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When rent control goes too far

I was catching up with a friend of mine over coffee this morning and he was telling me about his recent trip to Porto, Portugal. I’ve never been, but it’s fairly high up on my list of places to visit.

He was telling me about how beautiful the center of the city is and how it’s a UNESCO World Heritage Site. But he was also telling me how eerie it was to see so many abandoned and decaying buildings.

And part of the reason for this – I learned – is that up until fairly recently, Portugal had some incredibly onerous pro-tenant rent controls in place that dated back to the beginning of the 1900s.

In fact, they were so onerous that, by some estimates, roughly 150,000 households in Portugal were paying less than €50 per month in rent before the laws were changed!

Because of this, landlords in many cases could not, and cannot, actually afford to maintain their properties. Buildings were left to decay, and in some cases they were completely abandoned. That was their only option. And it led to a virtually non-existent rental housing market (according to the IMF).

Clearly, this is a problem. If you have a market distortion as serious as this one – where there’s virtually no incentive to invest – you’re on a highly unsustainable economic trajectory.

Which is why when Portugal received its bailout package from the International Monetary Fund and European Union following the 2008 financial crisis, it was asked to reform its rent control laws – which it agreed to do.

The hope was that the reforms would allow Portuguese landlords to charge more reasonable and market-oriented rents, as well as do other crazy things like evict tenants that don’t actually pay their rent. Not surprisingly, many fought the changes.

I don’t know precisely how these reforms have ultimately played out in the market over the past few years (if you do, I’d love to hear from you in the comments below), but I do believe that liberalization of the market was, and probably still is, needed.

While paying €5 a month for a 4 bedroom apartment in a desirable central neighborhood might be great for that one individual family, it’s not so great for the economy as a whole. And ultimately that comes around to impact even that household.

Image: Flickr

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