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RENT CONTROL LEGISLATIONS AND ITS IMPACT ON ECONOMIES: THE NEED FOR A FRESH PERSPECTIVE CHAPTER 1- INTRODUCTION Rent and rent control are factors that often influence our lives in a major way. Many of us live in rented apartments and pay a regular fixed amount of money every month to a person who owns the apartment that we call home. Those of us lucky [and rich] enough to own several houses often rent them out for a pre-determined amount of money which the occupants of these houses pay us every month. Thus every month, a certain amount of money changes hands in this manner. This process is repeated across the world by hundreds of millions of people. The people who are not the actual owners of the premises which they occupy and who pay money to guarantee their right of residence are called tenants while the real owner who is compensated for renting out his premises is known as the landlord. The money that is paid every month by the tenant to the landlord is called rent. Rent can take several forms but in this paper I am restricting the definition to include only the payment of money by the tenant to the landlord in consideration for a allowing the former to occupy a house or a portion of a land or building which can then be used for commercial purposes. It would an understatement to state that the issue of rent control has generated a passionate discussion amongst economists. This is one topic that is seen to be distinct from dry economic theories, and infact, the twin issues of rent control and governmental interference in the determining of rent rates have been responsible for establishing or bringing down governments, both at the local and at the national level. First of all I would like to arrive at a basic understanding of the functions of rent and the meaning of rent control. Rents serve two functions essential to the efficient operation of housing markets and to the economy as a whole: 7 They compensate providers of existing housing units and developers of new units for the cost of providing shelter to consumers; and 7 They provide the economic incentives needed to attract new investment in rental housing, as well as to maintain existing housing stock. Rent control, like all other government-mandated price controls, is a law placing a maximum price, or a "rent ceiling," on what landlords may charge tenants. If it is to have any effect, the rent level must be set at a rate below that which would otherwise have prevailed.To put it simply, rent control relates to the fixing by the government of rent rates at a particular level, so that all tenants across the board who fall in a particular category pay the same amount of money to their landlords. Governments seek to enforce these controls through instruments of law by means of rent control legislations. These rent control legislations lay down the basic framework within which the government can enforce its strictures. They are seen to be weapons in the hands of the tenants against the profit minded tendencies of the landlords. The State steps in to ensure that by standardising rates at which properties are rented out, it ensures that a large number of its citizens have access to housing at affordable rates, something which a de-regulated market would have made impossible for them. It is a common misconception that rent control is the invention of communists and is followed only in socialist countries, but many will be surprised to note that it is prevalent across the world. Even to this day, rent control legislations flourish in the heart of free market capitalism-the United States of America. Manupatra Information Solutions Pvt. Ltd.

Page 2 The best-known example of rent control in action would be the rent control regime in place in New York City. Rent control in this city enslaves two million tenants and landowners to a control mechanism that has done more harm than good. In North America, economists are virtually unanimous in their condemnation of rent control. It is interesting to note that in a survey of economists of the American Economic Association, fully 93 percent agreed, "a ceiling on rents reduces the quality and quantity of housing available."In India, the best examples of rent control would be the situation prevailing in Mumbai and Delhi. Rent control is a major election issue and political parties tend to procrastinate and prevent reforms in the archaic rent control laws in order to please their vote banks. The pathetic situation of the housing sector in the nations capital New Delhi serves as a perfect illustration of the politicization of rent control. In this context it is worth noting that fresh rent control regulations have been implemented in Maharashtra, Karnataka and Madhya Pradesh though Delhi is still stuck with an antique piece of a legislation that has led to a great deal of discontent and frustration amongst all sections of society. This paper will devote space to the arguments for and against rent control from both the American perspective and the Indian perspective. There are some fundamental points that this paper will seek to address . First of all, I will advance the argument that the abolition of the rent control regime can result in an acrossthe-board lowering of rents. In doing so this paper shall prove how rent control results in actually driving out affordable housing from the areas that are under the regulation. To support this argument, examples of the experiences of American cities in the pre and post regulation scenario will be quoted. Secondly, the paper would like to explode the myth that rent control has benefited the poor and the vulnerable sections of society by providing them with affordable housing options. Thirdly emphasis will be placed on the governments interference in a nations housing markets, which has lead to stagnation in the urban sector of the economy and has lead to profound economic and social consequences. This is because ultimately, the issue of rent control needs to be viewed in the larger perspective of urban development, rather than as a mere conflict of interest between tenant and landlord. Though these issues tend to overlap, they have been dealt with it in a concise yet cogent manner. CHAPTER 2- A BRIEF HISTORY OF RENT CONTROL Rent control is a relatively recent phenomenon in the world of economics. It has emerged over the past century, peaking during time of war and uncertainty such as the Second World War [1939-1945], but has been slowly dying out since the mid-1980s. In India, rent control really emerged in a big way in the years following the First World War . War Rent Restrictions that were imposed in the state of Bombay in the 1930s. This came about in the aftermath of the First World War when the accommodation scarcity in Bombay was very high. According to these restrictions, landlords could not exploit their tenants and only predetermined rents were to be paid. Unfortunately, these rent restrictions continued for over sixty years before they could be reformed. Rent control hit other parts of the Country after partition. Rehabilitation colonies were set up in Delhi, the capital city of independent India, as also in several cities. These rehabilitation colonies were planned residential areas with properly laid out roads, parks, community facilities, etc. It was also during this time that new towns and 'model towns' were developed. Further, the migration of people from various rural areas into the erstwhile Presidency towns, mostly from jobs in the newly formed central and state governments had led to a growing housing shortage in these big cities. This required the imposition of rent control. The United Kingdom imposed rent control after the end of the Second World War in 1945. This was the first time it was being implemented in the British Isles, and the main object was to ensure that there was equitable distributing of houses at reasonable rates to all sections Manupatra Information Solutions Pvt. Ltd.

Page 3 of society. Rent control in America is synonymous with its implementation in New York City. Rent controls were part of the temporary price controls imposed during World War II. This policy, known as the War Emergency Tenant Protection Act was meant to assist poorer residents and also to protect people from war related housing shortages. There was a fear that the return of troops from the battlefront would send rents skywards. Similar rent control legislations were in effect throughout the United States during the war years and for decades later. CHAPTER 3- RENT CONTROL LEGISLATIONS IN INDIA In this section I wish to focus on the rent control methods that have been adopted by the Government in three cities in India- New Delhi, Mumbai and Bangalore. These cities reflect the situation that prevails throughout the Country. While rent control laws have been revamped to a certain extent in Mumbai and Bangalore, New Delhi is still awaiting the implementation of revised rent control legislation. 3.1. New Delhi The Delhi Rent Control Act (DRCA) came into force in 1958. The old Delhi Rent Control Act, or legislation like the Urban Land Ceiling and Regulation Act (ULCRA) introduced as a Central legislation in 1976, it must be kept in mind, were framed at a time when the intention was to ensure that rich landlords did not terrorise poor tenants by evicting them for a bit more filthy lucre. It was also intended to ensure that the rich were not able to accumulate huge tracts of land, far beyond what they needed for their personal use, so that even the less well off had a chance to buy land. However, quite predictably, as with most other socialist-style legislation, it had exactly the opposite effect. The Delhi Rent Act was introduced and approved by Parliament in 1995. The President gave his assent to the Act but strangely enough, the Delhi Government has not implemented it. This is indeed a piquant state of affairs, and it shows the clear influence of certain interest groups on the decision making process. It also brings to light the arbitrariness and unaccountability that plague the functioning of the executive in this country. While the Delhi Rent Act [1995] is an improvement on the existing legislation, since it appears to be only an overly cautious attempt at reform, it falls far short of what was required. However, tenant activists feel that Ease of eviction and limited inheritability are two features that would ruin small traders in old commercial areas. The old legislation had several disadvantages, one of which was the restriction on sale or transfer of commercial properties which was responsible for the growth in "pugree", the illegal institution of one time lump sum payment to the landlord by the tenant, primarily to offset the low rents. This was one of the major sources of generation of black money in India. The old Act had also led to the decline in the supply of rental housing in the Capital. Taking advantage of the old law, tenants refused to vacate property they had taken on rent, thus moderate-sized Connaught Place shops that cost a crore, were being rented out for as low as a few hundred rupees a month. , Section 6 of the Delhi Rent Control Act allowed a maximum of a 10% rent hike every three years, no matter what the inflation. In India the average inflation every three years has exceeded 20%. Sot the Act also made it virtually impossible to evict a tenant. This sorry state of affairs improved slightly when in 2002 the Delhi High Court struck down three sections of the Delhi Rent Control Act (DRCA), 1958 which virtually had frozen the rent of residential and commercial properties since the legislation came into force. For example, under Section 6 of the Act [which was struck down], considering devaluation of rupee since 1939, the Court said a house rented out for Rs 100 that year would merely fetch Rs 229 to a landlord in 1998, while the value of rupee had decreased from Rs 38.26 to Rs 2.97 during the same period. The Court decreed Sections 4, 6 and 9 of the Act as ultra vires, a Stated that these provisions were arbitrary Manupatra Information Solutions Pvt. Ltd.

Page 4 and unfair to the landlords, the court said they were violative of the Constitution as they affect landlords right to livelihood, right to life and avocation. The DRCA and the [now repealed] ULCRA had together succeeded in throttling development in Delhi and have ended up creating an enormous housing shortage- the very situation that was sought to be avoided by providing for regulatory mechanisms. The implementation of the revised rules would indeed be a boon to both house owners and tenants. 3.2. Karnataka The old Karnataka Rent Control Act 1961 expired on 31.12.1999; this necessitated the promulgation of a new Karnataka Rent Control Act 2001. The Act is aimed at streamlining the entire rent determining process. An important feature is the attempt at curbing the practice of dodging income tax by fixing very low rent on the structure and hiking rent on fixtures. The rules specify that amount paid on these items should not exceed 15 per cent of the rent, while maintenance costs should not exceed 10 per cent of the rent. In order to bring in uniformity for fixation of standard rent, revision, enhancement and deemed rent, the rules provide for approval and registration of valuers. This provision that does away with the concept of static and unchanging rents represents one of the most significant features of the Act. In addition to this, the law has now made it compulsory to enter into written lease deeds thus abolishing the system of oral tenancies. Critics feel that the new law has altered the burden of proof in favor of the landlords and depriving the tenants the protection they received under the 1961 Act. They also believe that it would ruin the landlord-tenant relationship and wreak havoc on the legal system. 3.3 Maharashtra [including the city of Mumbai] Thanks to the old Bombay Rent Act, 1947, Mumbai today presents the symbol of urban decay. The development of housing and infrastructure in the city has suffered immensely under the restrictive provisions of rent control legislation. The extreme regulation of rents by the Government has led to a situation where, in some case, some tenants are paying rents fixed as far back as 1940 since under the Bombay Rent Act, there was a freeze'' on the rent paid at the beginning. No further increase in the rents was permitted. The Act, which applied only to private premises, provided that rent in excess of the standard rent is illegal except where an agreement entered into before September 1, 1940 provides for periodic increases. The rent control laws led to the neglect of repairs and maintenance and had virtually frozen the municipal bodies' income from property taxes, which are based on rateable values, which in turn are a function of the prevailing rents. Most if the buildings in Mumbai are in a state of disrepair and neglect because the landlords are not interested in taking up improvement works since the rent they receive is not enough to offset the costs of repair. People who occupy some of the prime properties in south Mumbai-some of the most valuable real estate in the Country, still continue to pay a princely sum of a few hundred rupees every month as rent. This anomalous situation can be attributed to the unjust provisions of the Rent Act. The unified Maharashtra Rent Act, 1999 replaced the Bombay Rent Act, the jurisdiction of the former now extends throughout the State. The new act says that the rent may be increased by five per cent in the first year, after which landlords would be permitted to raise the rent by four per cent every year following that. They are also permitted to increase the rent by a reasonable amount, if any structural repairs are carried out on the building. This has provoked criticism from both sides to the issue. The landlord associations are displeased with the "small" five percent increase while several tenants' rights bodies feel that the rents will escalate exorbitantly and therefore it is not a fairly framed act. Also, Under Section 55, all tenancy agreements, including leave and license agreements, must be Manupatra Information Solutions Pvt. Ltd.

Page 5 in writing and are to be compulsorily registered after the commencement of the Act. There is a fear in Mumbai amongst tenant rights associations that adopting the rates and structure for escalation together with a rate of return of even 5 per cent would result in an overwhelming body of protected tenants being unable to meet the increased burden. Another objection to the new legislation raised by tenant associations is the fact that makes the eviction of tenants easier and the fact that it provides severe curbs on the right of inheritance of tenancies. CHAPTER 4- RENT CONTROL IN USA: THE NEW YORK PUZZLE Rent control legislations began to sweep across major metropolitan areas of the United States in the aftermath of the Second World War. . In other parts of the United States, the social upheaval and high inflation of the 1970s was a driving force behind the reimplementation of rent controls. California, Connecticut, Massachusetts, New Jersey and New York are all states where jurisdictions implemented rent control policies during this period. There have been two major rent control regimes in New York, Rent Control and Rent Stabilization. Rent Control was a strict regime started in 1947 that assigned rents for individual properties and allowed minor increases. This policy currently covers slightly more than 70,000 units in New York City and is declining with vacancy decontrol and shifts to stabilization. Much more common are properties under Rent Stabilization. This system was implemented much later, in 1969, and was a less stringent form of rent regulation where periodic rent increases are allowed as approved by a rent regulatory board. At the time when the rent control laws came up for debate and reconsideration in New York, which has some of the strictest rent control in the country, 1.1 million of the city's 1.7 million apartments-about 63 percent, were regulated. This means a tenant population of about two million individuals, one of the most formidable political constituencies in the city, with a direct interest in retaining rent control. This pressure group has been effective in stalling all methods at reform. Rent control has destroyed entire sections of sound housing in New York's South Bronx. It has led to decay and abandonment throughout the entire five boroughs of the city. Although hard statistics on abandonment are not available, William Tucker estimates that about thirty thousand New York apartments were abandoned annually from 1972 to 1982, a loss of almost a third of a million units in this eleven-year period. Studies instituted in view of the impending debate over reforms in the rent control legislation in 1996 and 1997 show that New York has lost 200 of its 250 national corporate headquarters over the last 25 years, in part because these companies found housing almost unattainable for transferring employees. Besides, 88 percent of tenants living in pre-war, rent-controlled apartments have not moved in more than 25 years. This has led to a condition of low vacancy rates, much below the national average. Rent control has also meant that entire sections of apartment blocks in New York are in a state of disrepair, with landlords not wanting to spend money on wasteful improvement costs. New York Citys rent control laws also provided nonrent protection for tenants. In particular, the Rent Stabilization Code stipulated that landlords must offer tenants a renewal lease (at the stabilized rent) before the expiration of the current lease. It also limited the set of circumstances in which the landlord could evict a sitting tenant (non-payment of rent, for example). Thanks to rent control, and to potential investors' rational fear that rent control will become even more stringent, no sensible investor will build rental housing unsubsidized by government. Although many rent-control ordinances specifically exempt new rental units from coverage, investors are too cautious to put their faith in rental housing. In numerous cases housing units supposedly exempt forever from controls were nevertheless brought under the provisions of this law due to some "emergency" or other. New York City's government, for example, has three times broken its promise to exempt new or vacant units from control. So prevalent is this Manupatra Information Solutions Pvt. Ltd.

Page 6 practice of rent-control authorities that a new term has been invented to describe it: "recapture." As inflationary pressures eased, the agitation for rent control subsided and during the 1980s, a reaction set in among southern, western, and rural states, and 31 States adopted laws and constitutional amendments forbidding rent control. On January 1, 1997, Boston, Cambridge, and Brookline became the first major American cities to abandon rent controls since 1950. Other major cities like Chicago, Baltimore, Cleveland and Philadelphia had never even experimented with this policy. San Francisco and New York had some of the most restrictive rent control laws in the USA. While San Francisco is beginning to dismantle the archaic and ineffective system, today it is only New York that has been unable to do so. CHAPTER 5- THE HARMFUL EFFECTS OF RENT CONTROL 5.1 The economic implications of rent control 1. Inhibition of new construction projects: By forcing rents below the market price, rent control reduces the profitability of rental housing, directing investment capital out of the rental market and into other more profitable markets. Construction declines and existing rental housing is converted to other uses. When a community artificially restrains rents by adopting rent control, it sends the market what may be a false message. It tells builders not to make new investments and it tells current providers to reduce their investments in existing housing. Under such circumstances, rent control has the perverse consequence of reducing, rather than expanding, the supply of housing in time of shortage. To illustrate, in the United Kingdom, which had imposed rent control since the Second World War, the share of all housing provided through privately owned rental units dropped from 53 percent in 1950 to less than 8 percent in 1986, reflecting the flight of investment from the regulated market. In an unregulated market, a housing shortage [the reason usually cited for imposing rent control] will be addressed in a two-step process. In the short-term, rents on the margin will rise as consumers compete for available units. Over time, these higher rents will encourage new investment in rental housing through new construction, rehabilitation, and conversion of buildings from nonresidential to residential use, until the shortage of housing has been eliminated. Without the increased rents required to attract new investment, new housing construction would be sharply limited and there would be no long-term solution to the housing shortage. Conversely, a fall in rents sends the message to the market that there is no room for new investments. 2. Reduced consumer mobility: The primary beneficiaries of rent control are those consumers lucky enough to find themselves in a rent-controlled unit. But even these consumers pay a price. Consumer "mobility" is substantially reduced by the reluctance of many consumers to part with the rent control subsidy. A study in New York City found that rent control tripled the expected duration of residence. Consumers who would otherwise move to smaller or larger homes or closer to their jobs do not do so because they do not want to lose the subsidy. This loss of mobility can be particularly costly to families whose job opportunities are geographically or otherwise limited and who may have to travel long distances to reach those jobs available to them. The spill over effect includes increased demand for public services, traffic congestion, etc. 3. Deterioration of existing housing: By reducing the return on investments in rental housing, rent control also can lead to a drop in the quality and quantity of existing rental stock. This may take the form of cooperative conversions or, in some cases, abandonment of unprofitable property. It can also lead to a deterioration of the quality of housing stock as providers faced with declining revenues may be forced to substantially reduce maintenance and repair of existing housing. There are marked differences between rent-controlled and Manupatra Information Solutions Pvt. Ltd.

Page 7 other units in housing quality and the level of expenditures on maintenance and repair, especially in cities like Mumbai and New York. 4. Reduction in property tax revenues and increase in administrative costs: Rent control reduces the market value of controlled rental property, both in absolute terms and relative to the increase in property values in unregulated markets. The tax implications of this reduction can be significant, as taxable assessed rental property values decline relative to unregulated property. A study of rent control in New York City calculated the loss in taxable assessed property values attributable to rent control at approximately $4 billion in the late 1980s. There is also a corresponding increase in administrative expenses, since rent controls require the creation of elaborate bureaucratic systems. Rental property must be registered; detailed information on the rental property must be collected; and elaborate systems for determining rents and hearing complaints and appeals must be established. 5. The phenomenon of the rise of Shadow Markets: This concept was developed by Denton Marks in a paper in the Journal of Urban Economics in 1984. It is virtually impossible for a government to control and regulate the entire supply of a commodity. Once a shortage appears, alternative markets and black markets will arise. More often than not, however, governments may tolerate these markets as a way of relieving shortages. In many instances, according to Marks, governments will deliberately leave a portion of the market untouched by regulation in order to serve as a safety valve for excess demand. This unregulated portion of a regulated market becomes the "shadow market." Economists are of the view that prices in the unregulated portion of the market will be forced higher than their normal market value by rental restrictions. This is because the limited supply in the shadow market must absorb the shortage, the excess of demand over supply, in the regulated part of the market. Since prices are pushed too low in the regulated sector, they are forced above what would otherwise be the market price in the unregulated sector. The result is that average prices in both sectors are likely to end up about as high as their free-market level. They could end up higher because of misdistributions and diseconomies in the regulated sector of the market. The crux of the issue is that unsatisfied demand is diverted into this unregulated sector and because of the shadow-market effect, people in this sector pay higher-than-market prices. The poor, single individuals, and young people entering the market are especially hard-hit by these costs. This is in addition to consumer search costs that they have to incur in order to find suitable accommodation in regulated sectors of the market. 5.2 The social implications of rent control 1. The adverse impact on the poor and disadvantaged sections of society: The costs of rent control fall disproportionately on the poor. Poor families suffer a marked decline in existing housing as the quality of existing housing falls in response to reduced maintenance expenditures. The middle class can move out; for many reasons, poorer families lack this option. Poor families also are at substantial disadvantages when it comes to finding new housing. In a tight market, there may be more people looking for housing than available rental units, thereby giving housing providers substantial discretion in choosing among competing potential consumers. In an unregulated market, the level of rents will govern this consumer selection process. However, by restricting rent levels rent control causes housing providers to turn to other factors, such as income and credit history, to choose among competing consumers. These factors tend to bias the selection process against low income families, particularly female- headed, single-parent households. Poor families tend to remain stuck to their houses, and have to continue there no matter how bad the living conditions are. Once they enter the unregulated market that is a by-product of rent control laws, they will be unable to afford the new rents, thus their mobility is severely restricted, if not impossible. Manupatra Information Solutions Pvt. Ltd.

Page 8 2. There is an increase in housing discrimination: This is a corollary to the first point. If the mobility of the poor is restricted, then they tend to be concentrated in certain areas, and this leads to increased levels of poverty. Also, the reduction in housing caused by rent control also can slow the process of racial and economic integration of many communities, by limiting the opportunities of certain classes of consumers to reside in rent-controlled communities. The owners of the houses know that since they cannot decide the level of rent that is to be paid by them, they may choose tenants on the basis of a potential consumer's race, sex, family size or other improper or unlawful factors. This problem is especially serious in the United States where the rich or the middle classes use rent control as a method to exclude people belonging to the lower economic or social strata in society from residing amongst themselves. In fact, experience in the US state of California has shown that the moment new communities like Santa Monica develop, rent control limitations are imposed so that entry is severely curtailed, and these areas become exclusive and elitist zones, out of bounds to other sections of society. 3. Rent control invariably benefits the higher income householders more: It is indeed ironical that rent control legislations are viewed as an anti-poverty strategy in most countries and have been enacted with the intention to benefit the poor. However, the opposite is true in most cases. For example, a study of rent control [conducted in 1991] in New York City found that rent-controlled households with incomes greater than $75,000 received nearly twice the average subsidy of rent-controlled households with incomes below $10,000. It is also pertinent to note that rent control had the greatest effect on rents in Manhattan, the borough [New York is divided into five boroughs] with the highest average income. Similarly, a study of rent control in communities across the USA found that the beneficiaries of controls in those communities are "predominately white, welleducated, young professionally employed and affluent," and that rent control had substantially increased the disposable income of these tenants while exacerbating the problems of low-income families. There are starker examples than these to be found in India. Well to do traders in Delhis Connaught Place pay just a nominal sum of a few hundred rupees a month as rent. In Mumbai, prosperous businessmen occupy entire apartment blocks in posh areas, but pay rents that have scarcely changed over the past six decades. Surely, these individuals can comfortably afford to pay the revised rents. It is a shame that the obstinate attitude of a few has the effect of endangering controlled and planned urban development, and more specifically new housing schemes in our cities. 4. Rent control imposed unfair costs on house owners/ landlords: Rent control legislations are the root cause for the current bitterness that exists between house owners and their tenants. What rent control does is to unfairly transfer income of the property owner to the tenants, or more importantly to the owners of any business that makes use of the rental property. Thus rent controls supplement consumer income at the expense of rental property providers, by holding below market levels the permissible rate of return on rental property investment. There is substantial evidence that such transfers are highly inefficient. A comprehensive study initiated during the heyday of rent control legislations in the 1970s concluded that housing consumers gained in benefits only 52 percent of what housing providers lost- this was a result of the tendency of consumers in rent-controlled units to hoard housing and to be over-housed. Thus rent control appears to fail the test of Pareto optimality, since it involves considerable loss to one side in the transaction. Ideally, either both sides should gain or else nobody must suffer a loss. CHAPTER 6- WHETHER RENT CONTROL CAN BE ABOLISHED The negative consequences of rent legislation have become so massive and perverse that even many of its former supporters have spoken out against it. Existing rental units fare poorly under rent control. Even with the best will in the world, the landlord cannot afford to Manupatra Information Solutions Pvt. Ltd.

Page 9 pay his escalating fuel, labor, and materials bills, to say nothing of refinancing his mortgage, out of the rent increase he can legally charge. The sitting tenant is, in a sense, protected by rent control but, in many cases, receives no real rental bargain because of improper maintenance, poor repairs and painting, and grudging provision of services. The enjoyment he can derive out of his dwelling space ultimately tends to be reduced to a level commensurate with his controlled rent. Apart from these factors, there also exists significant consumer entry costs that exist in the rent control market and which tend to add vastly to the expenses of the potential tenant. Whenever a person wishes to obtain housing in a rentcontrolled city, a considerable amount of time and money is spent in locating a suitable apartment. Invariably, consumers find it next to impossible to penetrate the closed market and are then forced to rely on the shadow market to fulfill their needs. Today, what is known as the old lady effect is sweeping through those countries that still retain rent control legislations. An American economist Walter Block has explained this by giving the example of a two-parent, four-child family that has occupied a ten-room rental dwelling. One by one the children grow up, marry, and move elsewhere. The husband dies and the lady is left with a gigantic apartment. She uses only two or three of the rooms and, to save on heating and cleaning, closes off the remainder. Without rent control she would move to a smaller accommodation. However, rent control makes that option unattractive. Economists say that these practices further exacerbate the housing crisis and that the repeal of rent control would free up thousands of apartments very quickly. Some people wish to be a bit more cautious on this count and feel that a blanket ban on rent control would tear apart the social and cultural fabric that exists in cities. According to this school of thought, landlords must buy tenants out of their controlled dwellings. However, it is submitted that making property owners pay to escape a law that has victimized many of them for years is not an effective way to make them confident that rent controls will be absent in the future. The only thing that can be achieved by the buy back alternative is that landlords can silence the opposition, or literally buy them off and freeze rent control in the short run. One argument in favour of abolition of rent control will be that it will put an end to the withdrawal of apartments from the markets and make them accessible to a lot more people. New York in 1997 had only 3 percent of its apartments for sale falling in the regulated sector. The vast majority of the market for apartments was therefore fulfilled by the expensive and unreliable unregulated sector, and this was in a city where regulated housing makes up 63 percent of the market. In effect what the true situation in rent control housing markets today is that with the regulated portion market locked away, all new demand is funneled into the unregulated sector-the shadow market. Eventually the competition for these limited numbers of apartments creates highly inflated prices. It is like squeezing a balloon at one end--the pressure will simply create a bulge at the other end. Normally, when people cannot find accommodation in the rent control areas, they will then be at the mercy of the shadow market where the costs of houses are considerably higher. It must be clarified at this juncture that prices in the deregulated section of the market do not represent the actual value of property in those areas under rent control. Shadow market prices are not the actual prices, yet this huge differential between the regulated market and the shadow market strikes terror into the hearts of a rent-controlled population and fuels the fires against deregulation. The American experience with deregulation has proven that an abolition of rental laws will not enable landlords to double and triple rents; on the contrary, the overall effect would be far more modest. The single biggest concern with abolishing rent control is the perception that all landlords will increase their rents in an unreasonable manner, leaving many former tenants in the lurch, and forced to seek out other alternatives. One solution that definitely cannot be used as a method of deregulation is vacancy decontrol. Under this system, apartments are deregulated only when the current tenant leaves or dies. The truth is that tenants in regulated apartments never move, since leaving an apartment means being thrown into the shadow market, therefore, it may take 20 to 50 years before the market resumes its normal shape. What is even worse is the prospect of Manupatra Information Solutions Pvt. Ltd.

Page 10 landlords taking advantage of vacancy decontrol and thus using unlawful methods to pressurise their tenants from vacating. This system gives an incentive to the owners to do everything from hiring thugs to setting fire to their buildings to get rid of low-rent tenants. By compiling relevant statistics and comparing cities that have regulated rent control environments with those that do not, economists have successfully proven that abolition of rent control will lead to an across-the-board lowering of rents and that this would lead to a Pareto optimal solution. Basu and Emerson in their paper visualise reform in the area of tenancy rent control or second-generation rent control- a model best exemplified by the rent control laws in New York. The model allows landlords to freely choose a nominal rent when taking on a new tenant (the tenant is of course free to reject the offer), but places restriction on raising rents on, or evicting, a sitting tenant. This causes erosion in the real value of rent if a tenant stays on for too long, whenever there is positive inflation in the economy, which for most economies is true most of the time. This means that landlords will prefer short-staying tenants to long-staying tenants. Under such a regime, if inflation exists, landlords prefer to rent to short-staying tenants. Since departure-date-contingent contracts are forbidden and a landlord cannot tell whether a tenant is a short-stayer, an adverse selection problem arises. In this case, the equilibrium is Pareto inefficient. Since a tenants type will be better known to the tenant than the landlord, the tenancy market will be characterized by asymmetric information. In most cases, the tenants stay on for very long periods of time and if at all they vacate, the house is passes on to friends or relatives. The latter pay what is known as key costs- the value of the property in the market at that point of time. Only rarely does the rent control market allow for mobility amongst the tenants. What Basu and Emerson state is that it can be shown that the presence of tenancy rent control will, in general, result in a Pareto sub-optimal equilibrium, whereas a system of free contract will be Pareto optimal. Free contract will lead to overcoming the problem of asymmetric information and will contribute to efficiency in the rental market; resulting in lower rents and that makes all tenants better off. Thus while free contract will produce a Pareto optimal solution, Basu and Emerson believe that such a system would entail certain responsibilities on the part of the government. The government needs to provide a broad framework within which the contracts can be enforced. In addition to this, commonsense must be exercised to limit the terrain of permitted contracts to ensure that no party commits a breach of trust. If the government chooses to play an active role in bringing about deregulation, it could smoothen the process to a large extent. Increased construction of housing is the only proper remedy to the living space shortages in cities today. One way of stimulating the supply of affordable housing is through direct financial assistance to needy renters, whose increased purchasing power will lead to expansion of the quantity and quality of housing in the local market. Federal and State programs to this effect are in place in the United States. In addition, targeted programs to subsidize the construction or rehabilitation of affordable housing can be an effective complement to direct renter assistance and to ensure that new tenants will not be asked to pay a very high amount in order secure an affordable house of their liking. A step-by-step deregulation can be considered an effective alternative to a complete ban on rent control. This has already been tested successfully in America where in 1994; the State of Massachusetts lifted rent controls immediately in the three cities, but a two-year extension was allowed for tenants qualifying for the federal definition of "low income"-less than 60 percent of the median for the region or 80 percent for the elderly and handicapped. These groups were finally deregulated on January 1997. Though such a program would take a longer amount of time, there does not appear to be any reason why it cannot work in India. Even then, a ten or fifteen year step-by-step phase out would be sufficient to root out rent control. Of course this would entail a great deal of co-operation and mutual trust between the government, landlords and the tenants, a situation which one cannot safely foresee any time in the near future. In Boston, at around the time when Manupatra Information Solutions Pvt. Ltd.

Page 11 deregulation was coming into force, the landlords had helped their cause enormously by setting up the reserve bank of 200 apartments for emergency relocations. This was to provide a kind of a safety net to those tenants who had been recently evicted and who were now seeking alternative accommodation. A similar project in India in a city like Mumbai would need a thousand times the number of apartments, which could be used by former tenants, who would be on the lookout for accommodation in a deregulated market environment. Inspite of these disadvantages, an unhurried but well planned approach towards abolishing rent control should be sufficient to work in Indian cities. The only way to encourage private investment [which would boost new housing construction activity] is for the government to give an assurance that there will be no going back to the restrictive provisions of rent control legislations, which act as a severe deterrent to those wishing to consider the business opportunities in the housing sector. Obviously, until and unless a clear policy in favour of a phased withdrawal of rent control emerges, no real estate owner would be willing to spend enormous sums of money in constructing housing estates and then leasing them out to tenants at rates twenty times lower than the prevailing market rates. CHAPTER 7- CONCLUSION Experience over the past six decades or so has shown that rent control is an ineffective and often counterproductive housing policy. Rent control makes housing less affordable to anyone seeking housing in a rent-controlled market. Even people who already have a great deal, and who gain the most from the current rent control mechanism become prisoners of their own apartment. The inherent disadvantages that plague the system tends to overshadow the minor successes that it can boast of. This paper has proven that rent control legislations are at best a stopgap arrangement and an inadequate solution to a seething urban problem. The problem of housing shortage that plagues our urban centers requires serious thinking. Short-term solutions like rent control legislations only serve to aggravate the problems. Rent control may be a good idea for a country like India to adopt in the years that followed Partition in 1947. Perhaps it represented the only way to ensure that impoverished refugees from Pakistan were given access to housing at affordable rates. Had it not been for rent control, most of these unfortunate souls would have found themselves on the streets, being unable to afford the competitive market rents on offer. However, Delhi, and India, has progressed since those dark days. The United States of America and other nations in the Western world have realised that the World Wars and the extraordinary economic crises of the time are now behind them, and States in the USA in particular has been in the forefront of the anti-rent control drive. The time has come for the government in India to cautiously liberalise the rent control regime and to allow the rents to be determined by the prevailing market forces. Despite the good intentions of the originators of rent control legislations, whose avowed purpose was to make housing affordable, the experience from around the world was quite the opposite. Dr. Anthony Downs, a leading economist and internationally recognized expert on housing policy, concluded in a recent report on rent controls, that, other than during wartime, the economic and social costs of rent control "almost always outweigh any perceived short-term benefits they provide." As mentioned earlier, rent control policies in the USA are now becoming extremely unpopular. Many in that Country feel that Rent control is a disease of the mind that soon becomes a disease of the market. Thus, it is believed that those cities that succumb to the disease of rent control are doomed to neverending house-to-house warfare over an ever-diminishing supply of unaffordable housing. The agreement that rent control needs to be abolished cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the "right" to their fellow Nobel Laureate Gunnar Myrdal, an important architect of the Swedish Labor Party's welfare state, on the "left." Myrdal once stated, "Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision." As was aptly Manupatra Information Solutions Pvt. Ltd.

Page 12 noted by Assar Lindbeck, a renowned Swedish economist in 1971, "Rent control seems in many cases to be the most efficient technique, next to bombing, so far known for destroying cities." Whether the successful de-regulation measures that have been adopted in the USA and other Western nations can be successfully replicated in India is the point in question. Whether the socio-economic conditions that prevail in our country today will allow for such far reaching changes is also debatable. Obviously, a total ban on rent control legislation would be a preferable, but does not seem likely in the Indian context. Instead, those cities that still suffer from rent regulation must look at the attempts made to reform the process in Maharashtra and Karnataka in a favourable light. These new Acts that have come into place have contributed in no small measure in the battle to eliminate the archaic and often useless provisions of the rent control laws that had been hitherto prevalent. Rent control promotes gross inequality and inefficiency and goes against established legal principles of justice, equity and fair play. The sooner we get rid of it, the better it is for the nation as a whole. Hopefully, this will lead to an urban regeneration in India and will act as the catalyst for the proper and controlled growth of cities, commercial establishments and industries.

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