Research firm assails rent control in Middle East (page 1 of 2)

In December 2007 Dubai's government toughened up its 2005 Rent Law and reduced the maximum 2008 rent increase to only 5%. Abu Dhabi has likewise capped 2008 rent hikes at only 5%.

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

In adopting rent control the Gulf has moved in the opposite direction to the rest of the world. Elsewhere, rent control regimes have generally been dismantled or softened since the mid-1990s.

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.

The Gulf measures have dismayed landlords, and alarmed property investors.

In an extended research article published today, the pros and cons of rent control regimes in about 40 countries are reviewed by the Global Property Guide an international research firm.

"We believe that rent control is generally harmful," says Prince Christian Cruz, senior economist at the Global Property Guide.

"But 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 for contracts," he continues.

"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 halt," Cruz notes.

In defense of rent control

A common (and much abused) justification for rent control is the right to housing, which is sometimes protected by the constitution.

Another justification is to correct market inefficiencies such as information asymmetry and high transaction costs. Because of the high cost of moving, tenants can arguably be pressured by landlords to accept rent increases. Tenants may also be unaware of the real condition of units until they move in. If the tenant complains, the landlord may threaten to increase the rent.

Standard contracts perform a service to both landlords and tenants. In many cases in modern society, the state intervenes in contractual relations between individuals in order to provide simplicity, clarity, and order.

Both landlord and tenant are helped if standard provisions exist, for instance, which determine what should be agreed on - the initial rent, rent adjustments, date of payment, penalty for delays, conditions for eviction and such. These can provide both flexibility and security.

The problem with rent control

The principal argument against rent control is that it tends to distort economic incentives, leading to inefficient distribution of resources.

Rent control reduces the incentive of landlords to supply rental units. Rental units tend to be in scarce supply under rent control. Ironically this leads to an escalation of complaints against the landlord class. Vacancy levels tend to be relatively low and available units tend to be rented only under strict conditions, again aggravating relations between landlords and tenants.

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