Regulation of Rental Housing Market Becomes Necessary

EghtesadOnline: Market regulation has become the constant refrain of officials in recent years.

News ID: ۷۸۷۸۵۵

10 May 2022

In principle, when government officials realize that factors involved in supply and demand are not in the best interest of society, they try to streamline them through intervention, said Nasser Zakeri, an economic analyst, in an article for the Persian daily Shargh. A translation of the text follows:

The purpose of market regulation is, purportedly, controlling price growth, preventing shortages, reducing pressure on low-income households and, in general, winning over citizens.

The rental housing market of large cities is one of the markets the government has tried to regulate in recent years by setting rent increase limits. The gradual increase of rental housing market share in the national economy, the negative impact of rising costs on the economy of low-income households and the spread of dissatisfaction have been the reasons behind official efforts to control the rental housing market.

But how has the limit on rent increase affected the market? There is no denying that intervention in this market is necessary because of the following reasons:

• The share of tenants has been growing rapidly over the past two decades, reaching 40% in Tehran. Accordingly, with the rise in rents, the share of the population facing livelihood challenges has increased significantly.

With sanctions, recession and double-digit inflation, the dimensions of poverty in society have expanded and the population below the poverty line has increased rapidly.

The share of housing in the household expenditure has been increasing over the past decades, so much so that many tenants have been forced to move to suburban areas or rent smaller homes.

The inefficiency of the capital market and the implementation of inappropriate monetary policies have resulted in the sharp growth of speculative demand in the real-estate market, raising landlords’ dependency on rental income.

Thus far, the effects of government intervention by setting a cap on rent increase, or lending security deposit loans, have been insignificant on the market. Policymakers have failed to notice that the increase in speculative demand leads to a hike in rents.

Given the lack of investment opportunities in the capital market, real-estate market has turned into the only investment opportunity for those who have capital.

Under the circumstances, landlords estimate the value of their property and factor in the interest corresponding to the sum and calculate the rent. As the rental property market is not inherently the so-called buyer market (it is the seller market), the landlord can impose his terms on the tenant.

On the other hand, tenants have been hit hard economically with the government reducing the banking interest rates because landlords have found an opportunity to increase the cash share of rents by reducing deposit rates.

The banking sector’s policymakers should have separated the market of small and large deposits to allow higher interest rates to be applied to small deposits so that in addition to achieving the goal of organizing the monetary sector, no additional pressure is imposed on tenants. But since none of the decision-makers are tenants, they have not been able to realistically understand the negative effect that could have been easily prevented.

In the current economic situation, the only appropriate market regulation measure would be to reduce speculative demand and weaken the link between the value of property and its rental value. With this policy, the government will send a message to liquidity owners that they should go to other markets if they are looking for a profit commensurate with their liquidity.

Also, the imposition of a tax proportionate with the rate of rent increase can reduce landlords’ incentives to increase rents.

The prevalence of poverty, as a result of rising housing rents over the past few years, is a warning sign to the government to take rental housing market regulation more seriously before it is too late.