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Is Housing Rental Control Good for the Maldivian Economy?

Male’ ariel view. From Unsplash Ishan @seefromthesky

One of the growing concerns among Maldivian residents, notably those in the Capital Male, is the fact that the housing rental prices are on the rise. In fact, between 2010 and 2018, house CPI (Consumer Price Index) calculated from 2012 as a base year, rose from 91 to 129.3. This is an increase of 42% in general house price levels. While the masses back the idea of government regulating the price charged by landlords to the tenant, and it sounds like a sensible approach to ease the impact on the renter, the downsides of the measure are something that cannot be ignored when considering the economy.

The inflation concerning house prices is unsurprising since prices, in general, have increased over the past years. Between 2010–2018 inflation has grown at an average rate of 4.28% while the real GDP is averaging at 6.41% for the same span. Inflation is an indication that the economy is improving overall so the outlook of the Maldivian economy looks positive and price inflation can be seen as a product of economic development.

According to the National Bureau of Statistic of the Maldives, the median income per month of a Maldivian household in 2016 was about MVR 19900. 10 years after the first Household Income Expenditure Survey (HIES) in 1993, the 2002–2003 survey showed a dramatic tilt of the household’s consumption proportion from food to housing. While food consumption in Male’ accounted for about one-third of total expenditure in 1993, it had gone down to less than one-quarter in 2002–2003. At the same time, household expenditure increased from 15% of the total expenditure to almost 25% between 1993 to 2002–2003. This means that the household’s expenditure on food and housing is more or less the same. Realizing such facts might make us mistakenly wonder why the government haven’t intervened in the market yet.

Some of the forms rent regulation takes on is rent control and rent stabilization. Rent control is putting a price cap on the rent and rent stabilization is setting limits to the degree by which rent can increase over a period of time. Supporters of this cause argue that setting a maximum price will help low income and middle-income groups to reduce the burden of the high rent and reconfigure spending on other necessities such as food. In Germany, where almost 50% of the people rent their houses, it is illegal to charge rent more than 20% above the level of a comparable property. In Seattle, USA, rents for one-bedroom apartments increased by almost 11% between 2010 and 2013. A point can be raised that imposing rent control will enable renters to benefit from long term security and shift the balance of power away from landowners to the renters. Amid growing concern over income inequality in the Maldives, especially Male’, such regulations sound appropriate.

However, looking at things more objectively, it is bad for the economy in the long term. An American economist, Paul Krugman wrote in the New York Times in 2000, rent control is “among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial”. Economists believe that such price restrictions on rent can affect the long-term supply of property in the market. Price caps would disincentivize landowners to let their apartments. It would also discourage them to fix up their buildings and would not bother to maintain them because their earnings are limited by the market cap. As house owners are not competing to bring in more tenants, they might stop building properties to rent. While rent control helps us in the short term, governments efforts may go waste in the long term as landowners stop renting their properties. Cheap rents are meaningless if it leaves many people homeless, defeating the whole purpose of the rent control.

A better solution would be to simply build more housing. The government should focus on building and aiding private housing projects. It is noteworthy that there have been considerable dwellings in the past years. Authorizations for residential building and construction has amounted to 216100, 352672, 332759 square meters in 2015, 2016, 2017 respectively. Increasing the amount of housing will increase the number of houses available in the market and help to push the prices down in the long run. With the increase in houses and apartments, people would be able to find a property that matches their income more sustainably.

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Source URL: Medium

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