continues to be used in many cities, and has recently been expanded in
Toronto.
The Predicted Effects of Rent Controls
Binding rent controls are a specific case of price ceilings, and therefore
Figure 5-3 can be used to predict some of their effects:
1. There will be a shortage of rental housing because quantity
demanded will exceed quantity supplied. Since rents are held
below their free-market levels, the available quantity of rental
housing will be less than if free-market rents had been charged.
2. The shortage will lead to alternative allocation schemes.
Landlords may allocate by sellers’ preferences, which may include
(illegally) allocating the rental units on the basis of gender,
religion, or race. Alternatively, government may intervene by
using security-of-tenure laws, which protect tenants from eviction
and thereby give them priority over prospective new tenants.
3. Black markets will appear. For example, landlords may (illegally)
require tenants to pay “key money” reflecting the difference in
value between the free-market and the controlled rents. In the
absence of security-of-tenure laws, landlords may force tenants
out when their leases expire in order to extract a large entrance
fee from new tenants.