Imagine a country in which rents are negotiated annually, price rises are capped based on a benchmark approved by the government, and landlords must specify three months in advance if they plan to evict tenants.
Until recently, Abu Dhabi’s residents had rent increases capped at 5 per cent, while Dubai’s tenants have rises tied to Rera’s baroque online calculation system. Landlords and tenants are not allowed to change contractual terms at will — lengthy notice periods with written letters in triplicate are usually required for either party to do anything at all.
Of course, there are a few differences. Under Labour’s plans, contracts by default would be established for three years. And letting agents would be unable to charge fees simply for signing a tenancy agreement. That’s a far cry from the obligatory 5 per cent fee most Abu Dhabi residents pay just for handing in their paperwork.
UAE government officials are fond of saying that the country has a free market economy. This isn’t quite right, but that’s no bad thing. The Government, through developers such as Aldar and Nakheel, is responsible for almost all of the construction of residential housing stock in the country — it sets supply.
The UAE is far from alone. Governments across the 20th century sought to intervene in housing markets, and for good reason.
Housing is not like any other consumption good — the housing stock is of macroeconomic importance. Owners use housing both as a store of savings and as an investment good that yields revenues over an extended period of time. As Thomas Piketty shows in his recent book Capital in the 21st Century, these rentier incomes are far from insignificant. On average, they constitute about a quarter of national income in developed countries.
The dynamics of a local rental market have a significant effect on a city’s vibrancy. The price of residential housing stock affects the rate and composition of immigration and the level of expenditure that a workforce can sustain. Obviously the price of commercial buildings filters through to firms’ bottom lines: when rents are cheap, corner shops flourish.
Rent caps have their drawbacks. They redistribute welfare from landlords to tenants. Keeping residential rents low incentivises owners to become commercial landlords or to use the property themselves instead of renting. This can shrink the stock of available rental housing, increasing capacity constraints. And why should a landlord improve a property if he or she can only raise its price by 5 per cent? Inflation and upkeep costs will eat into the potential to profit from improvements, while revenue gains are limited. The housing stock may deteriorate.
But rent controls also help people on lower incomes deal with the cost of living and improve cities’ competitiveness as destinations for price-sensitive migrant workers.
Expensive housing tends to concentrate property ownership in the hands of the rich. Credit constraints and a paucity of savings reduces the flow of new buyers and cements the position of existing owners — whose incomes from capital can quickly outstrip those of renters. Ignoring who owns what is to turn a blind eye to redistribution from workers to rentiers.
And, of course, shelter is a basic human need.
London, Dubai and Abu Dhabi each have different property markets. Rent rises in the UAE appear to be outstripping those in London — if JLL and Cluttons are right — but each city has similar issues. Prices are rising as financial inflows and in-migration bid up the price of all segments of the housing market. Rising rents squeeze tenants’ livelihoods in the UAE and the UK alike. It’s no wonder Ed Miliband is looking to Abu Dhabi for solutions.