IEA report: Rent controls do more harm than good

The briefing paper from the Institute of Economic Affairs (IEA) comes at a time when calls are growing for the introduction of rent controls in the UK in response to the housing crisis.

Rent control is when the state sets the rent, which is usually below the market value. The article by Dr. Konstantin A. Kholodilin, senior researcher at the German Institute for Economic Research (DIW Berlin), examines 196 studies conducted over 60 years. They cover almost 100 countries on all inhabited continents.

The briefing paper underscores the strong and sustained consensus in the academic literature on the impacts of rent control. According to Kholodilin, rent control benefits existing tenants but comes at a significant cost to society as a whole.

This leads to lower maintenance spending, home conversions and fewer new properties being built, ultimately exacerbating the housing shortage. This week, reports emerged that rental supply in Buenos Aires increased by 195.2% after Argentine President Javier Milei repealed rent control laws.

According to Kholodilin, rent controls can also lead to “overdemand” for housing, which can make it difficult for new residents to find housing. This in turn reduces labor mobility, increases discrimination against marginalized groups, and encourages the black market.

The regulation can also lead to people staying in their existing homes longer than intended. For example, a widower may stay in a large rent-controlled apartment even though his family has long since moved out. The lack of movement leads to a “misallocation” of available real estate, causing further economic damage.

Dr. Konstantin A. Kholodilin, author of the article and senior researcher at the German Institute for Economic Research (DIW Berlin), said: “Rent control effectively reduces rents in the controlled sector, but it comes at a high price. Tenants occupying rent-controlled housing benefit the most, at least in the short term, while newcomers lose out from rent control. In the long run, rent control can harm the rental sector by forcing landlords to convert their housing and turning tenants into owners.”

Dr Kristian Niemietz, IEA editorial director, said: “Economists are a notoriously divided profession: ask three economists and you will get four opinions. But there are exceptions to this, and the study of rent controls is one of them. This is an area where the empirical evidence really overwhelmingly points in the same direction. The finding that rent controls reduce the supply and quality of rental housing, reduce housebuilding, reduce the mobility of private renters and lead to a misallocation of the existing rental housing stock is as close to a consensus as economic research can realistically get.”