What is Rent Ceiling
Rent ceiling is the maximum price a landlord is allowed to charge for rent. Rent ceilings are usually set by law and limit how high the rent can go in a specified area. However, as a result of this regulation, the quantity of available housing is often decreased because landlords are not willing to rent out their property for a low price.
BREAKING DOWN Rent Ceiling
Many economists question the effectiveness of rent ceilings. They have no effect if the equilibrium price is below the ceiling. If the ceiling is set below the equilibrium level, however, then there is a deadweight loss created. Other problems come in the form of black markets, search time and fees, which are not exactly rent such as "key money" (large initial cost for new keys).
Questioning the Effectiveness of Rent Ceilings
Since rent is often very high in some major cities of the U.S. (and rest of the world), local governments can attempt to rectify the situation for lower income residents, who can't afford market-priced apartments. But rent ceilings create problems for owners as a landlord may not be able to get as high a rent as they would have liked to receive. Artificially reducing prices also increases demand for properties with rent ceilings, as it increases the number of people who can pay for apartments. This creates a shortage as the rent ceiling causes quantity demanded to exceed quantity supplied. Rent ceilings are usually limited to a certain number of apartments in an area.
In some cases, rent ceilings can give rise to black markets. For instance, if a prospective tenant offers to pay $100 to $150 extra for rent, they may be able to skip a waiting list for a rent-controlled apartment. The only catch would be that the extra rent would be paid separately as cash, so it remains off the books.
Economists are fairly unified in the conclusion that rent controls are destructive. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93 percent of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available." Similarly, another study reported that more than 95 percent of the Canadian economists polled agreed with the statement.
In addition, economists have consistently shown that rent control diverts new investment, which would otherwise have gone to rental housing, toward greener pastures—greener in terms of consumer need. They have demonstrated that it leads to housing deterioration, fewer repairs and less maintenance.