China should not cap rent increases
Recently, a piece of news from Germany has been widely spreading in China. On May 1, Germany's Tenancy Law Amendment Act officially went into effect, allowing the government to cap rent increases at 15 percent over a three-year period, down from the earlier limit of 20 percent. At present, Berlin and Munich have already planned to implement the new regulation.
With the rapid development of China’s economy, millions of people migrate from rural areas into cities every year, but few have money to buy a home when they relocate. So there are more and more people chose to rent apartments. Taking Beijing as an example, in the recent more than ten years, the permanent residents in Beijing has increased to nearly 600,000 each year, and up to now, the non-registered Beijing residents has occupied 36% of the total population. For the newly increased population, most of them cannot afford to buy houses, so they have to solve the housing problem through the house rental market.
Facing with the growing demands of renting house, there haven’t enough supplies, thus leading the continuous rising of rents. The media statistics indicate that the rents in various regions have increased at a speed of around 10% in recent years. Therefore, many believe that China should introduce similar regulations to prevent local renters from being gouged.
But I don't think such a law would have success curbing rental prices in China’s top-tier cities. Considering China’s situation, such laws would only hurt benefits of tenants.
As is mentioned above, the current rent rising in the rental market is not due to the vicious rising of house rents by house owners, but because of the strong demands generated by a large-scale of urbanization. Under such a premise, the house rental market has become a sellers’ market. However, the soaring rents are only the situation that occurs in the very few big cities in China, and not in whole China. In the second and third-level cities that occupy the majority of cities in China, due to the real estate markets growing vigorously which cause the great increase of houses, but the increase of foreign population is limited, so lessees occupy a powerful position in the rental market.
As rents rise, more property owners will be motivated to put their vacant homes onto the rental market, which will in turn increase supplies and help stabilize prices.
In the recent years, though the rent prices in China have been rising, its growth is far lower than the rising speed of house prices. Calculating by the price-to-rent ratio, China’s house prices are obviously high: the internationally recognized healthy ratio between selling prices and rents should be 1:100 to 1:200, and the price-to-rent ratio in China mostly is over 200.
Under the situation of the excessively high price-to-rent ratio, the house property owners with investment as the main purpose are unwilling to put the vacant houses to the rental market, but expect to gain profits through selling at higher price. Besides, currently most houses provided by China’s real estate market are apartments with naked decoration, it means that if the investors who attempt to gain profits through the rising of house prices want to gain rents, they must also decorate the houses -- and in the deals of second-hand houses, the decoration is not valuable. Just because of such a situation, when the house rents are not high, though there are many vacant houses in the market, only a few of them are used for rent.
Then, with no limiting on rent growth, will house owners “raise prices randomly”? Though we have read many relevant reports, we have to say that many phenomena are really too extreme. When rents increase too much, there are few tenants that can afford them; then property owners have to bear the corresponding costs - the commission to real estate agents and the opportunity cost occurring during the house vacancy period. For a house owner, except that the rental price of his house is obviously lower than the market level, or the house demand exceeds supply too much, he will raise the house rent, otherwise, raising the house rent is not efficient.
Then, will the control on house rent prices play a role of protecting lessees? In my opinion, administrative ceilings on rent growth will only compromise the interests of landlords, who could easily choose to sell their homes instead of renting them. With reduced supply, though the nominal rental price keeps unchanged, the actual rent prices will be higher — because competitions among lessees may raise the actual prices above the controlled level. In many cities with rent control policies, lessees has to pay property owners for a large amount of “the fee for getting the key”, or they will be charged for nonrefundable cash deposits.
Of course, there are not necessarily no gainers under the rent control plan. One is the government, though the policy finally is harmful to the benefits of lessees, on many occasions, it will win more popular wills; secondly, for those lessees who previously have gained the house rents at rather low prices, and they have gained the rent prices that are lower than the market level, preventing the behaviors of raising prices by house owners. Of course, the earning profits of these two groups are all under the premise of the net loss of the whole social welfare. In 1972, Olson, an economist, took the rent control plan of New York as an example, and he found that the losses of immovable properties were two times the benefits gained by consumers. In fact, many researchers also have found the similar phenomena in cities of Toronto etc.
For China, in 2012, the Chinese urbanization proportion was just over 50%, and in the future there will be the population of nearly ten million moving from countryside to cities. How to solve the houses for this part of group? For the sake of new urbanites, planners should abandon the plan of rent price regulation and expand supplies in the rental market.
Originally published on China Times | 2013-5-9
