Rent control creates market distortions – Likukela

by Edgar Brandt

Rent control creates market distortions – Likukela

Windhoek

While government is mooting the idea of implementing rent control to reel in out of control increases in rental prices, a leading economist believes rent control creates market distortions.

Government recently pledged to speed up the implementation of a rent control board, as set out in the Rent Ordinance 13/1977, which among other things will regulate rental prices as well as resolve any disagreements arising from rental contracts. However, Mally Likukela, Standard Bank’s manager of economic and market research, yesterday commented that with rent control the number of houses producers supply will not be directly related to the prevailing market price.



“Rent control has proven elsewhere to be an ineffective and often counterproductive housing policy because of its ignorance towards the very basic laws of market economics. Not only that, but it also destroys the key functions of rent in the housing market that are essential to the efficient operation of housing markets in the economy,” said Likukela.

He noted that the key functions of rent in the housing market include compensating providers of existing housing units and developers of new units for the cost of providing shelter to consumers. A further function is providing economic incentives to attract new investment in rental housing, as well as to maintain existing housing stock.

“Over and above this, the economic and social costs of rent control almost always outweigh any perceived short-term benefits they provide. Rent controls are both unfair to owners of rental units and damaging to some of the very low income renters they are supposed to protect. Government should explore other options to address the housing crisis, because reliance on rent control as a solution to the problem of housing affordability cannot be justified at this point in time,” Likukela added.

In addition, Likukela  believes rent control will negatively affect the house market as it will make the market less attractive for investors. Also, he feels tenants will be more disadvantaged and he warned that rent control could actually worsen the housing shortage crisis.

“Rent control will affect tenants. Because tenants will be paying cheaper rent, very few tenants will move out of rent controlled apartments, meaning that there is less turnover and therefore less available units. Lack of availability is further hampered by builders’ disinterest in building new units because their profits will be lower. Cheaper rent also means less income for landlords, often meaning that there is less maintenance on both the apartment unit and entire building. Rent controlled buildings may remain in disrepair, while other residential buildings  experience revitalisation,” Likukela cautioned.

When asked about the challenges of implementing rent control, Likukela mentioned the translation of legislation into administrative directives, which he feels will prove to be a huge challenge.

“Until such time when the rent control board Act or institution’s mandate is clarified, there is little hope of a national consensus on the law/policy/Act. Just like NEEF, HPP and many others, lack of communication and clarity to the nation by government will jeopadise the chances of rent control to be effective,” said Likukela.

Furthermore, he noted that the establishment of administrative units and methods necessary to put rent control into effect remain ambiguous at this point in time, adding that saying very few compositions of this nature have lived up to their expectation in Namibia.

Finally, Likukela touched on the application or routine administering of rent control. “The administrative costs of rent control can be substantial, often outweighing any short-term benefits of rent regulation. It will 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. The associated costs in dollars and time fall not only on providers, but also on consumers and municipal authorities and I am not sure the parties are ready to absorb such costs,” Likukela said.

 

 

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