Term Paper on "Rent Control Price Ceilings"

Term Paper 8 pages (2634 words) Sources: 3 Style: MLA

[EXCERPT] . . . .

Rent Control- Price Ceilings

Rent Control and Price Ceilings

This essay will introduce the topic of rent control and price ceilings to the reader. The paper is divided into three parts: First, we will introduce the topic to the reader, laying out the relevant details of the law, when it was enacted, how it works, what it was designed to accomplish, and any other pertinent information to assist the reader in understanding the policy in question. Secondly, we will try to analyze the policy, giving arguments both in its favor and against it. Finally, we will present the conclusions of this paper together with our own personal view on the matter. Moreover, we will try to give suggestions for the modification of the policy in order for it to become more effective.

In order to present the topic to the reader, we will try to define the main terms. In a free market, the demand and the supply tend towards what it is called 'the market equilibrium', that is towards a balance point. Because in some cases this thing does not happen, due to different reasons, the state decides to impose a floor price or a ceiling price, meaning that the state will impose through a law or other regulating act a minimum or maximum price of a good. "Rent control, like all other government-mandated price controls, is a law placing a maximum price, or a 'rent ceiling,' on what landlords may charge tenants." This law has its roots in the years after World War I when "rents were 'controlled' through the efforts of local rent anti-profiteering committees and public pressure." That is, between 1919 and 1924 some cities and states adopted measures such as "rent and eviction control laws." The next step was the adoption of modern rent control after the Second World War and "following Richard Nixon's 1971 wage and price controls."

In the United States, there are five states with rent control, thirty-five states that preempt rent control and eleven states with no rent control or preempt rent control. The five states with rent control are: California, District of Columbia, Maryland, New York and New Jersey. Each of these states has different laws regulating rent control, but they all cover the same issues.

Probably the most important one is New York where the Office of Rent Administration is accountable for "regulating rents in approximately 1.2 million privately owned rental units statewide under four laws: the Emergency Housing Rent Control Law, the Local Emergency Tenant Control Act, the Rent Stabilization Law, and the Emergency Tenants Protection Act (ETPA)." These four laws are the foundation of the rent regulation systems commonly known as rent control and rent stabilization.

The Emergency Housing Rent Control Law (State Rent Control) was initially adopted in 1946 and modified throughout the years. "The Local Emergency Housing Rent Control Act (City Rent Control) transferred the administration of rent control from the state government to the New York City government." Moreover, the Rent Stabilization Law through the Rent Stabilization Code is managed by the New York State Division of Housing and Community Renewal. This law has been established in 1969, being a modification and successor regulatory scheme to Rent Control. Finally, the Emergency Tenant Protection Act gave the legal support for rent stabilization in multiple cities (local opt-in) in Nassau, Rockland and Westchester counties. It "predicated on a continuing housing emergency (i.e., vacancy rate less than 5%), brought improvements to the NYC Rent Stabilization Law, and ended the 1971 vacancy decontrol of rent stabilized units." The last modification on rent control law is the Rent Regulation Reform Act of 1993 which ruthlessly destabilized rent defenses for all rent regulated occupants.

In order for these regulations to affect the market in any way, the rent level should be established at a price under the one that would in normal cases have been applied. However, if this level is lower than the regular equilibrium price, then demand will exceed supply and this will lead to a scarcity of dwelling spaces. Without a rent control, in a case when demand exceeds supply, the prices would rise in order to eliminate or reduce the shortage. The control from the state "prevents rents from attaining market-clearing levels and shortages result."

Moreover, if there is a rent control regulation, thus shortages in the controlled sector, there will be an excess or rise in demand in the uncontrolled sector of the market. Normally this segment tends to be smaller than the controlled one. This, combined with an excess in demand will logically lead to a boost in prices in that segment. Ironically, then, albeit rents may be lower in the controlled segment, they increase significantly for uncontrolled units and may be higher for rental housing as a whole. Thus, as in the case of similar price ceilings, rent control leads to shortages, diminution in the quality of the product, and queues.

The most important goal of this regulation is to protect the rights of the poor. However, there are several arguments for and against this policy. The most important ones are presented below.

The pros of rent control underline the fact that the implementation of this regulation is the only method to guard lower-income tenants from landlords who overcharge. Moreover, it protects them from having to leave a district for the reason that they cannot meet the expense of the rent. This is seen as a simple measure in order to assure consumer's protection: Once moved in the occupants are entitled to some guarantee that they will be able to preserve some constancy in their housing condition. Rent control is "considered necessary to prevent landlords from imposing rent increases that force key-workers or vulnerable people to leave an area" Restraining the fee that a property-owner can require "helps maintain a city's ethnic diversity and prevents the creation of slums on the outskirts of the main city." Moreover, in the absence of rent control, even renters paying full rent can be unexpectedly asked to move out without doing anything wrong.

Secondly, by connecting rental fees to dwelling repairs and material improvement, rent control regulation actually leads to an improvement in the state of housing, on one condition "the goals of rent control can be reached if they are administered in a careful and just way." With rent control, renters can be certain that concealed defects of their house will be mended in order for the house to meet the terms of the code requirements, without having to worry about retaliatory rent boosts. Thus, this policy may lead to a compensation for the inefficiencies of the lodging market." On the other hand, this policy may in fact increase the motivation to refurbish individual units: occupants may consider investing "sweat equity" and personal capital in order to improve their living conditions if they consider themselves protected from "landlords trying to capture the added value." No matter on which side one is, housing is perceived as being an unchallengeable positive human right, and this property equals or surpasses the property rights of owners. Thus the necessities of the renter ought to surpass the needs of the owner.

Thirdly, the rent control policy has positive effects on some tax reductions. Income tax codes frequently grant benefits for lodging holders, and rent control permits residents to contribute to several of those benefits. Moreover, even when increasing rents, property-owners can argue for depreciation deductions for rental possessions. Furthermore, property holders can also "deduct property taxes and mortgage interest, and exclude capital gains, from their taxable income."

Another important pro-of rent control is that through its implementation it allows people to retain their dwellings even in time of inflation and allowing renters to share in the benefit of the property tax control.

Furthermore, although it is considered that the implementation of rent control brings a decrease in the housing and apartment investment sustainers of this policy regard this subject as being highly debatable as this policy often includes new constructions.

Finally, One-dimensional assertions claiming that the rent control policy actually brings a decrease in lodging investment disregard to a great extent, larger influences such as the effects its non-application might have on local economy, public services, and tax burden, leaving beside countless additional voter-driven policies.

After mentioning the pros of the rent control policy we will focus next on debating the arguments which state against the implementation of this regulation. Unlike the purely theoretical arguments of supporters of the rent control policy, its opponents have both theoretical as well as practical know-how in order to sustain their ideas.

The first economical argument presented against the rent control policy is that rent control leads to the establishment of a market that is unfair for everyone. Price ceilings will create shortages and diminish the quality of the housing market. It is disputed that rent control policies create a scarcity of lodging, decreases its quality, discourages further investments, and augments rents on occupants who are excluded from its protections.

By applying this policy two… READ MORE

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