x Abu Dhabi, UAETuesday 25 July 2017

Rent caps are a blunt instrument for price control

Regulating rent rises, as is being sought in Sharjah as it feels the effects of Dubai's property boom, is only an option for markets that are already distorted and unfair.

With rents rising sharply in Dubai, pushing some families into neighbouring emirates and causing corresponding rent hikes there, there is little surprise about the call for the introduction of regulation to protect tenants living in Sharjah. However, this kind of intervention in the market is at best a very blunt instrument and while it may provide temporary relief for some families squeezed by a booming property market, it inevitably has a distorting effect on the market overall.

To demonstrate the effects of this, one only needs to look at the experiences of Abu Dhabi, which recently announced the end of the longstanding five per cent annual rent cap, Dubai, where the rent-cap system has been adjusted to better reflect current market prices, and Sharjah, where no rent regulation has yet been introduced.

When Abu Dhabi introduced its rent cap in 2006, the emirate was undergoing profound change and a period of ambitious expansion fuelled by an unprecedented development programme. The resulting sudden influx of workers and their families vastly outstripped the available housing supply, causing some rents to increase by double or more. Since then, the distortion created by the rent cap was demonstrated when neighbours found themselves paying vastly different amounts for effectively identical properties, based purely on when they had arrived in Abu Dhabi.

The decision to remove the rent cap last year reflected the fact that the housing market had caught up with supply to the point that normal market forces are enough to keep prices in check.

Dubai is going through a similar process now, but is trying to lessen the effects of rent regulation – and avoid an Abu Dhabi-style disparity – by more closely aligning rents to prevailing market prices. Through a complex sliding scale of maximum rent increases, a landlord who has been renting a property for 30 per cent below the market rate, for example, will now be able to increase it by 10 per cent each year, twice as much as before.

As the authorities in Sharjah will be contemplating now, this kind of regulation has to be a balancing act, and must only occur when the market is demonstrably unfair, as was the case in Abu Dhabi in 2006. This is because any intervention inevitably leads to distortion, and so should only be applied when the market is itself already showing signs of strain.