Rent controls help to keep communities together, providing society with intangible benefits that unrestricted markets can sometimes fail to deliver. Jayne Russell / AFP
Rent controls help to keep communities together, providing society with intangible benefits that unrestricted markets can sometimes fail to deliver. Jayne Russell / AFP

Why do governments bother with rent controls?



In our last two articles, we have seen how rent controls cause housing shortages, damage housing quality, and waste the valuable time and resources of the low-income groups that the policy is designed to assist. Yet despite the manifest malfunctions of rent controls, they remain an intensely popular policy, both at the grass roots level, and among senior policymakers. Do they have any redeeming qualities, and are there superior alternatives?
As a general maxim, history is littered with examples of ineffective policies that retain popular support, due to ignorance of economic principles. A salient example is minimum wage policy, which often hurts low-income households by decreasing demand for their labour, and by accelerating the introduction of labour-saving technology. Thus, one could argue that the persistence of rent controls despite the damage that they cause merely reflects a failure by stakeholders to understand the economic consequences of imposing price ceiling.
The 1972 re-election of Richard Nixon in the US illustrates this. In 1971, in response to spiralling domestic price inflation, Nixon announced restrictions on increases in prices and wages at the level of the economy. The general public strongly supported the policy, and they expressed their approval by re-electing Nixon by a landslide.

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Rent controls are a waste of society's time and resources

Rent controls create shortages and diminish quality

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Yet economy-level price and wage restrictions are equivalent to rent controls on steroids, with amplified adverse consequences: the economy suffered hugely from a variety of shortages, forcing an abandonment of the policy. Other countries tried and failed with the same policy, ensuring that economy-wide price and wage restrictions have been consigned to the policy dustbin. Unfortunately, laypeople simply do not connect the dots, misguidedly preferring to blame the ensuing shortages on external bogeymen or greedy capitalists. In the Nixon case, OPEC was the convenient scapegoat that allowed people to think that price and wage restrictions were a solution to — rather than the source of — widespread shortages and deteriorating product quality.
However, rent controls do have an unconventional virtue: they help keep communities together, providing society with intangible benefits that unrestricted markets can sometimes fail to deliver.
Housing is a unique commodity. When I eat an apple, or visit the doctor, the benefit I receive depends exclusively on me, and is unaffected by the decision of others to eat apples or visit the doctor. In contrast, housing benefits are interdependent — in fact many extended families in the Gulf will go out of their way to ensure that they live close to each other, because of the beneficial interactions that the proximity permits. Your enjoyment of your house depends a lot on who your neighbours are.
Moreover, in the case of housing, many of these interdependence benefits are the result of the cumulative time that neighbours spend together, i.e. the communities that are created. If rents are determined purely by markets, sharp increases in rents can lead to the destruction of community capital as families are forced to relocate. This is one reason why many low-income households stand in favour of rent controls, and against gentrification.
Are rent controls the only ways to help low-income households afford housing and stay in communities? One effective alternative is housing vouchers: the government giving each household a voucher that they can use to lease at a certain rent level, and then allowing the market to balance supply and demand. The value of the voucher is determined by policymakers, who then fund it via general taxation. This allows low-income households to secure housing without worrying about shortages or wasteful queues, while still giving landlords an incentive to maintain their properties.
Another alternative is public housing: the government uses general taxation to build housing units and then assigns them to the general public with a priority on low-income groups. Most governments have such programmes, yet they suffer from several flaws.
First, unlike the capitalists in charge of building commercial housing, the civil servants overseeing the construction of public housing have very little incentive to ensure good quality and efficient production, since any revenues accrue to the general government. Moreover, functionaries are susceptible to corruption in the allocation process, because they do not face the disciplining effect of market competition.
Second, even well-intentioned functionaries will struggle to produce the amount of housing necessary to service public demand, due to the complexities of the market. Market competition gives capitalists a very strong incentive to study housing demand and to anticipate potential spikes, ensuring that shortages or gluts are transient. In contrast, civil servants lack the incentive to study the market diligently, or to respond to changes nimbly—a problem exacerbated by government bureaucracy. For this reason, governments the world over have begun to respond to the persistent ineffectiveness of public housing by turning to the private sector.
More generally, the key point to remember is that opponents of rent controls are not proponents of ignoring the plight of low-income households. Rather, they are people who want to ensure that policies that actually help low-income households — such as housing vouchers — are deployed, and those that hurt them are kept on the shelf.

Test

Director: S Sashikanth

Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan

Star rating: 2/5

'Worse than a prison sentence'

Marie Byrne, a counsellor who volunteers at the UAE government's mental health crisis helpline, said the ordeal the crew had been through would take time to overcome.

“It was worse than a prison sentence, where at least someone can deal with a set amount of time incarcerated," she said.

“They were living in perpetual mystery as to how their futures would pan out, and what that would be.

“Because of coronavirus, the world is very different now to the one they left, that will also have an impact.

“It will not fully register until they are on dry land. Some have not seen their young children grow up while others will have to rebuild relationships.

“It will be a challenge mentally, and to find other work to support their families as they have been out of circulation for so long. Hopefully they will get the care they need when they get home.”

UAE currency: the story behind the money in your pockets

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

MATCH INFO

Fulham 0

Aston Villa 3 (Grealish 4', Hourihane 15', Mings 48')

Man of the match: Jack Grealish (Aston Villa)

RESULTS

6pm: Mazrat Al Ruwayah – Group 2 (PA) $40,000 (Dirt) 1,600m
Winner: AF Alajaj, Tadhg O’Shea (jockey), Ernst Oertel (trainer)

6.35pm: Race of Future – Handicap (TB) $80,000 (Turf) 2,410m
Winner: Global Storm, William Buick, Charlie Appleby

7.10pm: UAE 2000 Guineas – Group 3 (TB) $150,000 (D) 1,600m
Winner: Azure Coast, Antonio Fresu, Pavel Vashchenko

7.45pm: Business Bay Challenge – Listed (TB) $100,000 (T) 1,400m
Winner: Storm Damage, Patrick Cosgrave, Saeed bin Suroor

20.20pm: Curlin Stakes – Listed (TB) $100,000 (D) 2,000m
Winner: Appreciated, Fernando Jara, Doug O’Neill

8.55pm: Singspiel Stakes – Group 2 (TB) $180,000 (T) 1,800m
Winner: Lord Glitters, Daniel Tudhope, David O'Meara

9.30pm: Al Shindagha Sprint – Group 3 (TB) $150,000 (D) 1,200m
Winner: Meraas, Antonio Fresu, Musabah Al Muhairi

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