like we mentioned early, does not produce an environment suitable for investment opportunities. Investors who would feel discouraged to invest in an industry where market prices are regulated by the authorities would most likely turn to new and profitable ventures even in other countries. The economic growth of the country in question would as a consequence be derailed. Where there would no investment opportunities, there would be no jobs as well. The purchasing power of the people would, as a result, be lowered. An economy that cannot sustain the livelihood of its population is said to have failed or stunted in growth. Such an economy would have suffered the consequences of regulated market prices. Market prices regulation, in particular rent control, would, therefore, hurt the economy and slow the process of economic growth.
Rent control has been a debated issue ever since its inception. There are those who have always argued in favor of it while there are those who have been continuously opposed it. The arguments for and against rent control hold merit depending on the side of case one stands. Even though market prices need to be checked and regulated from time to time to cushion consumers against exploitation by greedy landlords, we have demonstrated that prices control more so rent control has more disadvantages than advantages. Rent control does not only interfere with the dynamics of a free and competitive market but also deprives consumers of the right to participate in the determination of market prices of commodities. The economic consequences of regulated rental prices also have adverse effects on the economic growth of the country. In addition, rental prices control hinders the infrastructural development of the country. Most potential investors, like we have demonstrated would shy away from investing in an industry where market prices are set by a regulating body. Price regulation, therefore, minimizes the prospects of maximizing profits. Investors would consequently not be willing to invest in an industry where profits would be deemed to be low. Where rent was not regulated, it is my considered opinion that there would be significant investments in the housing industry and, as a result, considerable economic growth will be realized. Price determination, which is either a reduction or an increment, is determined by the availability of goods and services and the availability of demand in the market. When the commodities supplied are higher than the quantity demanded, prices are likely to be lower whereas when the demand is greater than supply, the prices of goods are likely to be higher. Apart from economic growth, the investors or the landlords would also have the opportunity to carry periodically out improvements and maintenance works on their investments. I, therefore, wish to restate that rent control has more adverse effects on the housing market than it is believed to help.
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