by
Franz Schellhorn
11.04.2014

Why rent controls only help higher earners

The Austrian Chamber of Labour (AK) calls for the state to combat rapidly rising rents with rent controls. While this is well-meaning, it is at the expense of those who are actually supposed to be helped.Anyone currently seeking a new flat will confirm the AK's following findings: the price of housing has noticeably increased in the last few years, particularly in the highly popular city-centre locations. "Since 2005 private rents have been rising twice as much as income and general inflation", the AK criticises. Thus it confirms one of the central findings of the Agenda Austria study "Teurer Wohnen" (German: http://www.agenda-austria.at/inhalte/publikationen/), according to which, at an average of 3.6 percent per year, rents in Vienna have risen (nearly) twice as fast as the general price level. New tenants are primarily affected, particularly young (generally lower-income) families.

To put a stop to the price hike, there is an urgent need for strong government rent controls, as demanded by the AK. This is certainly well-meaning, but will only hurt those who they are actually supposed to help: the socially weak. This is because rent controls have two unpleasant side effects. First, the rents in the lower price segment approach the (higher) price ceilings. Second, demand intensifies for flats in popular areas because a greater number of people can suddenly afford the state-controlled rents. It is always the "better-situated" tenant with the higher pay slip who wins, however – because he offers the landlord the security of the rent not falling into arrears. Frequently, higher earners can also pay higher rents, but they don't because the state rent control protects them from having to do so.

The criticism of rent control expressed by "Agenda Austria" at the beginning of the year has also been confirmed by the German Institute for Economic Research (DIW). Rent control treats merely the symptoms, not the illness, the DIW writes in a current study (German: https://www.diw.de/documents/publikationen/73/diw_01.c.442366.de/14-15-1.pdf). In the short term prices may decline, but in the long term the negative consequences take precedence for both the landlords and tenants. If the price signal is no longer valid, the gap between supply and demand increases, with the unpleasant consequence the absence of urgently needed flats. Moreover, no investments are made because letting pays less, or the in the extreme case, is no longer worth it. Instead, the money is put into the more profitable freehold segment, which further reduces the supply of rentals.

To get the sharply rising rents under control there is only one effective solution: a much greater supply of flats, particularly in conurbations. The state should also not forget to strengthen tenants' purchasing power by lowering taxes and duties on income. Currently, however, the exact opposite is happening, despite the fact that the tax and duty rate is already 45 percent of annual economic output. It is this way because the government is unwilling to correct the structures that have become too costly. It prefers to skimp on its citizens instead.