What Is a Rent Ceiling?
The term rent ceiling refers to the maximum amount of rent a landlord is allowed to charge a tenant. Rent ceilings are a form of rent control and are usually set by law, limiting how high the rent can go in a specified area at any given time. Limits are designed to protect tenants by preventing landlords from overpricing their properties. Some people believe that the quantity of available housing often decreases because landlords are not willing to rent out their property for a low price.
- A rent ceiling is the maximum amount of rent a landlord is allowed to charge a tenant.
- Rent ceilings are part of rent control laws enforced by local municipalities.
- These limits are meant to protect the rights of tenants by keeping housing affordable—especially for people with low or fixed incomes, the elderly, or those with other abilities.
- Many economists argue that rent ceilings—and rent control in general—are destructive because they create housing shortages and discourage investment.
Understanding Rent Ceilings
Rent control has been in effect in the United States since the early 20th century as a way to protect the public from housing shortages and highly inflated rental prices. These rent control laws continue to be enacted today by local governments and, in some cases, states. They cover several key aspects of how rental properties are treated including how much rent a landlord can charge their tenant(s) as well as the amount by which they can increase that rent and when it can be done.
The limits or maximum amount of rent a landlord can charge is called rent ceilings. Landlords must register their properties through the local rent control board by submitting regular rent rolls in areas where the law is in effect. The rent control board determines the maximum amount of rent based on the location, size, and condition of the property, along with any other pertinent information such as the economy. The board also decides the rate of allowable increase—if any—each year.
Rent control laws—including the enforcement of rent ceilings—are prominently exercised in densely-populated areas where rents are high and affordable housing is scarce or hard to obtain. As noted above, these laws are designed to help keep housing affordable for tenants—especially for people who have low to moderate levels of income, those fixed incomes, the elderly, and those with different abilities.
These laws, though, are not enforced uniformly throughout the United States. In fact, less than 200 local governments have rent control laws with rent ceilings in place—all of which are in California, New York, New Jersey, Maryland, and Washington D.C. Oregon enacted a state-wide rent control law in 2019—the first state to do so. More than half of states actually forbid their municipalities from enacting rent control laws.
Many economists question the effectiveness of rent ceilings. They state that these laws have no effect if the equilibrium price is below the ceiling. If the ceiling is set below the equilibrium level, however, then a deadweight loss is created. This happens when supply and demand are out of balance. Other problems arise in the form of black markets, search time, and fees.
There is a lot of debate as to whether rent ceilings and rent control are effective—on the one hand, they help keep housing affordable, while some people believe they discourage investment.
Economists are fairly unified in the conclusion that rent controls are destructive and clash with the concept of free markets. In a 1990 poll of 464 economists published in the May 1992 issue of the American Economic Review, 93% of U.S. respondents agreed, either completely or with provisos, that “a ceiling on rents reduces the quantity and quality of housing available." Another similar study reported that more than 95% of the Canadian economists polled agreed with the statement.
Advantages and Disadvantages of Rent Ceilings
Rent is often very high in some major cities. New York City has some of the highest-priced properties in the United States, making it nearly impossible for people to afford rent. Local governments can step in to try to rectify this situation—especially for residents who can't afford market-priced apartments. Rent ceilings and other forms of rent control can protect the interests of tenants who may otherwise be forced to pay high rents charged by unscrupulous landlords.
But artificially reducing prices through rent ceilings increases the demand for properties with rent ceilings, thereby decreasing the available supply. That's because it increases the number of people who are actually able to pay for apartments.
As noted above, rent ceilings may also 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 also consistently show that rent control diverts new investment, which would otherwise have gone to rental housing and to greener pastures—greener in terms of consumer needs. They have demonstrated that it leads to housing deterioration, fewer repairs, and less maintenance.