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Rent Control and Tenants' Welfare: The Effects of Deregulating Rental Markets in Finland

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  • Lyytikäinen, Teemu

Abstract

Private rental markets in Finland were subject to rent control from 1967 until the beginning of the 1990s when the rent control system was gradually abolished. This study estimates the costs and benefits of rent control to tenants in private rental dwellings in 1990 using the years 1998 and 2001 as benchmarks. Special emphasis is placed on the welfare costs of increased discrepancies between actual and desired housing consumption due to the overdemand situation caused by rent control. Earlier studies on the welfare effects of rent control usually assume that the household would consume on the estimated demand curve in the absence of rent control. Here it is shown that this assumption biases estimates of the net benefit of rent control to tenants downwards and welfare measures are derived that also allow for suboptimal housing consumption in the absence of rent control. The empirical implementation of these measures utilizes micro-simulation to differentiate between 'natural' free market disequilibrium costs and additional disequilibrium costs caused by rent control. According to the results, the additional disequilibrium costs offset roughly 30 per cent of the benefits of lower rents to tenants and amounted to over 2 per cent of consumption expenditure of tenant households. The estimated net benefit of rent control to tenants, taking both low rents and disequilibrium costs into account, was 4.5 or 6.5 per cent of consumption expenditure, depending on the reference year. The ratio of the net benefit to tenants to the costs of lower rents to landlords was 64 or 72 per cent.

Suggested Citation

  • Lyytikäinen, Teemu, 2006. "Rent Control and Tenants' Welfare: The Effects of Deregulating Rental Markets in Finland," Discussion Papers 385, Government Institute for Economic Research Finland (VATT).
  • Handle: RePEc:fer:dpaper:385
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    File URL: https://www.doria.fi/handle/10024/148365
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Virén, Matti, 2011. "Does housing allowance feed through into rental prices?," Research Discussion Papers 11/2011, Bank of Finland.
    2. Rik de Boer & Rosamaria Bitetti, 2014. "A Revival of the Private Rental Sector of the Housing Market?: Lessons from Germany, Finland, the Czech Republic and the Netherlands," OECD Economics Department Working Papers 1170, OECD Publishing.
    3. Matti Viren, 2013. "Is the housing allowance shifted to rental prices?," Empirical Economics, Springer, pages 1497-1518.
    4. Mora, Juan S., 2008. "The institutions of house tenancy markets in post-war Western Europe : an economic analysis," IFCS - Working Papers in Economic History.WH wp08-11, Universidad Carlos III de Madrid. Instituto Figuerola.

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