Rent controls, sometimes, have the perverse effect of making the problem of scarcity and affordability worse.
The most recent example of this was seen in Argentina, where a series of stringent rental controls meant landlords preferred to keep their properties empty rather than rent them out and get locked in. At one point, nearly a fourth of Buenos Aires’ properties were left empty, driving home the maxim that good intentions do not work in markets as the latter have their own dynamic.
The removal of such controls sent rents spiralling high but also unleashed a wave of supply into the market. After a couple of years, it appears as if the market is starting to stabilize as affordability clashes with market values and an equilibrium – a negotiated one - is reached.
It does mean that when such controls are lifted, the situation at first does become worse before it gets better. We have seen in cities like Dubai that landlords will go about having their way. In a post-Covid market surge, tenants were flooded with eviction notices, and moved across town only to be served with eviction notices a second time in many cases.
Evictions became commonplace
This phenomenon has been primarily in the mid- and upper-mid-income segments of the marketplace, but has also been common in areas such as International City and Discovery Gardens. In many cases, tenants have renegotiated leases with the landlords to stay in their places, with the consequence that they have been priced out of the property ladder.
Developers have responded with a flurry of off-plan projects at significantly higher prices, a phenomenon seen earlier in cities such as Manhattan and Miami. (Both have started to see prices fall as delinquencies have started to rise). Incentives will always be a way of working through in a market economy and prices will always have their way.
In Argentina, despite the backlash, the good news is that the markets have now reached a state of equilibrium. In Dubai, despite the headlines, we have started to see the same, partly because tenants have moved to options in Sharjah and elsewhere, and partly because new supply has finally started to hit the market.
The room for negotiating has become somewhat easier for tenants, a factor that is expected to increase in 2025 and 2026, despite the projected influx of additional residents. In such an environment, artificial controls (such as a 3-year minimum contract that was put into place in Argentina that led to the flourishing of a black market) lead to a backlog of litigation and create an artificial scarcity of supply. And subsequently to an equally artificial surplus.
Removes the grey market activities
The removal of such caps may create a rise in short-term inflation, but in the medium term helps the market stabilize a lot quicker. And avoids artificial problems such as overcrowding of apartments, and other mechanisms such as subletting to other tenants. Or worse, evicting tenants only to rent them again at market rates (which is clearly illegal) in the hope that they don’t get caught.
It also avoids the yawning gap that exists between tenanted properties and those that are empty. (In Buenos Aires, the gap widened to as much as 27 times; in Dubai the data suggests that in some places the gap at times was 3x the value.)
In either scenario, the good intentions get swallowed up by market forces leading properties to become out of reach for most people to purchase. This is one of the reasons why rental controls are imposed in the first place.
Luckily, in Dubai, the elasticity of supply is such that the problem for the most part is being taken care of itself. After 3 years of a runaway market, it appears as if price and rental growth are starting to show signs of stability and maturity.
Nonetheless, this is a symptom that will keep recurring in market cycles at inflection points. It is for this reason that RERA has even allowed for an individual rental evaluation of properties. Perhaps it may be time for such rental indices to be either updated more frequently or be put back on the shelf and let the market do its job in clearing prices.
