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Friday 19 April 2019
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Rent Control – the blue pill or the red pill?

Screen Shot 2016-08-19 at 10.48.40 AMThere is a scene in the movie “the Matrix” where Morpheus offers Neo a choice by holding out two pills:
“This is your last chance. After this, there is no turning back. You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I’m offering is the truth. Nothing more.”

The Namibian government publicly stated that it will set up a rent control board as set out in the Rent Ordinance 13/1977 to address escalating rentals and to make housing more affordable for tenants. Some see rent control as a panacea for our housing ills where we introduce rent control, take the blue pill, and believe whatever we want to believe. A more sensible approach would be to take the red pill and explore the potential impact of rent control in more detail.

Namibia’s housing problems are well documented. For many years, double digit housing inflation has been the norm. As a general rule, adequate affordable quality housing has been hard to come by. The cause of this can be debated, but the general (informed) consensus is that lack of municipal planning has, at least in part, been a major contributor to the house price increases. Planning permission can take many months to complete and municipal authorities simply do not make enough serviced plots available for development. This of course also puts upwards pressure on rent.

Rent control is not a new concept. Proponents of rent control argue that it is necessary in order to protect “poor” tenants from being exploited by “greedy” landlords. Those against rent control argue that it is an ineffective and counterproductive housing policy measure and in fact reduces the supply of new housing on the market (by making it more expensive to build) and also reduces the quality of available housing (on the basis that there is no incentive for landlords to invest money in improving their properties if rents are in any event capped).

Berlin introduced a rent control law in 2015 since a large number of inhabitants rent, as opposed to own properties. The aim was not to stop rent escalation, but to slow down rent increases. The idea is that a rental body sets prices for certain neigbourhoods and house types, and that new rental contracts should not exceed those prices by more than 10%. A 2015 study from property firm CBRE showed that rents dropped marginally in the first month the new law was introduced, but began to spike again thereafter. One of the problems was enforcement of the new laws. Typically, disputes are time consuming and expensive and for many it was simply not worth their time, effort and money to go to court to resolve rental disputes. It remains to be seen whether these new laws will have the desired effect of curbing rent increases or whether they will have a negative effect but the bureaucracy surrounding rent control can certainly be an inhibiting factor.
There are also other potential difficulties with rent control: For example, in New York, there is some evidence to suggest that those living in rent-controlled flats tend to have higher median incomes than those who rent market-rate apartments. This is hardly an intended consequence but nevertheless a market reality.

Many economists (including Paul Krugman who wrote an article in the New York Times in 2000 stating that rent control is “among the best-understood issues in all of economics, and—among economists, anyway—one of the least controversial”) argue that placing a restrictive cap on rental prices negatively impacts on the supply equation. The supply / demand equation is the backbone of market economics. In Namibia, there is a high demand for housing – and a limited supply of housing units – which is reflected in the (relatively high) prices for rent. In an ideal scenario, equilibrium is achieved when demand matches supply. This however rarely happens in practice and the markets tend to oscillate naturally in order to try and reach market equilibrium.

How does rent control impact on basic market dynamics? In essence, rent control sets an artificially lower level where price is supposed to meet demand. In other words, it disincentives those providing the supply (i.e. property developers and landlords) from building new units. Looking at it from a different angle, if the supply of available housing units decrease, then it creates more demand for units, not less. It is therefore entirely possible (and some will argue, likely) that rent control in Namibia will have the opposite effect from that which it intended to achieve (however noble that cause may be). The bottom line is that should property developers (and landlords) have less incentive to build new units (because their return on investment has been reduced), then tenants will find it harder to obtain quality units. This is not to say that everything involving rent control should be dismissed. One upshot is that a “rent committee” tasked with solving disputes between tenants and landlords would be a welcome development. Many landlords and tenants simply cannot afford to go to court if a dispute arises, and a committee tasked with solving disputes quickly and effectively might alleviate some of these pressures. It is also important to properly investigate the real (as opposed to perceived) causes of the housing shortage and rising rents. If it comes down to bad municipal planning – and there is ample evidence to suggest it might be the case – then it might be better to pass laws which ultimately increase supply of housing, rather than pass laws that encourage disinvestment in housing.

Rent control – which effectively amounts to government intervention in the housing market – can have profound social and economic implications. It should not be considered lightly or implemented as a “knee-jerk” reaction to populist demands. It requires careful deliberation and extensive research failing which it could very easily lead to a reduction in the quality and quantity of available housing units, as opposed to an increase. If rent control is applied incorrectly, then we may all wake up one day to find that the rabbit hole goes a lot deeper than we thought, and it may have been better to take the red pill and stay in Wonderland.

. Erik Muthow obtained an LLB from Stellenbosch University in 1996 and LLM in commercial law from UCT in 1997. He worked as a lawyer in South Africa, London and Dubai for about 15 years. In Dubai, Muthow was a partner at one of the largest law firms and headed the international transport and trade department.




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