Rent control is not providing affordable housing

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By Nikolas Ioannou

Rent Control measures have been applied around the world for many centuries as a part of housing policies to tackle the issue of affordable housing.

The basic form of rent control is a ‘rent ceiling’ which prevents landlords from adjusting rental rates according to market figures.

It determines under what circumstances a tenant can be evicted and other clusters of regulations that mainly favour and protect tenants.

However, rent control comes with various critics and ambiguities as to the long-run effects that it can have on the real estate market as well as to socioeconomic factors.

In particular, it discourages new housing supply creating, thus, housing shortages which consequently can lead to other social and economic undesired outcomes.

Residences are left unmaintained or redirected to alternative uses, since landlords would not benefit from higher rental incomes, creating thus an image of low-quality structures.

In Cyprus, the Rent Control Law 23/1983 protects the tenant who is considered ‘statutory’, providing that satisfies specific criteria, from a) security of possession and b) security of uncontrollable rental increases.

The law in Cyprus covers only certain areas (such as the towns and some rural municipalities) and it refers only to buildings which have been constructed prior to 31/12/1999.

It covers all buildings except hotels and vacant land.

The Law was initially introduced after the 1974 Turkish invasion, in order to protect tenants during the post-invasion years of crisis.

A statutory tenant is one which satisfies the above two criteria and retains the possession of the premises after the expiry of the contract.

The biggest issues arise from the fact that tenants could only be evicted under certain circumstances which despite being reasonable, it could take up to 2-3 years for a court to rule an eviction order.

In the meantime, tenants can take advantage of the long court delays by possessing the premises without paying rent.

Other cases are more complicated involving companies which may have changed shareholders or are in financial debts, in which cases lost rental remunerations are even harder to be obtained.

Despite, the fact that a large number of properties still fall under rent control, it is essentially a fading law as buildings deteriorate rapidly and over time the number of buildings that fall under that category will start to be reduced in number and perhaps be replaced by newer structures.

It is important to note, however, that a number of these buildings are classified as ‘listed’ and they fall under a special planning regime which prevents their demolition.

In those cases, the situation becomes even more complicated for owners.

The issue of a housing supply shortage in Cyprus arises from other factors and not directly from rent control acts, due to the fact that the Law covers only buildings that were constructed prior to 2000.

Therefore, the supply of new residential units would not be affected by it.

The shortage in supply has been attributed mainly to the slow construction activity that we have experienced during the post-crisis period until things started to pick up again in 2017, a period during which supply of new residential units was extremely limited.

In the meantime, demand started increasing at a fast pace, creating thus, a massive disequilibrium in the supply-demand balance, which in turn caused rental rates to be uncontrollably increased.

Drastic measures

The issue of affordable housing for Cyprus is evolving into a massive social problem that needs to be tackled with drastic measures to be put in place.

The socioeconomic struggle that many residents face due to being unable to cope with the inflated rental rates is evident mostly in town centres where available residential units at decent prices are nonexistent.

The Government has recently shown a willingness to tackle the problem by planning large residential developments that will consist of budget housing.

Take for example the proposal of the Limassol Municipality to the Cyprus Land Development Corporation for the development of 740 residences on the outskirts of Limassol which will be leased to young couples at up to 30% below the current market rental rates.

Besides, specific measures have been introduced to provide incentives for developers to include affordable housing units within their planned developments.

This is achieved by increasing the permitted building densities or permitting the construction of additional floors.

Other measures could be more drastic including complete involvement of the authorities in the planning and building permits issued at each phase of the economy.

Development should be unfolding into a more holistic approach by considering all types of markets and not necessarily the most profitable ones.

For example, for every building permit that is issued for a multi-storey tower, the authorities could require developers to erect an equivalent amount of square meters of budget housing to cover the needs of the local market.

Other measures could provide incentives to the banks to take into consideration practices that assist young couples to acquire their own house.

A commonly-used financial tool of developed markets is the ‘financial leasing programs’ which involve leasing contracts at low rates which give the right to lessees to buy the property during the duration of the contract.

It is a measure that protects tenants from uncontrollable increases as they are locked into a pre-agreed rental rate for the whole duration of the contract until the purchase.

The writer is from the Property Studies & Valuations Dept at Danos | An alliance member of BNP Paribas Real Estate