The impact of rent control on housing maintenance: A dynamic analysis incorporating European and North American rent regulations

This paper examines the widely accepted view that rent control leads to lower reinvestment in housing and, hence, lower housing quality. This view is based on fairly simple housing models and a very simple form of rent control that rarely occurs in practice. We consider the impact of rent control on housing maintenance within the framework of a dynamic model of housing reinvestment developed in Kutty (1995) that incorporates adjustment costs, durability of housing, uncertainty, and the role of future expectations. This paper develops a range of cases of rent control, incorporating particular features of actual rent control regulations prevalent in Europe and North America. We find that the impact of rent control on housing maintenance, within the theoretical framework of our dynamic model, is ambiguous. In most cases that we consider, though not in all, the level of reinvestment under rent control is lower than the level of reinvestment in the absence of rent control. Adjustment costs and future expectations play an important part in the response of landlords to rent control and, together with features of actual rent control ordinances, contribute to the theoretical ambiguity of the impacts of rent control on housing maintenance. We find that the discouraging effect of simple rent control on housing maintenance can be mitigated by provisions in rent control ordinances that reward quality improvements, and/or include the enforcement of housing quality codes. An important result in this paper is that when rent control ordinances allow increases in the level of housing services to be valued at their market price, the level of reinvestment under rent control is the same as the level of reinvestment in the absence of rent control.