In every city where rents start to rise dramatically, the calls for rent control become loud enough for the regulators to follow with some form of restrictions.
And in every city where such controls have been introduced, the effects have been ambiguous at best, with economists arguing for “market based pricing”, while social activists talk about the need to protect the stock of affordable housing. It is worth looking at the data in Dubai over the last 10 years to ascertain what the impact on housing has been.
Rent controls were introduced at a time of runaway rental inflation, when the stock of housing (particularly freehold) was in acute shortage; following the first boom-bust cycle that culminated in 2011. The subsequent rapid recovery in prices (and rents) meant the restrictions put in place did not allow landlords to ratchet up rents indiscriminately higher, thereby putting a curb on inflation.
In the current downward cycle that began in mid-2014, rents have fallen by up to 15-20 per cent in most freehold areas, offering tenants relief as the supply of new stock has caught up in most communities on the supply side, even as economic sluggishness has meant demand softened.
However, a closer look at the rental data over the past three years shows that even as economic conditions have softened, rents have continued to climb — albeit moderately — in areas such as Al Nahda, Garhoud, Al Ghusais, Al Quoz and even parts of Karama. In many cases, rising rents have compelled people to move, which is not only more expensive, it had the traumatic effect of moving families away from neighbourhoods they had been living for years. (Studies from other cities indicate the cost of moving neighbourhoods cost as much as 15-20 per cent of annual income).
The generally more affluent areas of Dubai Marina, Downtown Dubai, Palm Jumeirah, Emirates Living and other gated communities have all experienced rental declines. This appears troubling, as it has the perverse effect of protecting the high paid banker, while the plumber and the electrician are forced to pay market rates.
The intent of rental controls has always been to prevent “price gouging” and was effective at a time when supply of housing stock was lagging demand, as was the case during 2002-08). However, in a housing market where supply has caught up, and in some cases even exceeded, demand, communities where there are localised housing shortages are the ones where tenants are the most vulnerable.
Perversely, rent controls end up exacerbating the localised supply shortage as developers have a disincentive to build more. Particularly if their stock is likely to be purchased by investors looking for yields.
What does make sense is to build more houses. This may seem counterintuitive, especially in the current environment where everyone appears to be concerned about oversupply in Dubai.
However, closer analysis reveals that the demand for luxury and upper income housing — which was in acute shortage during the 2002-08 cycle — was met by developers building furiously, thereby arbitraging away the higher prices and rents.
A similar exercise needs to be undertaken for mid-income housing in areas where private sector developers can either be allowed to enter. Incentives in the form of additional built up area grants can be given for expeditious completion time frames, as was done in New York by then Mayor Bloomberg.
Or government sector developers can enter the fray to balance the supply/demand mismatch. In the interim, to help manage the transition, private sector market based initiatives — these have already started popping up selectively — can be encouraged in a system that allows vouchers to be issued by developers/landlords to encourage tenants to move into areas where rents are rising.
Whatever the solution, the ultimate argument is that it is certainly likely to be better than rent controls, as a plethora of economic studies state conclusively. In the final analysis however, rent controls remain popular among policymakers and the populace alike. Poll after poll suggests that the overwhelming majority of people continue to support such measures.
It remains to be seen whether empirical evidence that suggests its pernicious effects will be taken seriously enough to consider alternatives that are clearly needed.
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