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Tuesday, March 8, 2011

The landlords: demand, supply and price ceiling

Some of University students in my housing area are complaining that some of the landlords of their renting houses charging excessive rental rate. It is normal that tenants are paying about RM800 – RM1,000 a month for a two bedroom house. I am thinking about the policy of imposing limits on the rents that landlords can charge to the tenants. The purpose of rent-control policy is to ensure that the students can find affordable rental houses.

The questions are what type of price control we want to implement? How can we influence the landlords to follow the policy? What is the best policy for the tenants and the landlords of the house? We know that owners of those houses face daily concerns, such as covering rising insurance, upkeep, water, plumbing, landscaping and other costs. The problem is that repairs are not in a timely fashion. Is it possible in Malaysia that the owners to pass through half of the costs of capital improvements to tenants? For example, when the landlords painting a bedroom for RM1,000, he or she may divide half of that cost to the tenants, to cover the cost of painting.

Is it true that a rent control policy that reduce the price for which a landlord can rent their houses. Clearly this will hurts the landlord, but it also can harm renters. The lower the rent for this house will make building or buying houses in this area less profitable. If the landlords can’t make a profit building or buying a house, then they will not build or buying them. Over time, the number of rent-control houses should decrease as old houses become run down and landlords lack the incentive to build new one.

Thinking critically about policy:
1. This article describes that significant costs associated with rent-control policy. Despite these costs, rent-control policy is very popular with tenants and local politicians. Why would some tenants support rent-control policy? Do all tenants in the market gain from rent control policy?
2. Economists are critical of rent-control policy for several reasons. One reason is that the policy creates a deadweight loss. The magnitude of this deadweight loss depends on the slopes of the demand and supply curves. What causes the deadweight loss? What would the supply curve have to look like for the deadweight loss to equal to zero?

7 comments:

hariyani said...

Implementation of rent-control policy is good but who will actually monitor this? I have doubts on the enforcement of this policy based on below concerns:-
1. Can we trust our local authority to ensure the enforcement of ceiling limit? What is the penalty impose?
2. How about bribe? Can we trust the enforcement officers? We have heard a lots of bribe activities.This policy like an avenue of additional "cari makan"? Where at the end the tenants still suffer.
3. With this ceiling limit what will be the impact on quick rent?

This policy have it pro and con:-

1. Yes it may protect tenant but do tenant really aware of his right? To my opinion we are still lack of awareness? Why? It may have some personal interest to certain individuals. Less awareness by tenants will make the owner more profitable...
2. It seems also cost of education will increase too..not only the fees but other factors that influence the cost - meals, hostel.This is where in my opinion all universities in m'sia should have it own "sufficient" hostels.This will ease the burden of the middle,low and poor income earner.
3. It apply the same to hospital. Such a big hospital still lack of hostel and most of the nurses need to rent nearby.Again the rent will increase?

The key success of this awareness is the enforcement of the rent-policy.LHDN also need to play a part of this policy.Every renting activities must have an account with LHDN. Excessive renting should have higher "Tax Bracket".For banks they can request the rent to be assigned to bank.This indirectly will curb from charging higher interest rate.
Hariyani 807774
09/03/2011

Assoc. Prof. Dr. Jamal Ali said...

University administrators can do intervention to correct market failures through 1) moral suasion, 2) direct production, 3) command and control regulations, and 4) economic incentives.

Through moral suation, University can initiate the strategy like call a meeting with all the landlords. Telling them the issues and make them aware that if it's still happen, i.e. excessive rent rate, the University will build more hostels inside the campus and nobody will rent house outside the campus (Direct Production technique).

You mention about function of Majlis Bandaran and Lembaga Hasil Dalam Negeri (LHDN). Actually their function more toward command and control regulations - and I'm not sure whether they collect the tax from the landlords.

Hospital - still lack of hostel and most of the nurses need to rent nearby. So, maybe they need to build more building like police department and fire brigade. Even our prime minister will be happy because have an opportunity to implement new popular projects.

As for Economic Incentives - this technique are based on a different philosophy than command and control regulations. Rather than defining certain behaviors as legal or illegal and specifying penalties for engaging in illegal behavior, economic incentives simply make individual self-interest coincide with social interest. We can give landlords that setting the renting rate less than the ceiling price a contract for one or two years, and listing them in the University website.

Anonymous said...

Commonly, houses built around university campus will always fare higher rental value. Reason being demand is greater than the supply.
If we imposed rent-control policy, it will discourage invester. However, a reducing ceiling price with the age of the property may work, ie. the rental is at its highest when the property is new, and reducing when it aged. This will help to take care the benefit of invester of having to serve higher interest at the begining of the loan tenure. The reducing rental rate subsequently will take care the benefit of the tenants. However, question is who should regulates the policy and at what assumption? Can it be transparent?

Michelle 808563

hariyani said...

Prof Jamal,

Good ideas to have more hostels surrounding the universities, hospitals etc. I agreed with you too this will be favorite project by the government!!
Government should also form some incentive to the universities also in providing this hostels to students such as subsidize (only to those eligible (with recommendation from university) or in term of taxes it should give 100% rebates to the tax payer who supporting their children education. They can impose the max amount of this purpose as long as have receipt to show.Engaging authorize landlord also is good ideas where this landlord will sign certain agreement with university and publish in the university website the authorize landlord. Can UUM pioneering on this Prof?To my opinion this will be good efforts and it towards CSR also.
Hariyani 807774 Rezzen KL

Faizah said...

Actually it’s quite inappropriate to impose any policy on rent. Buying a house or building for renting purposes actually is an investment for some people but sometimes it due to some other reason (transfer etc). This is part of economic contribution. The rent conrol policy only will affect the quality and quantity of available housing. In the long run, it’s not only harm the housing providers but also to the consumers. What government should do is to provide limitation on property ownership in certain area to avoid monopoly cases.

Faizah 808550

Anonymous said...

yes,i agree with Faizah. We shouldn't have a policy that has a direct control on the market. it will affect the market. However, we may have some guidelines to follow or limit the property ownership for certain areas.

Nurul-806630
Rezzen

Linda Sabri said...

Dear Prof,

I agree with you on moral suasion where it can reflect appeals to community spirit from the landlords and to keep to official guidelines in order to correct market failures. The government can also give certain incentives to landlords in certain ways if they can help the community in terms of social obligation and social responsibility. With the mutual understandings between the landlord, society, universities and government, it can benefit all by lowering cost of living and lowering certain chain of reaction in terms of cost towards the country’s overall economic condition.

Linda Sabri
808560/UUM-Rezzen