The Regulation of Residential Tenancy Markets in Post-War Western Europe: An Economic Analysis1

By Mora-Sanguinetti, Juan S. | The European Journal of Comparative Economics, January 1, 2011 | Go to article overview

The Regulation of Residential Tenancy Markets in Post-War Western Europe: An Economic Analysis1


Mora-Sanguinetti, Juan S., The European Journal of Comparative Economics


Abstract

This paper provides an economic analysis of the post-war regulation of European tenancy markets. Two representative types of market regulation are analyzed: the introduction of compulsory duration clauses in tenancy contracts (as a means of protecting the tenant against eviction); and rent control policies. First, the study describes and analyzes the recent history of such regulations in Spain, Italy, Finland and the UK, in order to draw some general conclusions about the evolution of European institutions in recent decades. Their effects are then explored by adapting a theoretical model of tenancy markets. The results show that both rent control and compulsory duration clauses potentially entail negative effects for European tenancy markets as they may drive some participants out of the market. These effects are consistent with the trends observed during the latter half of the 20th century in several European countries.

JEL Classification: R31, K12, N4.

Keywords: Rent control, Tenancy contracts, Compulsory terms

(ProQuest: ... denotes formulae omitted.)

1. Introduction

In several European countries, the weight of the tenancy market relative to the total stock of principal residences has diminished throughout the 20th century. Figure 1 shows, using information held in public databases of the European central banks, recent evidence for 12 European countries.

Several explanations could be provided to understand that general trend, ranging from the finance literature, which considers housing as an investment good, to the more general housing economics literature that regards housing as a consumption good (see Henderson and Ionnides, 1983 and Rosen et al. 1984 for some early references). For instance, in recent decades improvements in access to credit and significant development of the financial markets (Iacoviello and Minetti, 2003, Kumbhakar and Lozano-Vivas, 2004, Blanco and Restoy, 2007) have occurred, which may have favored the property market. Some fiscal regimes have also privileged buying over renting of residences (see López-García, 1996, García-Vaquero and Martínez, 2005, for the case of Spain).

Nevertheless, it is only some specialized literature which takes into account the effects of regulations and institutions of the tenancy market (other than fiscal policies), such as rent control clauses or periods of protection for tenants. A weak tenancy market and a diminishing rate of tenancy seem to be related, for instance, to the introduction of rent control policies. In this respect, the microeconomic intuition that relates a rent ceiling with a diminishing quantity and quality of residences in the tenancy market has been supported by several theoretical explorations (Basu and Emerson, 2000, Raess and Ungern-Sternberg, 2002, Basu and Emerson 2003) or empirical analyses (Johnson, 1951, Alston et al., 1992, Glaeser and Luttmer, 2003, Sims 2007 among others).

However, most of the research on rent control has merely examined the type of market intervention enforced in local markets of the United States (for a summary, see Turner and Malpezzi, 2003). In contrast, less analysis has been made of the specific effects of European-style tenancy restrictions. Exceptions to that are Peña and Ruiz- Castillo (1984) for Spain, by Munch and Svarer (2002) for Denmark and by Lyytikäinen (2006) in respect of Finland.

Moreover, the regulations in force in various European countries impose not only rent control clauses but also clauses of protection term (duration clauses) against eviction. Both kinds of rules may have had an effect on the diminishing share of tenancy in very different economies. At the same time partially liberalizing laws, such as those adopted in the UK (England and Wales) and Finland, may have had the opposite effects.

The aim of this paper is to analyze the regulations specifically directed to the tenancy markets in Europe and to provide a theoretical exploration of their economic implications.

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