In developed nations the idea of rent control may appear outdated, yet various types of rent control exist to provide stability in the real estate market, not only to enable struggling pensioners to maintain their homes as the surrounding market skyrockets.
Rent control is a restriction on the increase of rental charges, assisting markets to remain reasonable in extreme growth circumstances. In most world markets tenants are protected by a form of rent control, whether it is a limit on the percentage increase per year, or a system where rental is set at a pre-determined level by the local housing authorities based on the market value of the home.
Rent control has become extremely effective over the past decade with the excessive, fast growth of real estate in emerging markets. While the attraction of foreign investments to boost a country’s economy may appear attractive at the initial stages of the market’s growth, it can often result in excessive rents and unaffordable housing for the domestic market. To counteract this issue, restrictions may be placed on rental increases, enabling the domestic market to access the housing, often a necessity in poorer countries only beginning to experience economic growth.
Different countries follow varied types of rent control systems, often adjusting the structures to enable flexibility as the market modernises. It is rare to find a country where absolute rent control is practiced, keeping all rentals at a pre-determined structure. Most emerging markets will place a restriction on the maximum increase percentage per year, protecting the tenants as well as avoiding the rental market from spiralling out of control.
Other structures may also follow a freeze on the rental amount until the property becomes vacant, enabling the owner to increase the rent to a reasonable market level when new tenants enter the property. In order for controlled rentals to be effective for both landlords and tenants, the owner of the property needs to be able to recover the investment outlay and associated costs, while ensuring the tenant is protected from excessive and unexpected rental increases.
Although older styles of rent control can be extremely beneficial to tenants, it can place a hold on any growth in the local market, detracting buy-to-let investors as the returns may not cover their investment outlay. This is considered to be a major downside of rent control, as the opportunities for investment growth are absent. Rent control systems following the older formats tend to be hard to encounter, with governments placing restrictions on the controlled units for the benefits of reduced income households, rather than an average tenant.
While in many world markets the implementation of rent control may appear obsolete, controlling excessive growth has become necessary to avoid an unrealistic markets and extreme decline. Considering rent control laws is essential when purchasing a property in a foreign market for its buy-to-let potential. This will assist to ensure a complete understanding of the market being entered, the owner’s legal obligations and any considerations for calculating potential yield returns.