Why Dubai should consider removing the rent cap

Property prices in Dubai seem to be fairly stable, and it may be time to rethink the need for the rent cap.
Why Dubai should consider removing the rent cap
By Ed Attwood
Fri 21 Nov 2014 01:34 PM

“Rent control, along with laws protecting tenants against eviction, involves partial expropriation of property rights. It limits the owner’s rights to use and to profit from the use of his property.”

So runs the foreword to a paper by economists Milton Friedman and George Stigler, written just under 70 years ago. The market they were referring to — the post-war US — may be far removed from 21st century Dubai, but the complaint about the imposition of a rent cap is the same. In a free market, supply and demand should determine the cost of rent, and keeping prices artificially low serves no-one.

Dubai’s cap — which limited rent rises to 7 percent every year — was introduced in 2007, in a bid to protect tenants as the housing market shot out of control. Since then, it has been adjusted a couple of times to reflect the state of what has been an exceptionally volatile market. Now, for the first time for a decade, property prices in Dubai seem to be fairly stable, and it may be time to rethink the need for the rent cap.

Most tenants would argue that this would mean immediate rent hikes, and in some cases this would be true, at least in the short term. But if a landlord can achieve higher rents from someone else who is prepared to pay more, then it is hard to see what is wrong with that. If they are unable to find someone to fill their property, then that is their problem.

There is perhaps a lesson to be learnt from nearby Abu Dhabi, which removed its own rent cap last November. Admittedly, the UAE capital has a far less volatile property market than its neighbour, but the most recent data, from MPM Properties, suggests that more than half of all rent increases in the most recent quarter were between 0 and 5 percent.

Landlords tend to get a bad name. They are easy to characterise as “greedy” and “unscrupulous”. But when you take emotion out of the equation, all most landlords are trying to do is obtain a better return on their investment. They do not ‘owe’ tenants lower rents, in much the same way that tenants did not think twice about their landlords when the bottom fell out of the rental market four years ago.

The fear for the tenant is that they will be priced out of the market, and it is a valid one. However, this is hardly the fault of landlords and is symptomatic of a wider problem — the lack of affordable housing, especially for the mid-income segment. Developers have steered clear from this segment in the past, mainly because it’s more profitable for them to sell luxury housing.

Ironically, the rent cap itself may be playing a part in the dearth of affordable property. It puts off potential investors who are rightly concerned that the returns on their investment are being kept artificially low. With fewer investors in the market that, in turn, discourages developers from building more houses.

The flipside to the removal of rent control should be a regulation to ban the practice of paying for a year’s lease upfront, in one cheque. This practice has its roots in the days when companies’ used to pay for their employees’ housing but soon spread to cover the entire market. It’s unfair and puts undue pressure on the tenant.

While renters should be allowed to pay by one cheque if they wish (presumably at a discount), quarterly or — preferably — monthly payments should be mandated.

There is little doubt that any move to abolish the cap would cause short-term difficulties for some tenants in Dubai, but the long-term benefits in the form of more investment in the market should prevail.

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