Rent Control may not do the market good

The rent control reforms instituted by many of the Gulf States may have found favor with its residents saddled under weight of successive lease rate increases and that in the general cost of living. But there are others who suggest that such controls may not be the best thing for the market.

“Rent control can be benign if:
1. It is implemented so that its market-restraining effects are modest:
2. It helps to defuse public protest about high rents; and
3. It assists landlords and tenants by providing an agreed framework from contracts",
says Prince Christian Cruz, Senior Economist at the Global Property Guide.

“Most of these conditions are not present in rent control measures in Qatar and UAE. If rent control persists in its current form, the property market boom might grind to a half.”
The argument against rent control stems from a concern that it would invariably distort economic incentives and thus leads to an ‘inefficient distribution of resources’.

According to the Global Property Guide summary:

■ Rent control reduces the incentive of landlords to supply rental units, which tend to be in limited supply under such an regime. This inevitably leads to an escalation of complaints against the landlords.
Vacancy levels tend to be relatively low and available units tend to be rented only under strict conditions, again aggravating relation between landlords and tenants.

■ Rent control discourages landlords from maintaining and repairing units till the end of a tenancy.

■ There is also an incentive for landlords to discriminate against tenants likely to stay for a long time, like retirees or couples with children.

■ In some countries, landlords collect key money to offset the losses occasioned by rent control.

■ Rent control tends to lead to bullying and illegal behavior by landlords. If rent increases are allowed between vacancies, landlords will try to evict tenants in any way possible. This will likely translate into demands for government protection for tenants, i.e. into a further layer of bureaucracy and policing.

■ Tenants in tenancy rent controlled units are less willing to move to other places, despite the possibility of earning higher wages.
Moreover, a recent study suggests ‘the removal of rent control can not only increase efficiency in the rental market, but can also lead to a general lowering of rents, making all tenants better off.’

In December 2007, Dubai’s government toughened up its 2005 Rent Law and reduced the maximum 2008 rent increase to 5 per cent. Abu Dhabi too has capped 2008 hikes at 5 per cent.

In Qatar, a freeze has been implemented while the government is determining the new rent increase cap. For the past two years to February 2008, rent increase was limited to 10 per cent annually.

In adopting rent control, the Gulf has moved in the opposite direction to the rest of the world. Elsewhere, these have generally been dismantled or softened since the mid-‘90s. rent control has been removed in most of Eastern and Central Europe. Asia has also followed the trend: China, Japan, Malaysia and Singapore have lifted rent controls since the early 2000s.
“We believe that rent control is generally harmful,” says Cruz. “Qatar and UAE can learn a thing or two from Canada.
“Although the laws appear to be protenant, the system is not entirely disadvantageous to landlords. Allowable rent increases are based on each province’s CPI, allowing regional disparity.”

A landlord can usually petition for a rent increase above the ‘rent increase guidelines’ set for the province.

Landlords doing so have to apply to that province’s rent authority. Landlord-tenant disputes are resolved by the provincial (small claims) court system, or through a tribunal/arbitration system. Global Property Guide suggests that rent control can be harmless or even (in some cases) mildly beneficent where it occurs in the context of standardization of contract structures, designed to increase market certainly and to provide guidance for citizens.