Tag: Rent control

Solved Problem: Rent Control in Holland

Supports: Microeconomics, Macroeconomics, Economics, and Essentials of Economics, Chapter 4, Section 4.3

Image generated by ChatGTP-40 of a street in a Dutch city.

An article on bloomberg.com has the headline “How Rent Controls Are Deepening the Dutch Housing Crisis.” The article’s subheadline states that: “A law designed to make homes more affordable ended up aggravating an apartment shortage.” According to the article, the Dutch government passed a law that increased the number of apartments subject to rent control from 80% of all apartments to 96%.

  1. Why might the Dutch government have seen expanding rent control as a way to make apartments more affordable? 
  2. Why might the law have aggravated the shortage of apartments in Holland?

Solving the Problem
Step 1: Review the chapter material. This problem is about the effects of rent control, so you may want to review Chapter 4, Section 4.3, “Government Intervention in the Market: Price Floors and Price Ceilings.”

Step 2: Answer part a. by explaining why the Dutch government may have seen expanding rent control as a way to make apartments more affordable. Figure 4.10 from the textbook shows the effects of rent control. In the example illustrated in the figure, after the government imposes rent control, the 1,900,000 people who are still able to rent an apartment pay $1,500 per month rather than $2,500 per month. For these people, rent control has made apartments more affordable.

Step 3: Answer part b. by explaining why rent control laws can make an apartment shortage worse. As Figure 4.10 shows, rent control laws impose a price ceiling below the equilibrium market rent. The result is that the quantity of apartments supplied is less than the quantity of apartments demanded, causing a shortage of apartments. In the case of the Dutch law discussed in the article, existing rent controls were expanded to cover more apartments, forcing the rents charged by landlords for these apartments to fall below what had been the equilibrium market rent, thereby adding to the shortage of apartments in Holland.

Extra credit: The article notes that as a result of the law, some owners of apartments that had previously not been subject to rent control had decided to sell their apartments, taking them off the rental market. That result is common when governments impose rent control or expand the scope of an existing rent control law. One important aspect of rent control is that a shortage of apartments gives landlords a greater opportunity to pick and choose the tenants they prefer. The article notes that a provision of the new law requires that rental contracts be open-ended, rather than for only one or two years, as is more common. As a result, landlords have more difficulty evicting tenants who might be noisy or causing other problems. The law thereby gives landlords an incentive to rent to foreign tenants who would be more likely to give up their apartments voluntarily after a year or two. The result is even fewer apartments available for Dutch residents to rent.

A recent article on bloomberg.com notes that the negative consequences of the law expanding rent control has led the Dutch government to propose modifying the law to allow landlords to charge higher rents on at least some apartments. If passed by the Dutch parliment, the changes would go into effect January 1, 2026.

Rent Control in Europe

Image generated by GTP-4o of “an apartment building in Amersterdam.”

Recent articles in the media discussed the effects of rent control on the market for apartments in the Netherlands and in Stockholm, the capital of Sweden. The articles describe a situation that is consistent with the analysis in Chapter 4, Section 4.3. Figure 4.10 shows the expected results from the imposition of a rent control law. Some renters gain by living in apartments at below the equilibirum market rent, but the shortage of apartments resulting from the price ceiling means that some renters are unable to find apartments. As with other price controls, rent ceilings impose a deadweight loss on the economy, shown in the figure as the areas B + C.

An article on bloomberg.com discusses the effect on the market for apartments in the Netherlands of the passage in June of the Affordable Rent Act. The act raised the fraction of apartments covered by rent control from about 80 percent to 96 percent. The expansion of rent control appears to have led to an increased shortage of apartments. The article quotes one teacher who has been unable to find an apartment for her family as saying: “The cost isn’t the problem, but a real shortage of housing is.”

The article indicates that some landlords who doubt they can earn a profit under the new law are selling their buildings. If the buildings are converted to other uses, the shortage of apartments will be increased. The article mentions another unintended change to the apartment market from the provision of the new law that requires leases to be open-ended. Some landlords fear that as a result they may find themselves unable to evict tenants, however troublesome the tenants may be. In response, these landlords are giving priority to foreigners, who they believe are likely to move more often.

An article in the Economist looks at another aspect of rent control. The following figure is reproduced from Solved Problem 4.3. It shows that because rent control leads to a shortage of apartments it creates an incentive for tenants and landlords to agree to a rent that is higher than the legal rent ceiling. In this example, renters who are unable to find an apartment at the rent control ceiling of $1,500 may bid up the rent to $3,500—which in this example is $1,000 higher than the market equilibrium rent in the absence of rent control—rather than not be able to rent an apartment. Clearly, renters paying this illegal rent are worse off than they would be if there were no rent control law.

According to the article in the Economist, the average time on a waiting list for a rent controlled apartment is 20 years. Not surprisingly, “Young Swedes often have to put up with expensive sublets agreed to under the table,” for which they typically pay rents above both the rent control ceiling and the market equilibrium rent. Most economists agree that expanding the quantity of available housing by making it easier to build homes and apartments is a better way of reducing housing costs than is imposing rent controls.