Direct Effects of
C. Peter Rydell
Chapter 2 concluded on a note of concern regarding the reluctance of investors to enter the rental housing industry in the face of rent control. Considering the alternatives, such reluctance would be rational in financial terms, and in the long run could threaten to make worse the very housing shortage that gave rise to controls in the first place. This chapter deals with the response of owners and managers who are already in the rental housing business at the time rent controls are introduced. As in the case of cautious investors, current owners can be expected to compensate for real or perceived financial losses. Reacting to revenue reductions by reducing maintenance expenditures, their behavior would gradually eliminate the initial price reduction benefits. Insofar as this behavior holds, rent control may be found to have transferred the social benefits associated with housing to some households in the short run, at the expense of other households in the long run. Of interest in this regard is the analytical challenge that faces anyone who chooses to investigate such an exchange of benefits.
Rent control laws differ greatly, but they have the common feature that they limit the amount by which rents can increase. As a consequence, rents of controlled dwellings are less than they would be in the absence of rent control. The difference between the market rent caused by rent control and the anticipated rent without rent control is defined as rent reduction.
Landlords who elect to stay in business can respond to the rent reduction in two ways. First, they can operate their properties the same as they would without controls. In that case, tenants will