Rent Control

1
Rent Control

• Discussion of past-paper

• 1989 C6

2

• Before and after World War II, the Hong Kong
  government imposed rent control on all domestic
  premises in the city, with the controlled rent
  significantly below the market rent.
• However, when a flat was vacant, the landlord
  could charge a prospective tenant a large
  lump-sum, called key money, for acquiring the
  right to lease. Following this, once the tenant
  moved in, he would only have to pay the
  controlled rent.

3

• (a) Let K key money
• Rm the would-be free-market rent
• (you may use Rm if this rent is expressed in
  terms of annuity)
• Rc the constant controlled rent, which is
  significantly below Rm or Rm
• r the constant rate of interest

Suppose the rent control is expected to last
forever. How would the key money, K, be
determined in the market? (8 marks)
4

• (a)

non-exclusive income

• For simplicity, assume the number of rental flats
  is fixed.

• At equilibrium, the maximum amount willingly
  given up by potential tenants is Rm, while the
  guaranteed rent to be received by landlords is Rc.

• The difference between Rm and Rc is the so-called
  non-exclusive income, which could be captured
  by the landlords through the form of key money.

• Key money, K ( Rm Rc ) / r

5

• (a)

• Some candidates did not follow the question or
  they did not read the question carefully. They
  wrote down the formula for calculating the
  present value of a finite stream of income,
  while the question required an infinite stream.

6

• (b) What would you expect of the change, if any,
  in the turnover rate of tenants under rent
  control, as compared to a free-market situation?
  Explain. (8 marks)

• The turnover rate will decline because the tenant
  would not likely give up possession for which he
  had paid key money to obtain.
• If the law and/or the landlord permits, the
  tenant who wants to move out would try to sublet
  in order to obtain a lump-sum key money from
  another tenant. This inconvenience procedure
  would tend to deter the turnover rate.

• Some candidates answered the question without
  using the assumptions and information provided in
  the stem of the question.

7

• (c) Suppose the law allows the landlord to evict
  the tenant at will if the former chooses to
  reconstruct a leased building. What would happen
  to the rate of housing reconstruction of leased
  buildings under rent control? Explain.
• (9 marks)

• The rate of housing reconstruction will rise.
  This is because the gain from reconstruction
  rises with vacant possession of the new
  structure, as the landlord could then charge the
  equivalent of a free market rent via the key
  money arrangement.