Rent regulation:
A conceptual and comparative analysis
Hans Lind
Division of Building and Real Estate Economics
Royal Institute of Technology
SE 100 44 Stockholm, Sweden
Phone + 46 - 8 - 790 73 65
Fax + 46 - 8 - 411 74 36
Email hanslind@recm.kth.se
October 1999
Abstract
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Rent regulations can take many forms and have different purposes. It is argued
that the often-used distinction between first- and second-generation rent control is too
crude to be useful. Five main types of rent control are instead identified. The first
dimension concerns whether the control covers rent changes for sitting tenants or
rents generally. The second dimension is whether then aim is to protect the tenants
against rents over the market level, against sudden big increases in rents or if the aim
is to keep rents permanently below market levels in attractive areas. The typology is
used to classify and compare the rent control systems in a number of European
countries and North American cities. It is also used to describe typical patterns of
change from "harder" to "softer" rent controls.
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1. Introduction
Economists are often very critical to rent control, but in the theoretical literature there
has in rent years been a tendency to revisionism (see e.g. Arnott 1995, Anas 1997 and
Keating et al 1998). A distinction is made between what is called first- and secondgeneration systems of rent control, between "hard" and "soft" rent control. The firstgeneration controls were nominal rent freezes, while the second-generation controls
are more flexible and allow nominal rent increases in a number of situations. Arnott's
point is that the economists' critique might be correct in relation to first-generation
rent control, but is it not obvious that the arguments are relevant against secondgeneration rent control:
"since second-generation rent controls are so different, they should be
evaluated largely independently of the experience with first-generation rent
controls." (Arnott 1995, p 102)
Given the specific features of the rental housing market:
"a well-designed rent control can be beneficial" (Arnott 1995 p 99)
In this article it is first argued that the concept "second-generation rent control" covers
such an heterogeneous group of systems that the concept is rather useless from a
scientific point of view (section 2). Therefore a more detailed typology of possible
rent control systems is presented, focusing more on what type of problem they aim at
solving than the specific tools used (section 3). Typical processes when a "hard"
system of rent control is modified are also described in this section. In order to test the
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typology and get a perspective on the rent regulations in a number of countries I
classify these systems according to the proposed typology. The classification is based
on secondary data, primarily Balchin (1996), Keating (1998) and the special issue of
Netherlands Journal of Housing and the Built Environment devoted to private rented
housing (Vol 13, No 3, 1998)1. The conclusions are summarised in section 5.
2. The distinction between first and second-generation rent control
2.1 First-generation rent control
Arnott (1995) starts the explanation of the concept first-generation rent control in the
following way::
"The form of controls was a freeze on nominal rents." (p 100)
This is later modified somewhat:
"While the nominal rent freezes were typically not absolute - intermittent
adjustments were made - controlled rents fell significantly in real terms, to
only a fraction of the rents in the uncontrolled housing that was constructed"
(p 100)
These statements indicated that it is possible to define first-generation rent control in
three different ways:
1
Some of the countries described in Balchin (1995) - primarily Ireland and Italy - are not included as
these chapters do not give any detailed information about the system of rent regulation.
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:
Definition 1: First-generation rent control is a nominal rent freeze. The regulation
just says that rents are not allowed to increase in nominal terms.
The problem with this definition is that the effects of such a regulation will depend on
the level of inflation. An extreme case is during deflation, when a nominal rent freeze
could coexist with rising real rents. This is obviously not the intention when firstgeneration rent controls are discussed. Definition 2 below avoids this consequence.
Definition 2: First-generation rent control is a nominal rent freeze that leads to a
significant fall in real rents.
This definition seems to fit the intentions much better, but the second quotation above
indicates that one more condition must be added. The resulting real rent level should
be significantly below the market (equilibrium) rent level.2 The following definition
would then cover the intentions behind the concept first-generation rent control.
Definition 3: First-generation rent control is a nominal rent freeze that leads to a
significant fall in real rents and to a rent level that is significantly below the market
rent level.
2.2 Second-generation rent control
2
The exact definition of market rent can also be discussed, but let us here just say that the market rent
is the rent level where demand equals supply. The details are not important for my purpose.
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Arnott describes the second-generation rent controls in the following way:
"They entail a complex set of regulations governing not only allowable rent
increases, but also conversion, maintenance and landlord-tenant relations."
"Second-generation rent control commonly permit automatic percentage rent
increases related to the rate of inflation. They also often contain provisions for
other rent increases [e.g. cost pass through provisions]....
"In some jurisdiction, second-generation rent control has permitted full
vacancy decontrol." (Arnott 1995, p 102)
Keating (1998a) writes that second-generation rent controls "allowed for across-theboard rent increases, usually annually" (p 5). Skaburskis & Teitz (1998) say that
"second-generation rent control aim to stabilize the rental market and improve the
tenants security of tenure" (p 58)
The problem with all these definitions is that they primarily are negative. Secondgeneration rent control is any regulation of the rental market that does not fulfil
definition 3 above. There is no nominal rent freeze, rents do not usually fall in real
terms and in the long run there might be no significant difference between actual rents
and market rents.
The fact that it is a negative definition has the consequence that the concept secondgeneration rent control can cover many different types of regulations of the rental
market. Arnott (1995) notes that:
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"There is considerable flexibility in the design of a second-generation rent
control package, in fact so much that it may be inappropriate to generalize
broadly about the effects of second-generation controls." (p 102)
We can only say that the consequences can not be assumed to be the same as the
consequences of first-generation rent control.
The distinction between first and second-generation rent control was a smart rhetorical
move in the sense that it opened up an almost closed discussion. It pointed out a
hidden presupposition in the traditional economic analysis, namely that rent control is
a rather homogeneous phenomenon. But as second-generation rent control covers so
many different cases the next step must be to identify more specific types of rent
control. Only when this is done can we discuss consequences of the new types of rent
control, as the consequence depends upon the exact construction of the system. An
evaluation of a specific rent control system also presupposes that we identify the
specific purpose. 3
3. A typology of rental regulations
3.1 Regulation of rental contracts and rent control
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Regulations concerning the rent level (rent control) can be seen as a subgroup of
specific regulations concerning rental contracts. Sometimes this distinction is blurred,
e.g. in the preface of Keating et al (1998) where they state that:
"Rent control, the governmental regulation of the level of payment and tenure
rights for rental housing.... " (p vii)
Regulation of tenure rights, e.g. when the landlord has the right to evict a tenant,
might presuppose certain types of rent control, but regulation of rights should be
separated from rent control.
We can identify at least three different levels of regulation that affect the relation
between tenant and landlord:
- General laws, eg contract law and anti-trust laws. These can e.g. include laws
against usury or against misuse of a dominant market position that can be applied to
the rental market.
- Specific regulations concerning rental contracts. In Sweden we have, beside
regulations concerning the rent level, regulations saying that the rental contracts must
be in writing, that the landlord can only terminate the contract in certain situations,
and that the tenant can terminate the contract with three months notice.
- Rent regulations: i.e. specific rules concerning the rent that a landlord is allowed to
charge for the disposition of an apartment. As noted in e.g. Arnott (1995) and Heffley
3
When for example Nagy (1997) writes "Politicians who wish to soften rent control by adding vacancy
decontrol-recontrol provisions may be undoing the control altogether" he fails to see that different
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(1998) it is a regulation of a price for space and not for precisely specified housing
services. In the next subsection five types of such regulations will be identified. All of
these can be either partial (covering only houses with certain properties) or complete.
They can be partial in a number of ways, e.g. covering only houses built before a
certain date, or owned by certain groups of owners.
The rent regulations can be divided into two main groups. One group covers only
sitting tenants (type A and B below) while the other covers all tenants (type C, D and
E below)
3.2 Type A: Weak transaction cost related rent regulation.
Protecting a sitting tenant against rents higher than the market rent
A household with a high transaction cost might be in weak bargaining position when a
rental contract shall be renewed. It is well known that many households put a high
value on being able to stay in their neighbourhood. A landlord might use this and
demand more than the market rent level and still get the tenant to accept the proposed
rent. Rent regulation of type A forbids precisely this behaviour. As the regulation is
related to the existence of transactions cost and as it is "weak" in the sense that it does
not protect the sitting tenant against increases in market rents we call it weak
transaction cost related rent control. This kind of rent regulation can be related to
regulations protecting tenant against evictions, as regulations of evictions would be
pointless if the landlord could demand any rent to renew a contract.
systems can have different purposes.
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Transaction costs can motivate this type of rent control, but it can be motivated also in
other ways. Arnott (1995, p 107) presents the following argument for intra-tenancy
rent control of this type. A landlord may demand a high rent from a tenant that he
found out to be a "bad" tenant. The "bad" tenant then moves to another landlord who
does not know that the tenant is "bad". The economic eviction therefore imposes an
externality on other landlords as they, because of asymmetric information, cannot see
that it is a "bad" tenant. A regulation prohibiting rents over the level in the open
market may in this case be welfare improving. We can also imagine that this type of
rent control aims at protecting households that are badly informed or bad negotiators.
In Sweden, a weak transaction cost related rent regulation exist on the commercial
rental market. The background is that the typical contract for a shop or an office is
rather short in Sweden. As there might be considerable costs for relocation of a store,
the landlord could charge more for a sitting tenant than for a new tenant. Such
behaviour would of course destroy the reputation of the landlord but there might be
cases where such a strategy still is profitable. The rule in Sweden is that if a landlord
demands a rent over the market level and the tenant moves, the landlord have to pay
damages to the former tenant covering the losses to the tenant compared to a situation
where he could continue to rent at the market level.
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3.3 Type B: Strong transaction cost related rent regulation.
Protecting sitting tenants against certain types of increases in market rents
The high transaction cost for certain types of households can lead to demands for
stronger protection for sitting tenants. The typical situation that a tenant might want to
have protection against is where demand for rental housing suddenly increases, either
generally or in some areas that becomes popular. Market rents and profits for the
landlords would then go up. The aim of rent regulation can then be to protect sitting
tenants against increases in market rents that are not related to cost increases. A
feature of many second-generation rent control systems is that they allow for rent
increases e.g. when the general price level increases or when specific operating costs
increase. But they do not allow rent increases for sitting tenants only because demand
has increased.
Another way of describing this kind of rent control is that it is a way to reduce the risk
for the household. Strong transaction cost related rent control means that the tenants
do no have to be afraid of having to move because demand and market rents suddenly
increase. From the landlord's point of view this rent regulation is not so problematic as
it allows for a reasonable profit on the original investment.
On the theoretical level this kind of rent regulation raises a number of questions. Why
chose this method for risk reduction compared to e.g. long run contracts or options to
renew the contract at pre-specified terms? Epple (1998, p 683) raises this question and
Arnott (1995, p 108) notes that
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"Rent control is then desirable when the distortion is the unavailability of
insurance against a sharp, unanticipated rise in rent."
In a footnote he also discusses why this insurance may not be available on the market.
Another question is why households are more interested in protecting themselves
against demand related rent increases than against cost related rent increases? Or is it
just that such protection is cheaper?4
3.4 Type C: Monopoly related rent regulation.
Protecting all tenants against rents higher than the market rent
A landlord has a certain monopoly power, as the housing supply is very
heterogeneous. This power can be used to get a rent from specific household that is
higher than the market rent. We can imagine that a household has special reasons for
wanting to live in a certain house, e.g. because they need to live close to a relative,
and that the landlord knows this. The point of rent regulation of type C is to prohibit
the landlord from using this knowledge and demand more than the market rent from
such a household. This kind of rent regulation can also be seen as a protection of
households that are nor so well-informed about the market rent level or are in such a
situation that they need an apartment very quickly and do not have time to search and
negotiate for better terms.
4
See Lind (1999) for some preliminary arguments.
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The difference between rent regulation of type A and type C is that type C is not
related to costs of moving and therefore it covers also new contracts.
Arnott (1995, p 107) refers to a model that shows that a system of controls that restrict
the landlords' possibility to use their market power can increase welfare. This would
then be a system of rent regulation of the type C.
Rules prohibiting rents above the market rent level might follow from more general
rules against usury or rules forbidding contractual conditions where one part has taken
advantage of another party because the latter party had a weak bargaining position.
Rent regulation might therefore exist even if there are no specific laws about rents.
3.5 Type D: Smoothing changes in market rents.
Rent regulation related to overshooting
The supply of housing is inelastic in the short run. This means that if demand
suddenly increases market rents might increase considerably, and then fall back to a
more normal level when supply has responded after a couple of years. The purpose of
rent regulation of type D is to cut these temporary peaks in rents, i.e. to avoid rents
that overshoot in relation to some kind of long run equilibrium level.
The mechanism used is this case can be to put a cap on the yearly increase in rent
levels. The cap is higher than normal cost increases so it doesn't bind in normal years.
The rule allows the rent level to catch up with the market rent level rather quickly
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when there are increases in the long run market rents. The purpose of this type of rent
regulation is not to keep the rent level below the market rent in a longer perspective.
The price for this kind of rent regulation is that during periods when the regulation
binds, it will be difficult to find an apartment for a new household in the market. The
level of the cap on the rent increases will determine this trade-off between rent and
availability. An interesting question is why households might prefer a system where
they have to search longer, compared to a system where they for a period would have
to pay a higher rent.
3.6 Type E: Protecting all tenants against certain types of increases in market
rents. Segregation related rent regulation
This type of rent regulation aims to keep rents for both new households and sitting
tenants below the market level "forever". One motive for this kind of regulation is that
"everybody" should be able to afford to rent an apartment in attractive areas. This was
the argument behind what Keating et al (1998) call the "hard" rent regulation in
Berkeley and Santa Monica in California, and it is a common argument in the current
debate about rent regulation in Stockholm.
The first-generation rent controls can be seen as an extreme version of this kind of
rent regulation as it not only stopped real increases in rents but in fact lead to falling
real rents as a result of nominal rent freezes and inflation. Some versions of what
Arnott called second-generation rent control are also of type E, but less extreme. The
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landlord is allowed to increase the rent if costs increase, but not just because an area
has become more popular.
3.7 The relation between the different types of rent regulation
Some kinds of rent regulation are specifically related to one goal, e.g. a rent regulation
protecting sitting tenants against rents higher than the market rent (type A). Other
types of rent regulations can handle several problems. The segregation related rent
regulation of type E would normally handle most of the other possible motives for
rent regulation, e.g. protecting tenants against rents higher than the market level. In
table 1 below we describe for each type of rent regulation what kinds of problems they
can solve. The motive for putting "partly" in the some of the boxes for overshooting
related rent regulation is that this system protects tenants against high rent increases
but not against smaller rent increases.
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Table 1: What problems do different types of rent regulation solve?
Problem 1:
Landlords
use monopoly
power
A. Weak
transactions
cost related rent
regulation
B. Strong
transactions
cost related rent
regulation
C. Monopoly
related rent
regulation
D.Overshooting
related rent
regulation
E. Segregation
related rent
regulation
Only for
sitting tenants
Problem 2:
Landlords
demand high
rents because
of tenants
transactions
cost
Yes
Problem 3:
High
temporary
increases in
market rents
Problem 4:
Increasing
market rents
leads to
segregations
No
No
Only for
Yes
sitting tenants
Only for
Only for
sitting tenants sitting tenants
Yes
Yes
No
No
Partly
Partly
Yes
Partly
Yes
Yes
Yes
Yes
Table 1 can also be used as the starting point for a discussion about different ways to
change the extreme first-generation rent controls without dismantling rent regulation
completely.
1. The first strategy is to keep a rent regulation of type E but make it less extreme. The
aim is still to keep the rents permanently below the market level, but the difference
between actual rents and market rents are narrowed. The landlord is e.g. allowed to
increase rents in certain situations, but not to close the gap completely.
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2. The second strategy is to move in the direction of an overshooting related rent
regulation. In this case all tenants are protected against high yearly increases in real
rents. (This can of course be combined with long-run rental contracts and other
devises on the market that lowers the tenants' risks further.)
3. The third strategy is to limit the protection to sitting tenants, and move to a strong
transactions cost related rent regulation. This type of rent regulation can also be
combined with an overshooting related rent regulation that makes the future rent level
more predictable also for moving households.
4. The fourth strategy would be to limit the protection to a monopoly related rent
regulation. The landlord is not allowed to charge more than the market rent. This
would also automatically imply a weak-transaction based rent control.
4. Classification and comparison of actual rent regulations
4.1 Introduction
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One way to "test" the typology presented above is to see if actual rent regulations fits
neatly into the typology and if it leads to a grouping of countries that seems
reasonable.
Laws related to rent regulation are modified continuously in most countries. The
description here concerns the systems as they are described in the written sources. In
reality this means the situation around 1995. Earlier systems are sometimes
commented upon, but the aim is not to make a historical study of the development of
rent regulation. In some countries older regulations are still in force for smaller parts
of the market, e.g. for older contracts in older houses. If this is a small and
diminishing part of the rental market they are not covered in the analysis below.
The focus is on rent regulations that cover normal privately owned rental housing.
Special regulations related to subsidised but privately owned social housing are not
discussed.
4.2 Some European systems
The countries covered in the sources are described in alphabetical order. A summary
can be found in table 2 at the end of the section.
Austria
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According to Förster (1995, p 114) Austria has a rent regulation that covers practically
all rental housing. Formally this is related to the granting of subsidised loans, but such
loans are used for almost all construction of rental housing. The regulation covers
both existing and new tenancies. The allowed rent increase is related to the rate of
inflation and costs for investments in the building. According to the classification this
is a rent regulation of type E (all contracts covered, rents kept permanently below
market level) which by implication means that all other types exist.
France
There are some apartments that still follow the rent controls in an old system which
kept the rent level clearly below the market level in attractive areas (Satsangi 1998, p
302). If we look at the system dating from the beginning of the 1990s there is no
regulations for rents the first time an apartment is let. When there is a new tenant in an
existing apartment the rent should be set by reference to comparable dwellings. This is
a monopoly related rent regulation (type C), but in practice its is also a system of type
D smoothing increases in rents. The use of comparables lead to lags between changes
in the market and changes in rents. For renewal of contracts there is a rule according
to which rent increases should follow cost increases (Satsangi 1998, p 304). He
presents data from 1991 indicating that rents in new lettings are around 30% higher
than the renewal rent.
Germany
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Germany (Hubert 1998, Tomann 1996) has a system that incorporates a number of the
different systems of rent regulation described above. One important component is the
system for protecting sitting tenants (system B). The rent is not allowed to increase to
a level that is more than rent for comparable apartments. As this is based on rents the
last 3-4 years it means that the rent will not increase up to the current market level.
Hubert (p 225) shows that there is a considerable gap between rents in new contracts
and in old contracts. There is also an extra protection for sitting tenants similar to
systems of rent smoothing (type D): The rent is not allowed to increase more than
30% in a three year period.
Basically the rent for new contracts were free during the 1980s, except for a system of
type C where the landlord is not allowed to charge a rent that is substantially higher
than "usual". If the rent is more than 50% higher than the usual rent, this is judged to
be usury, which is a criminal offence. In the 1990s, after the increased pressure on the
rental market caused by German unification, there was a new rule that limited the rent
level in new contracts to 20% above the rent for renewed contracts. According to
Hubert this led to a system of type E in many cities, as all rents were below the market
level. The recession and the increased supply in recent years have however led to a
situation where the regulations seldom are binding. We might therefore see the system
as one of rent smoothing that cuts temporary peaks. This is how it is classified in table
2 below.
Great Britain
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For lettings made before 1989 there is a system of type B, where sitting tenants are
protected against certain types of rent increases (Kemp 1998) . For these tenancies
there is a "fair rent regulation", which Kemp describes in the following way: "Fair
rents can be loosely defined as the equilibrium level minus a discount to reflect the
level of excess demand in the local market" (p 247). For lettings after 1989 there are
free negotiations between tenant and landlord, both when there is a new letting and
when there is a rent review (Kemp 1998 p 246f, Balchin 1996b, p 226). This means
that there are no rent regulations of type D and E. As security of tenure would be a
fiction if there were no rules concerning the rent demanded by the landlord at a rent
review, there must be some kind of weak transaction based rent regulation. There is
no information in the articles about rules concerning initial rent level, and therefore
there is a questions mark in the column for monopoly related rent control.
The Netherlands
For a long time the Netherlands had a system where the government directly
determined the allowed rent increase, or at least the ceiling of allowed rent increases
for sitting tenants (Priemus 1998, Boulhower et al 1996). This is a typical form of
strong transaction cost related rent regulation.
For new contracts there is a rule saying that the landlords is allowed to charge
"maximum reasonable rents". Priemus (1998 p 274) says that this rent "does not differ
to much from the free market rent level (and sometimes is even higher)". This is
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anyway close to a system of monopoly related rent control, protecting all tenants
against rents substantially higher than the market rent. The rules might also
incorporate a system of overshooting related rent control if a quick increase in market
rents would not lead to a comparable increase in "maximum reasonable rents". In table
2 there is a yes in parenthesis for type D (over-shooting) rent regulation.
Spain
The focus in the current system in Spain is on protecting sitting tenants against
demand-related increases in rents (Alberdi & Levenfeld 1995, p 184)). There are no
rules for the rent level in new contracts, but the rent is then not allowed to increase
more than the retail price index. This means that there is a system of strong
transactions cost related rent control. The article does not give any clear information
about whether there also is some rules about "usury" in new rental contracts.
Sweden
The Swedish "use-value system" that replaced a traditional rent regulation in the
1970s initially said that the rent charged by the private landlord should not be allowed
to be higher than the long run equilibrium rent (see Bengtsson 1992). In reality this
concerned both new tenancies and rent reviews for sitting tenants. My interpretation is
that it was created as an overshooting related system (type D). Step by step the system
was transformed and today the main rule is that the reasonableness of the rent in the
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private sector should be judged by a comparison with rents in similar apartments
owned by municipal housing companies. These rents are in turn set after negotiations
between the company and the local tenants union. The starting point is often the
companies' total costs and the negotiation primarily concerns how these total costs
should be distributed between different apartments. No distinction is made between
new tenancies and rent reviews for current tenants. In most municipalities the result
has been rents that are considerably below market rents in older apartments in
attractive areas, implying a segregation related rent regulation of type E. Such a
system automatically leads to systems of type A-D.
Switzerland
As described by Balchin (1996c, p 31) the Swiss system has much in common with
the German system. There is a regulation concerning rent reviews for sitting tenants
that primarily relates rent increases to cost increases, i.e. a strong transaction cost
related rent regulation (type B). This has led to large differences in rents between
older and newer apartments as construction costs have increased. There seems to be
no explicit regulations for rents in new tenancies and it is unclear from the material if
there is anyimplicit monopoly related rent. Therefore there is a question mark in the
column for rent regulation of type C.
Overview
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In table 2 below we present an overview of the system in the different European
countries. The symbol => means that this kind of rent regulation exist, but not as a
special system but as an implication of a more encompassing system of rent control. A
question mark means that it is not clear from the sources if this type of regulation
exists. A yes in parenthesis means that the practical application of another type of
system leads also to this kind of protection. The typical case is where a monopoly
related system partly is based on rents in an earlier period. This leads to a smoothing
of rent increases and an overshooting related rent regulation.
Table 2: Rent regulation system in some European countries
Country
Austria
France
Germany
Great Britain
Netherlands
Spain
Sweden
Switzerland
Type A
Weak
transactions
cost related
=>
=>
=>
?
=>
=>
=>
=>
Type B
Strong
transactions
cost related
=>
Yes
Yes
No
Yes
Yes
=>
Yes
Type C
Monopoly
related
=>
Yes
Yes
?
Yes
?
=>
?
Type D
Overshooting
related
=>
(Yes)
Yes
No
(Yes)
No
=>
No
Type E
Segregation
related
Yes
No
No
No
No
No
Yes
No
The table indicates that the countries fall into four groups.
The first group - consisting of Austria and Sweden - still has rent regulation that can
keep the rent level permanently below the market level also in new tenancies (type E).
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The second group has a rent regulation for sitting tenants that protects them from
certain increases in market rents (type B) and also some system for keeping rents in
new contracts from increasing rapidly, without "permanently" holding them below
market level (type D). Germany clearly belongs to this group, while the Netherlands
and France are borderline cases between this group and the next group.
The third group only has rules protecting sitting tenants against certain types of
increases in market rents. Switzerland and Spain seem to belong to this group.
The fourth group has only rules protecting tenants against landlords demanding rents
above the market level (type A and/or type C). Great Britain belongs to this group.
4.3 Some North American systems
In Canada and the USA rent regulation is not a federal issue. The
regions/states/municipalities can, within certain limits, introduce their own systems.
Here we will describe the systems that existed in some areas in the middle of the
1990s.
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Toronto
The Canadian experience with rent control is described in Crook (1998) and Nash &
Skaburski (1998). We will focus on the description of the evolution of rent control in
Toronto. The original arguments behind the system focused on protecting sitting
tenants from "economic eviction" when rents started to rise quickly in the 1970s. It
was what we call a strong transaction cost related rent control (type B). The purpose
was also to smooth changes in market rents and keep them temporarily under the
market level while supply increased (overshooting related rent regulation of type D).
The regulation introduced a maximum allowed rent increase (unless there were a
number of special circumstances). The effect was seen mostly in attractive areas
where market rents increased more than the allowed rent increase for a number of
years. Vacancies became extremely low in these areas (p 178). This meant that during
this period the system also worked as a segregation related rent control. In the middle
of the 1990s modification was on the way where one important feature was to let
landlords negotiate rents freely for vacant apartments, but once the rents were set the
guidelines would continue to apply. This will transform the system into a clear case of
a strong transaction cost related rent control. Whether there will continue to be some
kind of check on rents in new contracts that prevents rents higher than market rents is
unclear. Both Crook (1998) and Nash & Skaburskis (1998) however indicate that this
is not the last word and that new governments might strengthen the rent control again,
moving it back to at least a system of type D, that smoothes changes in market rents.
Berkeley
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The central component of the rent control in Berkeley was a cap on rent increases
(Barton 1998). During the 1970s and 1980s this cap kept rents clearly below the
market level for most rental housing, implying that it was a segregation related rent
regulation (type E). Making it possible for certain groups with low incomes to live in
the central city was an explicit motive for the system. In the beginning of the1990s,
landlords succeeded in getting higher rent increases, and the gap to the market level
closed considerably. In the middle of the 1990s, the California legislature made
vacancy decontrol mandatory. This transformed the system to a strong transaction cost
related rent control (type B). The vacancy decontrol was however phased in, implying
that the rent was not allowed to rise more than 15% compared to the rent before
vacancy. This can function as a system of type D, smoothing rents in new contracts,
and therefore we have put Yes in parentheses for Berkeley in that column. As in the
Canadian case it is unclear if there is any limitation on rents for new contracts aiming
at protecting tenants against rents higher than the market rent.
Los Angeles
Tietz (1998) starts by saying that the Los Angeles experience "provides evidence that
rental regulation can be managed in a way that does not provoke massive political
confrontations or seriously impede the operations of the private rental housing
market" (p 125). The following combination of features explains this. The first is that
it is a typical system of strong transactions cost related rent control (type B). There is a
maximum limit for rent increases for sitting tenants and vacancy decontrol. The
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second feature is that these maximum limits are rather high, which stabilise the
market but does not destroy the profitability for the landlord or the incentive to
maintain apartments. The third feature is that the system is partial in the sense that
construction after 1979 is not covered at all. There is no regulation of rents for sitting
tenants in these houses. This means that the incentive for new construction will not be
affected.
New Jersey
A large number of cities in New Jersey have some kind of rent regulation (Baar 1998).
The typical characteristic of these regulations is that there is a ceiling on annual rent
increases for sitting tenants and that there is some kind of vacancy decontrol (type B).
New construction is exempt from rent control for a certain number of years, but they
are not generally exempt as in the Los Angeles system. The New Jersey systems
would then qualify as a strong transaction cost related rent control of type B, but
nothing more. During the 1990s the limit of the annual increase in rents has been set
higher than the general rate of inflation, which means that the control has only had
effect in certain areas. We can therefore see at as a mild type B regulation. As the
allowed increase could lead to a level that is higher than the market rent level it is
unclear whether it generally qualifies as a weak transaction cost related type A system.
Baar´s general conclusion is that the controls "have provided significant protection, in
the form of security of tenure, and has served as a ceiling on rents in areas where
landlords could have commanded much higher rents" (p 150).
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New York
The core of the rent stabilization programme in New York (see Keating 1998b,
Pollakowski 1997) is rules about yearly rent increases in rents. The rules are complex
but f or our purpose the general point is only that they keep rents below the market
rent level for the apartments that are covered by the regulation. There is no general
vacancy decontrol, but for expensive apartments and/or wealthy household there is a
vacancy decontrol. From the material it is unclear how the rent stabilisation
programme is applied to new production of rental apartments. All rental apartments
are however not covered so the system is partial. There is a comment in Keating
(1998b, p 153) indicating that there exists some regulations also for contracts not
covered by the rent stabilization programme prohibiting "excessive rents". This seems
to mean rents over the market level. As there is no general vacancy decontrol the
system qualifies as a (partial) system of type E, with an additional general system of
type C protecting tenants against monopoly related rent increases.
Washington
Turner (1998) describes Washington as an example of a successful second-generation
rent control programme, very much in the same way as for Los Angeles. There is a
general rule about rent increases relating them to the Consumer Price Index, with a
maximum of 10% increase. Vacancy decontrol is not applied, but the landlord is
allowed to increase rents with an additional 12% for a new tenant. New construction
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is included in the rent control programme after a number of years. As the allowed rent
increases have been rather high there is no general difference between market rents
and regulated rents. Turner says "during periods of weak and slow market rent
inflation, a moderate system of rent control may have little or no impact on rent
levels; the main reason it is retained is as a safeguard against future periods of market
pressure." My interpretation is that the system has worked as a system of type D,
smoothing changes in market rents. Turner also notes that the system can lead to
higher rents than the market rent as the allowed increase at vacancy can be higher than
the changes in the market rent level. In these cases the landlords can use their
monopoly power. This is why there is a No in the column for type C.
In table 3 below there is an overview of the Canadian and American systems.
Table 3: Rent regulation system in some North American cities/regions
Area
Type B
Strong
transactions
cost related
Yes
Type C
Monopoly
related
Toronto
Type A
Weak
transactions
cost related
=>
Berkeley
Los Angeles
New Jersey
New York
Washington
=>
=>
=>
=>
=>
Yes
Partial
Yes
Partial
=>
?
?
?
Yes
No
=>
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Type D
Overshooting
related
On the way
out
(Yes)
No
No
=>
Yes
Type E
Segregation
related
On the way
out
No
No
No
Partial
No
The European countries were classified into four groups, and the same grouping can
be used for the North American systems.
Group 1 has some kind of segregation related rent control. As we can see in table 3
this is only the case in New York.
Group 2 has a strong transaction cost related rent regulation and some system for
smoothing rents in new contracts. Berkeley and Washington belong to this group.
Group 3 has only a strong transaction cost related rent regulation. This is the case in
Toronto (after the recent change in the system), Los Angeles and New Jersey.
Group 4 has only protection against rents higher than the market rents. The
cities/regions described above all have stronger systems of rent control, but my guess
is that a number of cities/regions have this weak control. As it is so mild it is often not
categorised as a system of rent regulation.
5 Conclusions
This article started from the distinction between first- and second-generation rent
control. It is argued that these concepts are vague and that second-generation rent
controls are a very heterogeneous group of systems. More distinct types must be
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identified in order to analyse the consequences of second-generation rent control. A
typology with five different types of rent control is proposed.
The first two systems focus on protecting sitting tenants and is related to the high
transaction costs for some tenants. This protection can be "weak" (only against rents
higher than the market rent) or "strong" (also against certain increases in market
rents). The third system was a general protection against landlords using their
monopoly position, or bargaining skills, to get a rent higher than the market rent level.
The fourth system focused on smoothing rent increases when demand increases and
there hasn't been time for supply to increase, but the aim is not to keep the rent level
below the market level permanently. The fifth system covers first-generation rent
control where rents were permanently below the market level and with a very big gap
to the market rent level. Some second-generation rent controls also belong to this
group as the rent is kept permanently below the market level, but with a smaller gap to
the market rent level.
The systems in a number of European countries and North American cities/regions are
classified using this typology and they fell rather neatly into four groups.
Group 1: Rents are kept permanently below market rent levels in attractive areas.
Group 2: Sitting tenants are protected against (certain types of) increases in market
rents and there is also a ceiling for rent increases of in new contracts. The ceiling is set
so high that it smoothes increases in rent, but do not keep the rent in new contracts
below the market level in the longer perspective.
Group 3: Sitting tenants are protected, but there is no regulation of rents in new
contracts.
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Group 4: The tenants are only protected against rents higher than the market level.
Group 1 is small and shrinking. One alternative is then to move to a system where
sitting tenants are protected against (some) increases in market rents and where there
is a smoothing also of rent increases in new contracts (group 2 countries). Another
possibility is to focus only on sitting tenants and let the rent adjust directly to the
market level in new contracts (group 3 countries). The final possibility, if some kind
of rent regulation is kept, is to protect tenants only against exploitation in the sense
that the landlord demands rents higher than the current market level (group 4
countries).
All systems can also be partial in the sense that only parts of the housing stock are
covered. An example is when houses built after a certain date are excluded from
control.
The next step from a research perspective is to look closer at each of the different
types of rent control. As Arnott (1995) has underlined most studies on rent control
have focused on the case where rents are kept permanently below the market rent level
in both new and old contracts. Today, however, the other types dominate and a more
thorough analysis of these seem to be more important. In section three some
remaining questions where sketched, e.g. why sitting tenants couldn't protect
themselves using devices on the market (options etc) and why rent smoothing could
be preferred even though it led to temporary queues.
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