Encyclopedia of Law & Economics - 5840 RENTING

5840

RENTING

Werner Z. Hirsch

Professor of Economics

University of California, Los Angeles

© Copyright 1998 Xerner Z. Hirsch

Contents

Abstract
1. Introduction
A. Economic Theory of Rental Housing Markets
2. Housing Market Theory
3. Housing Market Models
B. Rent Control Laws
4. Legal Analysis
5. Economic Analysis: General Remarks
6. Economic Analysis: Rent Control of Single Ownership Property
7. Economic Analysis: Rent Control of Divided Ownership Property
8. Distributional Effects
9. Constitutionality -- Is There a Taking?
C. Laws Complementing Rent Control
10. Vacancy Decontrol Laws
11. Just-Cause Eviction Laws
12. Anti-Conversion and Anti-Demolition Laws
D. Habitability Laws
13. Legal Analysis
14. Economic Analysis: Short-Term Welfare Effects
15. Economic Analysis: Alternatives
16. Economic Analysis: Long-Term Welfare Effects
E. Laws Complementing Housing Codes
17. Anti-Retaliatory Eviction Laws
18. Anti-Speedy Eviction Laws
F. Anti-discrimination Laws
19. Racial Discrimination: Legal Analysis
20. Racial Discrimination: Economic Analysis
21. Age Discrimination: Legal Analysis
22. Age Discrimination: Economic Analysis
G. Policy Implications
23. Policy Implications
Bibliography on Renting (5840)
Cases and Legislation


Abstract

Landlord-Tenant Law can be grouped into three major classes -- rent control,habitability, and anti-discrimination laws. At times, two or three such laws arein effect at the same time and even may be supplemented by some additionallaws needed to assure their effectiveness. When that happens, as in the casewhere a jurisdiction has both rent control and habitability laws, landlords canfind their financial future at risk. The reason is that virtually all landlord-tenantlaws, intended to protect the interest of tenants, impose costs on landlords. Themore such laws are enforced, the heavier the burdens on landlords, and the morelimited the latters' rights and opportunities to manage their enterprise. Moreover,both deductive and inductive studies suggest that some of the landlord-tenantlaws, while burdening landlords, are of little, and at times no, help to tenants,though tenants may deserve protection.

JEL classification: 619, 717, 722, 916, 917, 932, K11, K23

Keywords: Renting, Landlord-Tenant Relations, Rent Control, Habitability Laws,Housing Codes, Housing Discrimination Laws


1. Introduction

Renting involves a temporary exchange of rights to occupy and make use of realproperty -- unimproved and improved -- in return for a fee, i.e., a rent payment.While the property may be used for agricultural, industrial, commercial orresidential purposes, the law has taken special interest in residential property fora number of reasons. Housing provides shelter which is a necessity, andtherefore has inelastic demand; it takes a long time to build new housing, andtherefore it has inelastic short-run supply; it is one of the largest, if not thelargest, budget item of most families; and it has many intangible characteristicswhich determine its quality, including spatial location and fixity, durability, age,size and appointments.

This review, therefore, will focus on what Law and Economics hascontributed to the understanding, regulation, and evaluation of landlord-tenantrelations and particularly the laws' side effects.

Three classes of laws regulating landlord-tenant relations will be reviewed-- Rent control laws and, in conjunction with them, vacancy decontrol, no-faulteviction and anti-conversion laws since they tend to be associated with rentcontrol, Habitability laws and Anti-discrimination laws.


A. Economic Theory of Rental Housing Markets

2. Housing Market Theory

Nowhere is housing a single market in the neoclassical sense. In fact it is a setof submarkets which differ in their location, housing type, tenure, quality andother aspects Smith, et al. (1988, p. 30). They also differ in terms of thejurisdiction's tenure strategy, i.e., private versus public ownership of residentialrental housing. This strategy is well documented for Australia, Germany,Holland, New Zealand, Sweden, Switzerland and the United Kingdom J. Kemeny(1995, p. 75-129). Renting in a number of countries has also been discussed byHarloe (1985) and Emms (1990). Power (1990) has reviewed renting in fiveEuropean countries.

From these and other studies it is clear that the distinguishing characteristicsof housing in general, and rental residential housing in particular, are many.Some are responsible for governments all over the world frequently intercedingin the relations between landlords and tenants. For example, the fact that boththe supply of and demand for rental housing tend to be inelastic can lead tosharp rent increases during market adjustments, which interested parties oftenproclaim to constitute rent gouging (a terms basically devoid of economiccontent).

In order to analyze rental housing in general and the effects upon it oflandlord-tenant laws in particular, economists have developed special methodsof inquiry. One involves housing stock models and the other flow models whichuse hedonic price analysis Rosen (1974), Kain and Quigley (1970), Barnett (1979)and Quigley (1979). Hedonic price analysis also has been applied to estimate theeffects of certain landlord-tenant laws Hirsch (1981), Hirsch and Law (1979),Rydell et al. (1981), and Marks (1984)

Hedonic price analysis looks at housing as a complex commodity composedof a host of housing services flowing from the existing housing stock with thenumber of housing service units determining its quality. The housing servicesof a dwelling include location, heat, air conditioning, size, appointments, etc.,each valued and consumed by residents. Although the flow of housing servicesis not well-defined and its quantity hard to ascertain and to price, the monthlyrent can be considered the product of the number of housing-service units timesthe unit's price. The hedonic price approach supposes that the various housingcharacteristics of a dwelling have distinguishable values to residents. Thus, thehedonic housing price function estimates the marginal market prices consumersare willing to pay for each housing characteristic. Information from this functioncan be used to combine any set of measured characteristics into aone-dimensional measure of the value of the total flow of housing services fromdwellings in a specific housing market. This approach has major beneficialapplications to the analysis of landlord-tenant laws. It allows looking at rent asthe product of the number of housing service units and the price of a unit,providing useful insight into the effect, for example, of a rent control law. Thus,even if rent control succeeds in reducing rent, hedonic housing price analysispermits the estimation of the percentage associated with lower housing serviceunit prices as well as that associated with the reduced number of housingservice units. The latter testifies to the extent to which housing quality hasdiminished as a result of rent control Rydell et al. (1981). In a similar manner, withthe help of hedonic price methods, it becomes possible to determine what, if any,effect a habitability law has had on housing quality and the price of housingservice units Hirsch and Hirsch(1975).


3. Housing Market Models

Economists have developed a number of specific rental housing models, whichfall into the following categories:

1. Perfectly competitive static stock models which treat rental housing as ahomogeneous commodity, thereby neglecting such characteristics as location,quality, size, etc.

2. Perfectly competitive static flow models which assume the existence of anunobservable homogeneous commodity, i.e., housing services Muth (1983) andOlsen (1988). Rental housing has a variety of housing characteristics, each ofwhich has quantitative and qualitative dimensions. This characteristics approachof Rosen (1974) involves a model of demand, supply, and competitive marketequilibrium. Each housing unit has a vector of n objectively measurablecharacteristics. A bundle of such characteristics constitutes a housing unitwhich has a price in the housing market. In a competitive market, such bundlesand their prices indicate the implicit prices of characteristics, defined as hedonicprices. Multiple regression analysis can estimate these hedonic prices. Many ofthese models assume a group of households and firms to be confined to therental market, ownership housing to be a substitute for rental housing with theprice of ownership housing given, and rather static circumstances which do notidentify how quality changes come about, i.e., whether through maintenance,rehabilitation, conversion, etc. Arnott (1995)

3. Perfectly competitive flow models with select dynamic features. Forexample, a housing model by Sweeney (1974) incorporates a number of dynamicfeatures and also explicitly allows quality differentiation. In this model a landlordowning a durable housing unit of a given quality makes, for instance,maintenance decisions. Based on information on rent-quality relationships andthe rate at which the housing unit deteriorates subject to maintenance levels, thelandlord selects the maintenance expenditure level which maximizes thediscounted present value of net revenues from his housing unit. The modelallows for construction and abandonment of housing, and a model by Arnott(1987) allows for demolition followed by construction of rentals.

4. Imperfectly competitive flow models which recognize imperfections due tolocation, heterogeneity of housing units, neighborhood effects, search costsand imperfections in capital markets. Two major classes of such models exist.One is a monopolistically competitive model derived from search-based matchingmodels Diamond (1984). Tenants' tastes guide the search for rentals. In animperfect market, searchers finding the exact housing unit they desire can endup paying a rent above that commanded by rather similar rental units. Shouldlandlords recognize this fact, they could charge a price above marginal cost. Yet,should there be free entry and exit, profits would decline, possibly to zero, andvacancies result.

A second class of models can be referred to as contract models where marketimperfections result from asymmetric information Hubert (1990). For example,there can be reliable and unreliable tenants, whose identity landlords discoveronly after occupancy has commenced. Unreliable tenants will move frequentlyand, in the absence of widespread information about their behavior, imposeheavy costs on landlords.

5. Political-economic models theorize about the probability of a jurisdictionenacting landlord-tenant laws Fallis (1988). Such models take cognizance of thefact that landlord-tenant relations are significantly affected by the relative size,wealth, and political activity of the two groups to a bargain. Landlords in manycommunities tend to be richer but fewer in number than are tenants. But inaddition to tenants, there are also homeowners. Whether their economic interestis more attuned to tenants or landlords is not altogether clear Arnott (1995). Amodel by Epple (1994) explicitly recognizes that a community has permanent andtemporary residents, each with different interests. Neither group, however,knows the size of the other. Yet, homeowners are not incorporated into themodel.


B. Rent Control Laws

4. Legal Analysis

In many countries governments have enacted laws that regulate the rentslandlords may charge residential tenants for their property and services. Theavowed purpose has been to protect tenants from unwarranted rent increases,particularly if they might force them to vacate the premises. Most of thesecontrols were enacted in times of severe housing shortages, mainly duringwartime and periods of hyperinflation. The relation between rent control andinflation has been explored by St. John (1996).

Controls are of two types -- first generation or hard controls i.e., virtual rentfreezes, and second generation or soft controls which can allow for automaticrent increases (tied, for example, to the rate of inflation), cost passthroughs,vacancy decontrol, etc.

Rent freezes were imposed on many American and European cities duringWorld War II. Some, including New York, retained these controls long into thepost-war period. For example, in the United Kingdom, rent control was enactedby Parliament shortly after the outbreak of World War II Hirsch (1981) andTurner (1988). The Rent and Mortgage Interest Restrictions Act of 1939 appliedto rent controls as well as to security of tenure. Rents were fixed at September1939 levels. Also a number of major cities in developing countries have firstgeneration types of rent controls, although they differ in detail and enforcementMalpezzi (1993).

During run-away inflation of the 1970s, many local jurisdictions in the UnitedStates imposed rent control, including about 100 municipalities in the State ofNew Jersey alone. In California, when real estate prices skyrocketed in the late1970s and the electorate passed a revenue limitation measure (Proposition 13),the measure's sponsors promised to reduce rents. When rents were not lowered,a number of local jurisdictions (including the cities of Los Angeles, SanFrancisco, Oakland, Berkeley, and Santa Monica, and the County of LosAngeles) adopted rent control ordinances. Also, about one third of cities inCalifornia had rent control ordinances in effect on mobile home parks. Moreoverin the mid-'70s all Canadian provinces introduced rent control, though only fourhave retained them Arnott (1995). In 1995, residential housing under rent controlis estimated to fall between 10-15% Arnott (1995).

In the United States, rent control has typically been justified by localgovernment entities as an exercise of their police power. In the 1920s, the UnitedStates Supreme Court held that the use of state police power to enact rentalcontrols was consistent with the due process clauses of the Fifth andFourteenth Amendments of the United States Constitution only if utilized inresponse to a housing "emergency." Block v. Hirsch (1921). In recent years,however, for some courts a crisis or extremely exigent circumstances are nolonger required to justify rent control. For example, the California Supreme Court,in Birkenfeld v. City of Berkeley (1976, p. 129), declared that it "is now settledCalifornia law that legislation regulating prices or otherwise restrictingcontractual or property rights is within the police power if its operativeprovisions are reasonably related to the accomplishments of a legitimategovernmental purpose." Thus, in the United States, the court's inquiry in rentcontrol cases is generally whether the ordinance reasonably relates to alegitimate purpose. The more important question of whether the measure will, infact, achieve its stated objective of controlling rents is typically not reviewed bythe courts. This is the traditional dichotomy between procedural andsubstantive due process, and it is this approach that ignores the value ofeconomic analysis. The fact that rent controls may actually make a housingproblem worse often appears irrelevant to a court's view of a rent controlordinance. As long as the enacting body could reasonably conclude that themeasure is related to a legitimate purpose, the measure is likely to be upheld,even if it is counterproductive Palos Verdes Shores Mobile Estates, Ltd. v. Cityof Los Angeles (1983). American courts have two further concerns. In order notto be confiscatory on its face, a rent control ordinance must permit theregulatory board to grant across-the-board increases based upon classificationenumerated by the board or statute. Alternatively, the rent control ordinancemust institute a unit-by-unit procedure that will operate without what the courtconsiders to be an unreasonable delay. There is also a constitutionalrequirement for a "just and reasonable" return, a difficult concept. A requirementof recent vintage and to be discussed below is the "nexus" test.

Rent control laws differ in stringency and tightness, depending on theircoverage and pass-through provisions, the basis on which and manner in whichpermissible rent increases are calculated, the ease with which landlords can hopeto get such increases, and whether the laws allow for vacancy decontrol,demolition of buildings, and use change. Stringent ordinances cover allpremises, whereas the less stringent ones exempt single dwellings, luxuryapartments, and apartment houses with fewer than four or three units. Also, theless stringent ordinances permit the cost for major repair and minorimprovements to be passed on to tenants.

Great differences also exist in the manner in which allowable rent increasesare set and enforced. In the most extreme case, there can be rent freezes andeven rollbacks to an earlier date. Most laws provide a formula by which annual"general adjustments" are made: some stipulate a fixed annual percentageincrease, while others tie increases to changes in the cost of living. Since rentsare more in line with market rent under vacancy decontrol, total decontrol shouldbe easier in its presence than in its absence. However, discrimination can resultagainst groups of tenants that have low turnover rates (i.e., senior citizens).

Rent control is not unique to the United States. For example, in the UnitedKingdom, rent control has had a long history going back to 1939. The Rent Actsof 1965 and 1977 Rent Act (1965 and 1977) focused on "fair rents" and allowedtenants to apply to a rent officer (with a right to appeal to a rent assessmentcommittee) for determination of what is a 'fair rent' for the relevant premises. Inmaking the assessment, regard is to be had to the age, character, locality, andstate of repair of the premises, and also to the provision (if any) of furniture. Thisdetermination was to be made on the assumption that in the locality demanddoes not exceed supply, i.e., the market is in equilibrium, While the legislationdoes not prescribe how this determination is to be made, the favored method hadbeen to look for rents for equivalent premises in comparable jurisdictions. Whilepossibly generating horizontal equally, the method does not assure that the rentis appropriate. This determination of "fair rent" has been costly to administerand has resulted in a large amount of litigation Ogus (1994) . In recognizing itsharmful effects in a White Paper of 1987, rent controls were abolished by theHousing Act of 1988. The end of "fair rents" in the United Kingdom has beenexamined by Davey (1992) and Lee (1992) .

5. Economic Analysis: General Remarks

Rent control laws have in common that they reduce the freedom of landlords toset rent levels and diminish the range of rents and property types that canfeasibly be offered tenants. As a consequence, opportunities for mutuallybeneficial trades between landlords and tenants are reduced. Such laws amountto price control and result in distributional and efficiency consequencescommonly associated with such controls.

An exercise in positive economics reveals a host of effects on rental housingsupply, property values, maintenance and housing quality, new constructionand conversion, availability of rentals, potential mismatch of rental units tohouseholds and reduced housing mobility. Moreover, distributional effectsoccur, not only between landlords and tenants, but also among tenant groupswith differing income, gender, race and age characteristics.

It is helpful to recognize that rent control laws can apply to two major classesof property ownership. Rent control of apartments, unless they are furnished,involve single ownership, i.e. land as well as improvements are owned by oneand the same party. The second class involves divided ownership which occurswhen the improvements are owned by one party and the land on which they areplaced are owned by another. Examples are housing condominiums andcooperatives as well as mobile home parks on leased land. In relation to anappraisal of effects of rent control, the two ownership patterns differ.

Arnott recognizes, and our review confirms, that there are few empiricalstudies of first generation rent control in Europe at least in the English-languageliterature Arnott (1995, p. 102). Moreover, there are relatively few contributionsthat pertain to countries other than the United States. Exceptions are somepapers on Canada Arnott and Johnston (1981), Marks (1984), Smith andTomlinson (1981), and Fallis and Smith (1985); Germany Börsch-Supan (1986);Hong Kong Cheung (1975, 1979); Israel Werczberger (1988);Anas and Cho(1988); and United Kingdom Coleman (1988) and Ogus (1994) .

6. Economic Analysis: Rent Control of Single Ownership Property

First-generation or hard rent control laws, that involve a virtual rent freeze, haveusually been subjected to what Arnott (1995) refers to "Textbook Analysis."This analysis makes use of the first model discussed earlier, i.e., a perfectlycompetitive static stock model. It focuses on rent and availability of rentalhousing. When, for example, inflation raises the cost of providing rentalhousing, controls prevent landlords from passing on cost increases to tenants.Using a housing stock model in, Figure 1 the two axes are rent (R) and numberof dwellings (Q). Before the imposition of rent control on apartments, atequilibrium, the number of dwelling units was Q1 and the market-clearing rentwas R1. As a result of, for example, increases in the price of input factors(whether repair and maintenance costs, utilities, or property taxes), the supplyfunction shifts to the left (S2). Without a change in demand, a new equilibriumwould be reached at Q2 and R2. Rent control would prohibit landlords fromcharging the rent that they would otherwise have sought; that is, their rent willbe below R2. In the most extreme case where no rent increase is permitted,landlords would supply Q1 - Q3 fewer dwellings than would be demanded in theshort run. In the long run, rent control is likely to have a chilling effect oninvestors and therefore curtail the supply of housing. Thus, cumulative declinesin low-cost dwellings could be anticipated, accompanied by housing shortages.

Empirical estimates of the long-run price elasticity of rental housing supplyrelated to land prices in large U.S. metropolitan areas suggest it to be about +0.20Hirsch (1981). Thus, a 10% increase in the price of land per year would tend toincrease rents by 6.5%. If no rent increases were permitted, supply would bereduced by 2.4% of low-cost housing units, and if only half of that increase werepermitted, the shortage would be 1.2%.

The effects of rent control can also be examined from the demand side, wherethe rental housing demand function shifts to the right. If we assume that, in theshort run, the supply of low-cost housing rental units cannot change, a newequilibrium would be reached at a higher rent and number of dwelling units. Rentcontrol does not permit this new price for housing units to be obtained, and ashortage of dwelling units will result. Landlords not permitted to raise rents mayreduce repair and maintenance, and thereby the quality of housing. Or they maywithdraw dwellings from the market by converting apartments intocondominiums, convalescent homes, homes for the aged, or cooperatives. Somemay even abandon their properties because of the artificial imbalance betweencosts and rent.

The magnitude of the likely rental housing shortage can be estimated withthe aid of income elasticities for low-cost rentals. An econometric studyestimated it to be about +0.98 for 1974-75. Hirsch (1981, p. 293). In anuncontrolled rental market, in the presence of an annual per capita incomeincrease of 8%, for example, and on the assumption that the short-run supply oflow-cost housing does not increase, annual rent increases of about 8.0% couldbe expected. If rent control were to be imposed and were to permit no increasewhatsoever, an 8.0% shortage of low-cost rental units would develop. If, on theother hand, rent increases were held to half the expected 8.0%, or 4.0% perannum, a shortage of about 4.0% would result. These shortages would becumulative as long as income increases over time.

The textbook analysis has been effectively summarized by Arnott (1995).Accordingly, when rents are capped below market-clearing levels, tenants inrent-controlled apartments benefit. The longer the occupancy, the greater thebenefit. The below-market rents induce excess demand for housing and in turna mismatch of apartments to households; reduced mobility of tenants andtherefore the labor force; and grey- or black-market phenomena, e.g., "keymoney". Furthermore, landlords incur lower returns on their investment and acorresponding decline in property values. They tend to reduce repair andmaintenance, convert to non-controlled land uses and desist from addingapartments.

When the analysis applies the second model, i.e., a perfectly competitiveflow model, one can show that one effect of the reduced rents takes the form ofa reduction in the number of housing service units, i.e., quality of apartmentsprovided. Empirical methods permit an estimation of the relative importance ofchanges in the number of housing service units provided, i.e., quality ofapartments, compared to housing service unit prices.

If the main concern is with rent control's effect on housing quality, a housingflow model, using hedonic housing price functions, is appropriate. A theoreticalmodel by Frankena (1975) (the second type discussed earlier) separates theeffect of rent control on the number of housing service units from that on theunit's price. Frankena does so by examining the effect of rent control as a ceilingon rent (or, equivalently, revenue) per dwelling as opposed to a ceiling on priceper housing service unit. His model leads to a kinked supply curve when rentcontrol takes the form of a revenue constraint, as shown in Figure 2. Thehorizontal axis measures housing service units. Equilibrium price and quantityoccur at p0 and q0, respectively, in the absence of controls. If rent control limitsrevenue per dwelling to price-quantity combinations along the rectangularhyperbola ASSR2, then the effective supply curve will become SASSR2. In thisdiagram, equilibrium occurs at a lower quality level (q1), but at a higher price perhousing service unit (p1). Increased demand, then, will lead to even moredeterioration of quality.

Rydell et al. (1981) built a model that permits the estimation of both the priceand the quality effects of rent control. They relied on the housing-servicesapproach in which the variable of interest is a composite of the housingcommodity's desirable attributes. If landlords charge the market rent for adwelling with a certain quantity of housing services, a reduction in rents meansthat the landlords are now not being paid for all the services they supply. Forexample, if the rent declines by 5%, the landlord will be receiving payment foronly 95% of what he offers. The landlord then will be tempted to reduce thequantity of services to only those for which he is paid. This is done for the leastcost through less maintenance resulting in deterioration, which, of course, is theresult predicted by Frankena.

It was projected that, after rent control had been in effect in Los Angeles forfour years, the rents of controlled dwellings would be about 4% lower than theywould have been if rent control had not been in force. Likewise, after four years,the price of rental housing services was estimated to be 3.2% lower than it wouldhave been without rent control, and the quantity of rental housing service unitswas 1.5% lower Rydell, et al. (1981, p. VI).

A 1991 paper projected the effect of rent control on housing service unitsand their prices for eight years Rydell, et al. (1991) It confirms that rent controlof the sort enacted by Los Angeles in the late 1970s would confer its benefitsearly and extract its costs late. The early effects of rent control were exclusivelyhousing service price reductions, whereas, as time passed, landlords reduced thelevel of rental housing services in line with the rent they were permitted tocharge. Thus, controls would reduce benefits to renters and also reduce supply.If the rent-control ordinance were tightened, it would accelerate those reductionswithout providing proportionate increases in benefits to the renters.

The long-term effect of rent control on rental housing quality was estimatedby Mengle (1983). His study of eight large cities estimated that the presence ofrent control was associated in 1974 with a 7.4% decrease in housing quality,while three years later it was associated with a 13.9% decrease. For indigentblack tenants, the deterioration was 18.6% in 1974 and 26.6% in 1977. Thedeterioration was particularly serious for indigent aged tenants. Thus, in 1979 inthe presence of rent control, the housing quality of all tenants had declined by14.5%, of aged tenants 60 years and over by 17.3%, and of indigent tenants 60years and over by 23.0%.

Tenant gains and landlord losses that result from rent control have beencompared by Rydell, et al. (1991, p. 618). Gains are defined as net rent reductionsafter deterioration minus loss in consumer surplus due to reduced housing andrent control fees levied on tenants. Losses are the decrease in revenue due torent reductions and decline in housing stock plus landlords' rent control fees,minus reduced maintenance expenditures. The paper makes use of theMarshallian consumer surplus concept and assumes a constant elasticityaggregate demand function with an 0.7 price elasticity. It concludes that thepresent value of landlord losses exceeds the present value of tenant gains,pointing to two reasons -- 1) housing benefit losses to tenants due to qualitydeclines outstrip landlords' savings from under-maintenance and 2) burden ofrent control fees.

In order to estimate the overall effect of rent control, a rent capitalizationframework can be used. In it, the expected future flow of revenues from rentalproperties determines their values, which, in turn, depend on supply anddemand conditions and their modification by a changing legal environmentHirsch (1987b). An econometric study of nine middle sized cities in Los AngelesCountry, California estimated that rent control was associated with an annualizeddecline in property values of between 7.3% and 11.9%, ceteris paribus. Theeffect of rent control was also examined by Albon and Stafford (1990).

The third model, i.e., a perfectly competitive flow model with dynamicfeatures and explicit quality differentiation, also has been applied to asecond-generation rent control analysis. In its simple form it has dynamicfeatures, allows for quality differentiation and articulates specific provisions ofrent control laws. A more complicated model by Sweeney (1974) has beendiscussed before. It has been expanded to allow for rent control leading todemolition of existing buildings, followed by construction of new ones Arnott,et al. (1983).

7. Economic Analysis: Rent Control of Divided Ownership Property

Rent control under divided asset ownership has especially extensive effects.Here are some of the reasons -- improvements, whether condominiums or mobilehomes, are of no residential use without the land on which they are placed.Thus, land and improvements that jointly provide residential shelter arecomplementary goods. The tenant-owned condominium apartment or mobilehome has a negative cross-price elasticity of demand for the stream of housingservices associated with the stream emanating from the land on which theimprovement is placed. Consequently, a decrease in rent for fee simplecondominium or mobile home park land should increase the demand forcondominium apartments or mobile homes, thus causing their prices to rise. Inshort, capping rents of land on which condominiums or mobile homes are placedwill lead to an increase in their value, and thereby yield tenants a windfall profitwhich accrues in addition to benefits from reduced rents. Owners ofcondominium apartments and mobile homes benefit from unearned appreciatedvalues of their assets.

A capitalization model can be used to analyze, for example, the effect ofchanges in the rents for mobile home pads on mobile home values. Since thesupply of mobile homes is assumed to be inelastic at any point in time, in thismodel prices are basically demand determined in the short run.

P = f(U,V,W,C), (1)

where P is the sales price of a mobile home or its assessed valuation; U is theflow of housing services derived from the home; V is the price per constantquality unit of pad services; W is the price per constant quality unit ofalternative housing, mainly apartments; and C is the cost of transporting andinstalling the mobile home Hirsch (1988). The price of a mobile home unit isassumed to be inversely related to (C), the costs of transporting the home andinstalling it in a park. A home already located in a mobile home park should berelatively more expensive than a comparable one in a showroom, since for theformer the costs of transportation and installation are absent.

Mobile home prices should be positively related to the flow of housingservices (U). The amount of housing services is an increasing function of anumber of physical characteristics of mobile home units, including size, quality,and amenities contained in the coach. It is likely that consumers of mobile homeshave a negative cross price elasticity of demand for home services with respectto services of pads (V). Consequently, any decrease in the rent for pads shouldincrease the demand for homes, causing their prices to rise.

Two econometric studies have applied the capitalization model to estimatethe effect of rent control on the value of mobile homes. One covers the State ofCalifornia in 1984-86, where about 39% of all mobile homes were in rent controlcommunities. Sales prices were on average about $8,800 or 32% higher incommunities which had imposed rent control on mobile home park rents Hirschand Hirsch (1988). A second econometric study pertains to a particular mobilehome park in Ocean City, California in 1987-92. It found that during 1986-92, salesprices of mobile homes under rent control were $3,531 higher than those inuncontrolled markets Hirsch (1995).

When under divided asset ownership, income from one asset is capped, thelandlord's profit will be negatively affected in at least three ways -- first, theannual rent savings benefiting tenants are losses incurred by landlords.Secondly, the lower rent adjustment resulting from rent control will be capitalizedinto lower prices potential buyers are willing to pay for the land on which thecondominium or mobile home is placed. Thirdly, there is the damaging effect ofrent control on risks perceived by potential buyers of the land. Because ofheightened risks, potential park buyers will use a higher interest rate which theyapply to capitalized expected rents into land values. The higher the risk, thelower the prices they are willing to pay for the land.

8. Distributional Effects

The issue of equity has been argued from two different points of view. One viewholds that in a search for equity, macroeconomic instruments must be reliedupon. It recognizes that while some equity in housing consumption is important,governments can pursue an income distribution policy which can make housingpolicies inefficient and even inequitable Kain (1974), Aaron and Furstenberg(1971).

The second view distinguishes between general and specific egalitarianism,i.e., the general fairness of the income distribution, and concern that all citizenshave a minimum amount of essential commodities, including housing Tobin(1970). Specific egalitarianism requires an interest in the level of housing servicesaccruing to indigents, minorities and the aged, even if an optimal incomedistribution were to prevail. An evaluation of equity aspects of landlord-tenantlaws clearly is based on the specific egalitarian view, without necessarilydetermining an optimal housing service level.

Whenever a government caps rents, distributional effects are likely to occur.In the case of single, undivided property ownership, forcing a landlord to chargerents which are below the market-clearing rent will cause his property to declinein value. The capitalization formula presented earlier (P.18) gives expression tosuch an outcome.

Inequities tend to occur also among tenants. For example, sitting tenantstend to benefit from reduced rents. As a result, there exist fewer rentalopportunities for new tenants, who may be requiring apartments because ofchanges in their place of work, family circumstances, student status, etc. Thelonger tenants stay after rent control is enacted, the more they benefit. Inparticular, gains accrue to senior citizens since they tend to stay put. Landlordswhose rents are controlled tend, whenever possible, to seek new tenants whoare good credit risks. In the case of apartments, landlords prefer small families,whose members are not destructive, e.g., young professionals. As aconsequence, tenants who are poor, have young children and have large familiesare less likely to gain access to vacated apartments.

The long-term effects of rent control of apartments in Santa Monica, CA arewell-documented in a California Court of Appeal ruling Santa Monica BeachLtd. v. The Superior Court of Los Angeles County (1996, p. 2155-56). Thefollowing ten year effects of rent control were found the City's stock of rentalhousing units declined by nearly 5 percent and ... low-income rental units [by]12 percent ... notwithstanding that, during the same period, the rental housing

supply and the number of low-income rental units increased in all comparablenon-rent-controlled Southern California cities. The City also lost 285 "verylow-income" rental units, the largest "exodus of economically disadvantagedrenters" from any comparable Southern California city. At the same time, the Cityexperienced a 37% increase in the proportion of households with very highincomes (while the proportion of very high-income households dropped bymore than 8% in Los Angeles County as a whole). ...In addition, rental housingin Santa Monica has become "increasingly unavailable" to young families, withthe number of family households with children declining by 1,299, a 6% dropduring a period when no comparable non-rent-controlled Southern California citylost young family households. ... female-headed households with children under18 in Santa Monica fell by more than 27 [percent], despite an increase in suchhouseholds in Los Angeles County as a whole. ...Santa Monica's elderlypopulation ... declined by 1.7 [percent] [while] ... the elderly population of LosAngeles County rose by more than 15 [percent] over the same decade.

The distributional effects of controls under divided property ownership areeven more pronounced and widespread. With the help of the capitalizationmodel it can be shown that the more onerous and continuous the rent control-- and therefore the greater the difference between the controlled and marketclearing rent -- the greater the home sales price appreciation.

In addition to these distributional effects on landlords and tenants, certaintenant classes will be particularly effected. For example, the heightened resaleprices of homes placed in parks and the absence of park spaces hurts youngfamilies and transient workers especially. At the same time, sitting tenants, manyadvanced in age, are prime beneficiaries.

9. Constitutionality -- Is There a Taking?

In the United States, the constitutionality of rent control, particularly of mobilehome parks, has been of concern to the court in recent years. The issue involvesThe Takings Clause of the Fifth Amendment which provides: "[N]or shall privateproperty be taken for public use, without just compensation." This Clausegenerally requires just compensation where the government authorizes aphysical occupation of property. But where the Government merely regulates theproperty's use, compensation is required only if considerations such as theregulations' purpose or the extent to which it deprives the owner of theproperty's economic use suggests that the regulation has unfairly singled outthe property owner who bears a burden that should be borne by the public asa whole.

The U.S. Supreme Court has last ruled in 1992 on the constitutionality of rentcontrol of property under undivided ownership. However, in 1996 a CaliforniaCourt of Appeal in Santa Monica Beach Ltd. v. Superior Court of Los AngelesCounty (1996) ruled rent control of apartments in Santa Monica, Californiaunconstitutional. The alleged reason is that Santa Monica's rent control law hasfailed to mitigate the effects of a growing shortage of housing units by assistingthe poor, minorities, students, young families and senior citizens and, to thecontrary, it has made things worse." Thus, it did not meet the "nexus test", tobe discussed below.

The U.S. Supreme Court has ruled on the constitutionality of rent control ofproperty under divided ownership. Some of the characteristics of mobile homerent control may make it particularly vulnerable to running afoul of The TakingsClause. Courts have employed several tests in determining whether agovernment action or regulation effects an unconstitutional taking of propertywithout just compensation, typically focusing their inquiry upon: (1) thecharacter of the government action; (2) whether the property owner has beendenied his or her reasonable investment expectations; (3) the economic impactof the action on the claimants; (4) whether the action gives rise to a permanent,physical occupation of the claimant's property; and (5) whether the actionsubstantially advances legitimate state interests.

Until 1992, courts evaluating challenges to mobile home rent controlordinances typically focused on the fourth of these factors. Should mobile homepark owners be able to characterize the intrusion created by an ordinance as apermanent physical occupation, their challenges could succeed.

The leading case, adopting the position that mobile home rent controlconstitutes a permanent physical occupation and is, therefore, a taking is Hallv. City of Santa Barbara (1986). Owners of a mobile home park challenged amobile home park rent control ordinance by arguing that the ordinancetransferred to each tenant a possessory interest in the land on which their mobilehome was located. They claimed that the transfer was reflected in the facts thatthe prices for mobile homes in the park had shot up dramatically after theordinance was enacted, and that many homes in the park were selling for abovetheir bluebook value. A federal Court of Appeal citing, Loretto v. TeleprompterManhattan CATV Corp. (1982), for the proposition that a permanent physicaloccupation of property is a government action of such a unique character thatit is a taking without regard to the other factors that a court might ordinarilyexamine, concluded that the ordinance interfered with the park owner's propertyrights as described in Loretto and therefore constituted a physical taking.Specifically, the court found that the ordinance directs the landlord to givetenants a lease, a recognized estate in land, lasting indefinitely. Moreover, thelandlords' residual rights in the property are largely at the mercy of his tenants:he loses practically all right to decide who occupies the property, and on whatterms. If a tenant moves, the tenant alone decides who will be his successor byselecting the buyer for his rental unit; the landlord has no say as to who will liveon the property, now or in the future.

Moreover, because of the way the ordinance is alleged to operate, the tenantis able to derive an economic benefit from the statutory leasehold by capturingthe rent control premium when he sells his mobile home. In effect, the tenant isgiven an economic interest in the land that he can use, sell or give away at hispleasure; this interest (or its monetary equivalent) is the tenant's to keep or use,whether or not he continues to be a tenant.

Moreover, the court is concerned that the ordinance has "eviscerated" theproperty rights of the park owners, stating :...as the Santa Barbara ordinance isalleged to operate, landlords are left with the right to collect rents while tenantshave practically all other rights in the property they occupy. As we read theSupreme Court's pronouncements, this oversteps the boundaries of mereregulation and shades into permanent occupation of the property for whichcompensation is due. Hall v. City of Santa Barbara (1986, p. 2,4).

Some state courts, particularly in California, have rejected the Hall positionfor two reasons:

1) mobile home rent control merely regulates the relationship betweenlandlords and tenants, much like ordinary (apartment) rent control, and does notcause a permanent physical occupation of park owners' property, and

2) the original price of the regulated pad was artificially high (as a result ofmonopolistic aspects of the market) so that resulting recalibration of the pricesof both goods may be seen as a restoration of the equilibrium a free marketwould have reached. Such a restoration is not a taking.

While it did not adopt the California courts' approach, the U.S. SupremeCourt specifically rejected the Hall approach in Yee v. City of Escondido (1992),holding that a mobile home rent control ordinance without a vacancy decontrolprovision did not effect a physical taking. The Court held unanimously that aphysical taking can occur only when the government requires that thelandowner submit to a physical occupation of his or her land. Yet the Escondidoordinance did not impose such a requirement, because a park owner couldchoose to evict all tenants and change the use of his or her land. It merelyestablished the terms of the landlord-tenant relationship for those landownerswho chose to devote their property to mobile home parks.

Even as it rejected the argument that the Escondido mobile home rent controlordinance effected a physical taking, the Yee Court may have opened the doorto challenges to mobile home rent control ordinances as regulatory takings. TheCourt implicitly invited such challenges by noting that the plaintiffs' argumentwas "perhaps within the scope of our regulatory taking cases" Yee (1992, p. 165).The Court also stated that rent controls "are analyzed by engaging in the'essentially ad hoc, factual inquiries' necessary to determine whether aregulatory taking has occurred" Yee (1992, p. 166). Also, commenting on theplaintiffs' argument that the Escondido ordinance transferred wealth fromlandlords to incumbent mobile home owners, the Court stated that:

This effect might have some bearing on whether the ordinance causes aregulatory taking, as it may shed some light on whether there is a sufficientnexus between the effect of the ordinance and the objectives it is supposed toadvance. See Nollan v. California Coastal Commission, supra, at 834-835, 97L.Ed.2d 677, 107 S.Ct. 3141. But it has nothing to do with whether the ordinancecauses a physical taking. Yee (1992, p. 167)

Finally, in response to plaintiffs' argument that the Escondido ordinanceeffected a physical taking because it deprived landlords of the ability to choosetheir incoming tenants, the Court stated :

This effect may be relevant to a regulatory taking argument, as it may be onefactor a reviewing court would wish to consider in determining whether anordinance unjustly imposes a burden on petitioners that should "becompensated by the government, rather than remaining disproportionatelyconcentrated on a few persons." [Citation]. But it does not convert regulationinto the unwanted physical occupation of land. Yee (1992, p. 167)

With each of these statements, the Court hinted that a regulatory takingschallenge might succeed where the physical takings challenge failed.

As the Yee Court suggested with its citation of Nollan v. California CoastalCommission (1987). a challenge to a mobile home rent control ordinance as aregulatory taking could be based on the fifth of the five Takings Clause factors:whether the ordinance substantially advances a legitimate state interest. As isset forth in Nollan, this test requires more than just a rational basis for thestate's action. For the action to pass constitutional muster, there must also be anessential nexus between the stated ends of the state action and the meansemployed. An argument that mobile home rent control is a regulatory takingcould be based on the absence of a substantial nexus between mobile home rentcontrol and the objectives it is supposed to advance. For example, if theobjective of rent control is to alleviate a housing shortage and economic theorysuggests, and empirical evidence confirms, such an outcome to be unlikely, aregulatory taking would have occurred.

In a more recent decision, the U.S. Supreme Court appears to have added afurther requirement to the nexus test. In Dolan v. City of Tigard (1994) the Courtadded a "rough proportionality requirement". It held that the city's exactions forflood control purposes and a pedestrian bicycle path were unconstitutional.Although both were legitimate public purposes, and there was a significantnexus between these ends and the exactions required by the city, the degree ofthe required exactions was disproportionate to the impact that the planned landdevelopment would have on problems addressed by the exactions. In short, itfailed the "rough proportionality" test. There is still the question to what extentDolan is applicable beyond the context of exactions required for permit approval,e.g., rent control.


C. Laws Complementing Rent Control

Rent control laws, particularly those of the first generation, often createconditions that appear to require follow-up legislation. They include vacancydecontrol, just-cause eviction laws and anti-conversion and anti-demolitionlaws.

10. Vacancy Decontrol Laws

All over the world rent controls, once imposed, have been politically difficult tolift. Obstacles to terminating rent control are particularly formidable aftercontrolled rents have fallen substantially below market levels. In order to avoidthis situation, some jurisdictions allow vacancy decontrol of the following majortypes -- once tenant vacates premises, landlord can charge higher rents, e.g.,whatever rent the market will bear and 1) the premises remain decontrolled or 2)rent control is reconstituted at the higher rent. Some jurisdictions prescribe byhow much rents can increase once premises have been vacated.

Particularly the first type of decontrol would allow market forces to correctthe disequilibrium created by rent control. The result would be particularlyfavorable under divided property ownership, e.g., when tenant sells mobile homeor condominium Hirsch and Hirsch (1988).

Vacancy decontrol of mobile home parks, in particular, raises the question ofwho gains and who loses. While the unearned windfall profits of sitting tenantswill clearly be reduced, the effect on new tenants requires analysis, specificallywhether potential mobile home buyers will be better off with or withoutdecontrol. Using a simple supply-demand housing stock model, controls can beshown to limit quantity supplied. With rent control, the supply curve moves upand prices increase. With vacancy decontrol, the supply curve shifts down. Ifvacancy decontrol results in an increased quantity, then the price willnecessarily fall. While new purchasers clearly benefit in terms of lower initialprices, they are worse off due to pad rents starting at a higher level. This willlower the demand curve for mobile homes, but it would be hard to imagine a shiftthat lowered it enough to get a new equilibrium at a lower number of units.Sitting mobile home owners will generally be worse off due to the change. Withpermanent controls, they are free to sell the future rights to the controlled landrents, but lose this option with vacancy decontrol. They lose by the pricedecrease if they sell and by a lesser amount if they stay. For those planning tostay indefinitely, there is only a minor impact.

11. Just-Cause Eviction Laws

In the presence of vacancy decontrol, landlords have a strong incentive tocreate circumstances conducive to tenants vacating their premises. Tocounteract these tendencies, jurisdictions often enact just-cause eviction laws,which enumerate the specific causes which allow eviction. Causes includeamong others, failure to pay rent, disorderly conduct, willful damage to premises,etc. New Jersey Stat. (1974) Some states have attempted to apply such lawssolely to senior citizens California Assembly A.B.1202 (1974).

The effect of a just-cause eviction law is to increase the security of tenancy.The demand function for apartments with just-cause eviction guarantees ishigher, i.e., further to the right, than that without such guarantees, ceterisparibus. Thus, the law by protecting tenants enhances their utility. But whilejust-cause eviction laws increase the welfare of tenants, they also impose costson landlords. Specifically, such laws reduce landlords' rights and therebyflexibility, and place greater risk upon them. Moreover, legal costs are likely toincrease. As a consequence, the rental housing supply function shifts to the leftin the presence of just-cause eviction laws, ceteris paribus.

Depending on the relative shifts of the demand and supply functions, threedifferent outcomes are possible. In the most likely case, the cost to the landlordof operating under a just-cause eviction law are higher than is the law's value totenants; the result can be fewer dwellings. In a second case, the cost to thelandlord is smaller than the increased value to the tenant. The result usually willbe more dwellings, however, at a higher rent. In a further case, law-inducedbenefit and cost increases are about equal with all parties left in the same welfaresituation as before.

12. Anti-Conversion and Anti-Demolition Laws

To protect tenants from landlords circumventing rent control laws, somejurisdictions have enacted anti-conversion and anti-demolition laws. The formerprevent apartment house owners from converting properties into condominiums,cooperatives, or convalescence homes. While these laws protect tenants, theyinterfere with landlords' rights to seek the most efficient and profitable use oftheir property. Thereby they can create inefficiencies as well as inequities.Particulary when they prohibit ownership of residential rental property to go outof the housing business.


D. Habitability Laws

Habitability laws (or housing codes) compel landlords to make sure that a rentalmeets minimum standards of habitability, i.e., is not substandard housing.

13. Legal Analysis

Laws regulating landlord-tenant relations historically favored landlords overtenants. Specifically, the doctrine of caveat emptor was applied to relievelandlords of responsibility for warranting that a building rented for residentialpurposes was fit for that purpose at the inception of the tenancy. Landlords hadno responsibility for a building to remain habitable during the term of tenancy.Repair of damage caused by ordinary wear and tear was considered the tenant'sresponsibility.

In 1826, the doctrine of constructive eviction was first recognized in theUnited States Dyett v. Pendleton (1826). Grounds for constructive eviction,which permitted the tenant to surrender possession and vacate premises, werethe covenant of habitability and the covenant of quiet enjoyment. The covenantof habitability required the premises to be delivered in tenantable fit or suitablecondition. Concerned that the only relief for tenants was to vacate the premises,some state statutes and court decisions in the post-World War II periodmodified the doctrine of constructive eviction. In so doing, the doctrine ofcaveat emptor was reinterpreted in relation to the rights and obligations oflandlords and tenants. In light of the complexity of rental housing and theinequality of bargaining power in present-day society, a move towards thedoctrine of caveat venditor occurred. As a result, an implied warranty ofhabitability in urban rental leases evolved Markovits (1976) and Schwallie (1990).

In the mid-1970s two parallel developments occurred in the United Kingdomand the United States. In 1975 the Law Commission (Law Com. No. 67) handedto the Lord High Chancellor its proposed Codification of the Law of Landlordand Tenant. He in turn laid this Report on Obligations of Landlords andTenants before Parliament Law Commissioners (1975). The Report proposes interalia that particular obligations of landlords and tenants be divided into twoclasses -- mandatory obligations that cannot be varied or excluded, and variableobligations that can be varied or excluded by agreement of the parties. Theimportant mandatory obligations included the tenant's right to exclusivepossession of the premises and their quiet enjoyment; the tenant's mandatoryobligation was to pay rent, to protect the premises and to disclose his identity;as well as the landlord's obligations to disclose his identity.

The Law Commission also recommended that tenancy for a term of less than

seven years be governed by an overriding covenant obliging the landlord torepair the structure and interior of a dwelling. In tenancies of a furnisheddwelling for a term not exceeding 20 years there should be an implied, butvariable, covenant by the landlord to keep the entirety of the premises in repair.In tenancies over 20 years and in the absence of expressed agreement, the entireresponsibility for repairs of the premises should be imposed on the tenant.

In 1976, the American Law Institute adopted Restatement of the Law:Property 2d -- Landlord and Tenant American Law Institute (1976). Accordingto the document's section on habitability, a court could hold that a landlord hadbreached a covenant of habitability even though he had an agreement with atenant on a month-to-month basis that clearly indicated that both landlord andtenant were fully aware of housing code violation. Remedies available to tenantinclude rescission, damages, rent abatement and rent withholding. Moreover,tenants are protected against retaliatory eviction.

The United Kingdom has various laws providing for compulsoryimprovements and repair. For example, the Housing Act of 1974 in Part VIIIprovides powers to compel landlords to provide a bathroom and other standardamenities on request from a tenant Hadden (1978). This requirement, which hadexisted since 1964, was intended by the 1974 Act to include repairs associatedwith the provision of standard amenities, and also to permit local authorities toact without a formal request from a tenant. In response to representation from atenant, local authorities inform the owner and then inspect the premises andfinally prepare a schedule of work and an estimate of costs. Under certaincircumstances steps are initiated by the local authority as a result ofhouse-to-house inspection. At any time within six weeks, the owner may appealto the county court on the ground that the notice is invalid, for example that theexpense involved is unreasonable or that the standard of repairs required isunreasonable in relation to the age, character and locality of the house. Once thenotice has become operative, the owner has a further six months to decidewhether or not to serve a purchase notice on the local authority. If no action ofany kind has been taken by the owner on the expiration of the six month period,the local authority may then serve a formal reminder asking whether the ownerintends to carry out the work. Should this not produce a satisfactory response,the local authority may then serve further notice stating that it intends to carryout the work in default and, after a further 21 days, may do so. Alternatively, itmay wait until the full 12 months have expired and then act in default, though itmust still give the owner 21 days notice of its intention to do so. In eitherinstance, the cost of the work may then be recovered from the owner, subject tofurther provision of an appeal against the amount claimed.

Procedures for compelling owners to carry out repairs on their property havebeen successfully instituted under the Public Health Act of 1936 and 1961. Largeauthorities are reported to issue hundreds or thousands of formal and informalnotices per year under these statutes, compared to tens or hundreds under theHousing Act. Compulsory repair under the Public Health Act requires a findingof a statutory nuisance. As such it must either be prejudicial to the health of anoccupier of the house in question, or a nuisance that is a danger or anannoyance to adjoining occupiers or other people in the area. It appears that thePublic Health Act has been mainly used to require owners to remedy relativelyinexpensive defects.

By means of housing codes, many large American cities have shifted to thelandlord the responsibility for repairing leased premises and maintaining themin habitable condition. Toward this end in the Unites States, for example, threeremedies were developed -- repair-and-deduct, rent withholding, andreceivership, with the first two often supplemented by retaliatory eviction laws,designed to protect tenants from eviction by former landlords for complainingabout housing code violations.

The implied warranty of habitability has been used as a defense in action ofeviction, if the tenant is able to show that a "substantial" violation of thehousing code existed during the period rent was withheld. In addition, the tenantmay take affirmative action against the landlord for breach of contract, thoughremaining liable for the reasonable value of the use of the premises.

Of the three remedies listed, receivership is potentially the most costly to thelandlord. It results in a complete stoppage of rental income to him, since alltenants in the building, not only aggrieved ones, pay rents into escrow.Moreover, the landlord loses control over his building altogether. Instead,control is temporarily transferred to a receiver, who may be enthusiastic aboutfixing up the building, possibly even above minimum standards established byhousing codes. The repair decisions are thus made without due considerationof their potential profitability. Finally, contrary to most repair-and-deduct andwithholding actions, receivership is usually initiated by government, which hasvast resources behind it.

It must be remembered that these laws were designed to protect tenants inview of their unequal bargaining power as well as their inability to effectivelyinspect a dwelling in the light of its structural and technological complexity. Theunequal bargaining power issue affects mainly poor tenants and, in particular,members of minority groups. The great complexity of today's rental housing isof concern to all tenants, though the rich can quite readily cope with complexity.In response to both conditions, courts have extended warranties of habitabilityto leases of rental housing.

Concerning inequality in bargaining power, Judge Skelly Wright has arguedin Javins v. First National Realty Corporation (1970, p. 1071)

... The inequality in bargaining power between landlord and tenant has been welldocumented. Tenants have very little leverage to enforce demands for betterhousing. Various impediments to competition in the rental housing market, suchas racial and class discrimination and standardized form leases, mean thatlandlords place tenants in a take it or leave it situation. The increasingly severeshortage of adequate housing further increases the landlord's bargaining powerand escalates the need for maintaining and improving the existing stock. Finally,the findings by various studies of the social impact of bad housing has led tothe realization that poor housing is detrimental to the whole society, not merelyto the unlucky ones who must suffer the daily indignity of living in a slum.

In connection with the complexity of today's dwellings which affectseverybody, including the richest tenants, Judge Skelley Wright has stated inJavins v. First National Realty Corporation (1970, p. 1073):

... the increasing complexity of today's dwellings renders them much moredifficult to repair than the structures of earlier times. In a multiple dwelling repairmay require access to equipment and areas in the control of the landlord. Lowand middle income tenants, even if they were interested in making repairs, wouldbe unable to obtain any financing for major repairs since they have no long-terminterest in the property. ... The tenant must rely upon the skill and bona fides ofhis landlord at least as much as a car buyer must rely upon the car manufacturer.In dealing with major problems, such as heating, plumbing, electrical orstructural defects, the tenant's position corresponds precisely with the "ordinaryconsumer" who cannot be expected to have the knowledge or capacity or eventhe opportunity to make adequate inspection of mechanical instrumentalities, likeautomobiles, and to decide for himself whether they are reasonably fit for thedesigned purposes.

14. Economic Analysis: Short-Term Welfare Effects

By 1972 about half the states in the United States had a habitability law.Moreover, a number of local jurisdictions enacted such laws. An example is theCity of Los Angeles with its Habitability Enforcement Program Los Angeles CityOrdinance 171074 (1996).

While many legislators and judges are likely to agree that provision ofhabitable rental housing is a socially desirable goal, a crucial issue is whetherenacting habitability laws is likely to have socially desirable effects, especiallyon indigent and minority tenants. The outcome depends to a large extent onwhether landlords can pass on significant parts of their increased maintenanceand repair costs to their tenants.

In the early 1970s, this issue began to be researched, first by applyingeconomic theory and later by carrying out econometric studies. Ackerman (1971,p. 1093) reasoned that "when code enforcement is seriously pursued, marketforces will generally prevent landlords from passing on their increased coststhrough rent increases." In opposition to this position, Komesar (1973, p. 475,1187) argued that in many housing markets landlords were unlikely to be able topass on their cost increases. An econometric study attempted to empiricallyestimate the effects of various habitability laws not only on cost but also ondemand functions of rental housing Hirsch et al. (1975). In this manner anunderstanding of the welfare-effects of such laws became possible.

Habitability laws have forced landlords to improve repair and maintenanceof their dwellings and thereby improve the welfare of their tenants. It is clear thatthe cost to landlords increases in the presence of habitability laws. However, itis less clear, on a priori grounds, whether and, if so, to what extent thewell-being of tenants increases, leave alone whether tenants' welfare increasesexceed landlords' losses. One reason why tenants' welfare may not increaserelates to tenants' preferences. There can be instances, admittedly not too many,where tenants prefer to live in substandard housing as long as their rent iscommensurately low. Whether, on balance, the gains of tenants exceed the costsof landlords is affected by the relative importance of those tenants who areforced against their will to live in improved housing at higher cost.

Some econometric studies have attempted to estimate the welfare effects ofrepair-and-deduct, rent-withholding, and receivership laws, respectively Hirsch,et al. (1975). The econometric analysis uses hedonic price methods, and includeshabitability laws among the explanatory variables in the rental housing demandand supply equations. The extent to which the demand and supply functionsshift upward in the presence of a particular habitability law can be estimated, andso can the resulting change in consumer's surplus. If such laws are enforced andlead to improved repair and maintenance, the tenants' well-being will beenhanced and the demand function will shift upward.

On the supply side, habitability laws can affect maintenance and repairdecisions, and, as a result, they can increase landlords' costs. In consequence,they can make the supply function shift upward. Welfare conclusions can bederived by comparing the magnitude of the vertical shifts of these demand andsupply functions. Using a hedonic price approach, an econometric study foundthat, of the three types of habitability laws, in 1974-75 only receivership had astatistically significant effect on both the demanders and suppliers of low-costrental housing in 34 large metropolitan areas with more than 1/4 of the UnitedStates population. Receivership laws were found to be associated with astatistically significant increase in rental expenditures incurred by indigenttenants, which, however, was not matched by benefits. Costs exceeded benefitsby a factor of three and the consumer's surplus declined by more than 10%Hirsch (1981, p. 272). Thus, although habitability laws were designed to improvethe welfare of indigent tenants, in the sample studied, they had failed to do so.Receivership laws may even have been counterproductive.

An econometric analysis of black and aged indigent tenants, respectively,reveals that habitability laws affect them differently. For black indigents, againthe vertical shift of the supply function related to a receivership law is more thanthree times that of the demand function and the difference again is statisticallysignificant. Hirsch (1983, p. 128) Yet, for aged indigents, the vertical shifts of thetwo functions are about of equal size. In short, for black indigents, receivershiplaws were counterproductive, while for aged indigents they were of noconsequence.

Why are habitability laws inconsequential or even counterproductive? Onereason is that these regulations are not accompanied by an increase in theindigents' purchasing power which should have permitted them to pay forimproved housing. Without income transfers, habitability laws can becounterproductive Schwallie (1990, p. 525) recently concluded that the impliedwarranty of habitability and habitability laws incorporating this warranty haveoften failed indigent tenants. The main reason is that "the warranty ofhabitability results in scarcer, more expensive housing for the poor. Moreover,the quality of low-rent housing is a consequence of inadequate demand due tothe low incomes of renters..." The effects of making the implied warranty ofhabitability compulsory on repairs, maintenance and safety and on equity havebeen discussed by Singer (1993, pp. 756-759).

15. Economic Analysis: Alternatives

Consistent with the objectives of habitability laws, housing subsidy laws forrental housing meeting minimum standards have been enacted. When subsidiesgo directly to landlords, and only to those who meet minimum qualityconditions, improved housing is assured. Moreover, the entire subsidy is thenused for housing.

In the United States, one such program are Sections 501 and 504 of theHousing and Urban Development Act of 1970, often referred to as ahousing-allowance program. Under it, tenants who meet an income test are paida rent subsidy as long as they do not live in substandard housing. The rentsubsidy amounts to the difference between the rent payments and 25% of thetenant's income. Such an earmarked subsidy is very different from a generalwelfare payment that can be used by recipients for whatever purpose theychoose. Whenever the income elasticity of rental housing is smaller than one,and there exists evidence that this is the case for indigents, an earmarkedsubsidy is to be preferred F. de Leeuw (1971). As tenants receive such a rentsubsidy, their housing demand function shifts to the right. Depending on thedemand and supply elasticities and the nature of the demand function shift (i.e.,whether it is parallel or not), part, all, or none of the subsidy will be shifted tolandlords in the form of rent changes.

16. Economic Analysis: Long-Term Welfare Effects

Beyond short-run welfare effects of habitability laws, there exist also long-runeffects, particularly in terms of housing stock deterioration. If such laws reducedilapidation, upper income groups who by and large can assure themselves ofhabitable housing are little affected. The benefits to low and low-middle incomegroups are less clear. While the result is an increase in the supply of habitablerentals, their demand will also increase.

There is some empirical evidence regarding the effectiveness of habitabilitylaws in reducing substandard housing. An econometric study of the relationbetween habitability laws and two different measurements of dilapidation in theUnited States in 1960-75 produced the following results -- Among the differenthabitability laws receivership laws have the greatest effect on housing quality.In their presence, renter-occupied dilapidated and deteriorating housing unitsdeclined on average 12.4% Hirsch and Law (1979). The laws' effect was evenmore pronounced if substandard housing is defined as housing lacking some orall plumbing facilities. By this measure, substandard housing declined anaverage of 17.0%.

It would be a mistake, however, to look upon a decline in substandard rentalhousing as an unmitigated gain. In fact, in the absence of substandard housing,options for indigent tenants are reduced. Some tenants are likely to end up inover-crowded standard units, or even homeless.


E. Laws Complementing Housing Codes

Landlords may be tempted to evict tenants who invoke habitability laws. Forsuch cases, anti-retaliatory eviction laws exist in some jurisdictions and they canbe supplemented by anti-speedy eviction laws.

17. Anti-Retaliatory Eviction Laws

Such laws, designed to protect tenants from being penalized by their landlordsfor complaining about housing code violations, can be looked upon as a meansto assure tenants continued occupancy for a specified period. Already in themid-1970s, about half the states in the U.S. had such laws, usually with a 3-6month rent freeze. Determination of the landlord's motive is of critical importance.

In terms of economic effects, anti-retaliatory eviction laws can be viewed asminiature, temporary rent control laws which preserve the existing rent statusquo in the face of a changed buyer-seller relationship. The force of therebuttable or conclusive presumption tends to deter landlords from raising rentsfor the statutory period, while operating and maintenance costs increase. Thetemporary and rather limited scope of retaliatory eviction laws is unlikely tocause many landlords to abandon their property. However, when the landlordfeels legally "safe" in raising rents, the increase may be larger than would havebeen the case otherwise.

18. Anti-Speedy Eviction Laws

In the United States, for a long time the judicial process of ejecting a tenant washeavily burdened with procedural complexities and of slow pace. During themiddle and end of the 19th century, legislation was enacted to provide a moreefficient remedy through the institution of special summary proceedings forlandlords seeking to evict tenants. The new proceedings were to preventlandlords from taking the law into their own hands through self-help. In therecent past, laws to rein in the use of summary proceedings and self-help havebeen enacted.

Under a summary eviction law procedure, a basic pattern followed in moststates is that upon a judgment for the landlord, in the absence of an appeal, awrit of restitution will be issued. Then, after a short period, the sheriff willexecute the writ by evicting the tenant. However, in some states a concern forthe wellbeing of the tenant and a desire to mitigate the harshness of an evictionhas led to the adoption of legislation which permits a court to delay theenforcement of the writ of restitution. The major mitigating circumstance is thatthe tenant cannot find alternative housing.

In many states, the courts recognize some variation of the common law rightto self-help by landlords. The minimal conditions are a clear right to possessionby the landlord without use of unreasonable force in retaking possession.Generally, peaceable entry in the absence of the tenant will be recognized as alegitimate exercise of the landlord's authority. However, an increasing numberof states have abrogated this common law right to self-help. They haverecognized the existence of a tort claim by the tenant against the landlord whoenters to retake the premises, even with reasonable force.

One group of states permits a tenant a tort cause of action against thelandlord for removal of the tenant without resort to judicial process, if theremoval is against the will of the tenant. A second group expressly bars any useof self-held by the landlord, permitting the tenant a cause of action for the mereact of entry by the landlord in an attempt to remove the tenant. An example isCalifornia Jordan v. Talbot (1961).

Analysis of the economic effects of anti-speedy eviction laws can be similarto that of habitability laws. Both types of speedy eviction impose burdens ontenants while benefiting landlords; laws modifying or negating them shouldresult in upward shifts of the rental housing demand and supply functions. If thevertical shift of the demand function in the presence of anti-speedy eviction lawsexceeds that of the supply function, and the difference is statistically significant,welfare is enhanced, and vice versa. An econometric study of black indigenttenants indicates that laws reining in landlords' use of self-help measures maybe socially desirable. Hirsch (1983).


F. Anti-discrimination Laws

Housing discrimination is said to exist when members of one or more groups,commonly defined by race, gender, age, religion, or family status, are deniedhousing that is available to other groups, regardless of formal qualifications. Notonly does discrimination violate concepts of fairness, but it can also result inmany social and economic side effects.

19. Racial Discrimination: Legal Analysis

Countries have enacted a variety of laws to combat housing discrimination.Discrimination on the basis of race has played a major role in the history of theUnited States. A housing discrimination survey of 25 large metropolitan areaswith central city populations in excess of 100,000 and where at least 12 and 7percent of the population was black or Hispanic, respectively Turner (1991, pp.3-17) produced the following findings. In the United States in 1989 black andHispanic renters faced a 39 and 36 percent probability, respectively, of beingdenied information about housing availability, and a 17 and 16 percentprobability, respectively, of being told that the advertised unit is no longeravailable even though it was available to comparable whites. For blacks andHispanics the index of unfavorable treatment in completing the rentingtransaction was 44 and 42 percent, respectively.

Since the end of the Civil War in the United States, a number of affirmativesteps have been taken to combat discrimination. In terms of housing activities,Section 1982 of the Civil Rights Act of 1866 together with its interpretation bythe U.S. Supreme Court in Jones v. Alfred H. Mayer Co. (1968) was first. Nextcame the Fair Housing Act of 1968 and Fair Housing Amendments Act of 1988.

For housing, one of the most important acts is that of 1968 which is oftenreferred to as the "Fair Housing Act". It prohibits discrimination based on race,color, religion, sex, and national origin in the sale or rental of most housing.While it covers a host of activities related to real estate and housing, it includesreal estate brokers, apartment owners and extends to federally owned andoperated dwellings and dwellings provided by federally insured loans andgrants. Title VIII prohibits such discriminatory activities as refusal to rent adwelling; terms, conditions, or privileges of renting dwellings; indicatingpreferences or limitations in advertising; etc.

20. Racial Discrimination: Economic Analysis

Racial housing discrimination appears to exist in many countries with raciallydiverse populations Page (1995). In many Western countries, especially theUnited States, such discrimination has been on the decline. Economists havebeen interested in the reasons responsible for housing discrimination and howanti-discrimination laws affect them, and welfare effects of anti-discriminationlaws.

A number of theories have been advanced to explain the existence of rentalhousing discrimination and the resulting segregation by race. They include theaversion theory Muth (1970), racial prejudice theory Becker (1957) and Bailey(1959), and amenity theory Yinger (1976).

Effects of race discrimination which have been explored include segregation,employment opportunities, crime, drug use, homelessness, etc. Sander (1988)

Laws prohibiting racial discrimination in rental housing impose on landlordscosts which often can be sufficient to persuade them not to engage in thispractice. If this is the case, these laws can do more than merely contribute tofairness. Since racial housing discrimination is inefficient, as it restricts thehousing choices of minority families and their efficient access to housing,employment, and educational opportunities, these laws also enhance efficiency.

21. Age Discrimination: Legal Analysis

In the United States until recently little attention was paid to housingdiscrimination of age groups. Even as late as 1971, the U.S. Supreme Court inGraham v. Richardson (1971) included among "suspect" categories requiringstrict scrutiny only race, national origin and alienage. Recently, state legislaturesand courts, as well as local governments, have shown concern about housingdiscrimination against families with children. By 1981 nine states and the Districtof Columbia had enacted laws dealing with age discrimination in housing, andmany courts began to interpret discrimination laws to cover age. For example, theCalifornia Supreme Court, in Marina Point, Ltd. v. Wolfson (1982) interpreted theCalifornia Civil Rights Act as preventing housing discrimination againstchildren. The court also found that the strongest basis for this position restedupon California's Unruh Civil Rights Act (1982) which provides that "[a]llpersons ... are entitled to ... full and equal accommodations in all businessestablishments." California courts have interpreted the phrase "businessestablishments" to include housing.

Comprehensive federal legislation only arrived with enactment of the FairHousing Amendments Act of 1988. It prohibits landlords to refuse to rent orshow a house or apartment to a family with children younger than 18, or torequire such a family to pay higher rent, impose restrictions or create unfairbarriers not required of someone without children. However, under somecircumstances, families with children can be excluded, e.g., in "housing for olderpersons". There are two classes of such housing: 1) "62 or over housing", if alltenants in the housing complex are 62 years or older, and 2) "55 or overhousing", if at least 80% of all units in the complex have at least one occupant55 years or older and there exist significant facilities and services to meet theneeds of older people.

Major concerns have been voiced concerning the facilities and servicesrequirement of "55 or over housing", mainly its vagueness California SenateSelect Committee on Mobile Homes (1989). Fear has been expressed about thepotential for litigation and cost of providing appropriate facilities and servicesfor senior citizens, particularly since approximately 60% of the more than 5,000mobile home parks in California in 1988 had adult-only restrictions CaliforniaSenate ... (1989, p. 13).

Thus, age discrimination laws relating to housing have been directed mainlyat tenants with children and at senior citizens. The interests of these two classesof tenants can be in serious conflict. Senior citizens favor a tranquil life which

often becomes difficult with young children as close neighbors. Thus, somemobile home parks are dedicated to senior citizens. Young families, like allfamilies, want to be free to live wherever they choose.

Arguments in opposition to anti-age discrimination laws were advanced, forexample, in Flowers v. John Burham & Co (1971) where a California appellatecourt determined that, because of children's "independence, mischievousness,boisterousness and rowdyism," age discrimination within housing was notarbitrary discrimination. Also, the dissent in Marina Point Ltd. v. Wolfson (1982)argued that regulations regarding children are reasonable and rationally relatedto the services performed by the landlord when it has been determined that theapartment complex has been constructed for all-adult housing and its facilitiesare ill-adapted for use by children. Thus, landlords are faced with two costsassociated with the Wolfson decision: Not only will landlords be prohibited tochoose tenants on the basis of whether or not they have children, but they willalso be forced to incur expenses to alter their premises to accommodate children.

Arguments in favor of such laws include the serious impact on familystability as well as a deep psychological effect on children. Moreover, sincemany minority families have many children, child discrimination might bedisguised racial discrimination and no doubt contributes to such discrimination.

22. Age Discrimination: Economic Analysis

The conflict that can arise when children and senior citizens are housed in greatproximity can be looked upon as an externality problem. In the abstract, pricediscrimination can help solve this conflict. Depending on each market's demand,either families with children or senior citizens would be forced to pay higherrents, which in some instances could be prohibitive. Clearly such a resolutionof the conflict is likely to run into political opposition.

Furthermore, traditional economic theory tends to indicate that landlords inhighly competitive housing markets will seldom, if ever, refuse to rent to familieswith children. In such a setting, a landlord could satisfy his distaste for familieswith children at the expense of a higher vacancy rate. Therefore, housingmarkets with age discrimination probably contain elements of monopoly. Thelandlord has some locational monopoly as well as some market power due to anyunique characteristics his building may have. More important, exclusionarymaximum density zoning laws and slow growth policies of local governments,combined with a growing demand for housing rentals, have tended to widen thegap between the quantity of dwellings supplied and those demanded. Whilerents should have adjusted to this situation and helped to close these gaps, inreality price adjustment in the housing market has been slow. This result is dueto institutional features, as well as the existence of long-term leases.

Microeconomic analysis of welfare effects can utilize a demand and supplyhousing stock model. Since children impose costs on landlords, e.g., forheightened repair and maintenance, the supply curve shifts upward as thenumber of children increases. With children affecting negatively the utility ofsome tenants, their demand function will shift downward. The welfare effect ofsuch laws depends on the relative importance of tenants who enjoy children intheir building compared to those who are ill-affected and if so by how much.


G. Policy Implications

23. Policy Implications

Many countries have a host of landlord-tenant laws and there exists anextensive legal, economic and law and economics literature on the subject. Byfar the greatest interest has been shown in rent control. Until recently virtuallyall appraisals of its effects on society were negative, perhaps for two reasons --economists' misgivings about any form of price control and excessive focus onfirst generation, hard rent controls analyzed by perfectly competitive, staticeconomic housing models. A few voices have recently been heard claiming thatanalyses of second generation controls which recognize the imperfection ofhousing markets are much less conclusive. Arnott (1995, p. 118) concludes, "thecase against second-generation rent control is so weak that economists shouldat least soften their opposition to them." However, Arnott concedes that "[E]venif the optimal rent control package would be beneficial, the actual ... packagethrown up by the political process may be harmful Arnott (1995, p. 109).

Habitability laws are also common to many countries, although in only a fewinstances have their welfare implications been subjected to careful economicanalysis. Some deductive and one econometric study in the United States raiseserious doubts about their desirability.

Anti-discrimination laws have also become common all over the world associety is seeking to free itself from race and age discrimination in rentalhousing. While society has good reason to oppose housing discrimination, andanti-race discrimination laws tend to be socially desirable, the efficacy ofanti-age discrimination laws is less clear. The reason is that both young and oldfamilies have valid claims. The former lay claim to their right to live whereverthey want, and the latter to the quiet enjoyment of their homes andsurroundings.

Additionally, and perhaps most importantly, law and economics should notlook at the various laws in isolation. All too often jurisdictions have enacted anumber of laws, e.g., rent control laws with anti-conversion and anti-demolitionprovisions together with habitability laws. The former prevent landlords fromusing their best judgment in deciding on rent levels and on the best use of theirproperty, thereby reducing their investment's profitability and their ability topreserve housing quality. Yet, habitability laws compel them to provide tenantswith habitable housing. In the extreme case, thus, landlords find themselvesbetween a rock and a hard place.

In conclusion, this review of Renting confirms the judgement of Williamson 1996 that law and economics is a success story. This assessment is clearlycorrect in so far as Renting is concerned. Contributions to tools of economicanalysis, legal thought and public policy have had a major impact and provedvaluable.

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Cases and Legislation

Age Discrimination Act of 1975, 42 U.S.C. §§6101-6107 (1976 and Supp. II 1978).

American Law Institute (1976), restatement of the Law : Property 2d-Landlord and Tenant.

Birkenfeld v. City of Berkeley (1976), 17 Cal. 3d at 169-172, 550 P.2d at 1029-1032 Cal.Rptr.

Block V. Hirsch (1921), 256 U.S. , 135-156.

California Assembly (1973-1974 Regular Session), A.B. 1202

Dolan v. City of Tigard (1994), 512 U.S. 129 L.Ed. 304, 317, 114, S.Ct. 2309.

Dyett v. Pendleton (1826 N.Y.), 8 Cow, 727.

Fair Housing Amendments Act of 1988, Pub.L. No. 100-430, 102 Stat. 1625.

Fair Housing Act, 42 U.S.C. §3601-3631 (1976 and Supp. II 1978).

Fair Housing Act of 1968, 42 U.S.C.A. §3601 et. seq.

Flowers v. John Burham & Co. (1971), 21 Cal. App. 3d 700, 98 Cal. Rptr. 644.

Graham v. Richardson (1971), 403 U.S. 365.

Hall v. City of Santa Barbara (1986), United States Court of Appeals, Ninth Circuit, No.85-5838, August.

Housing and Urban Development Act of 1970, Pub. L. No. 91-609, §§501, 504, 84 Stat. at1784 and 1786 (1970).

Housing: The Government's Proposals, 1987 (Cm. 214).

Javins v. First National Realty Corporation (1970), 428 F2d 1071, DC Cir.

Jones v. Alfred H. Mayer Co. (1968), 392 U.S. 409.

Jordan v. Talbot (1961), 55 C2d 597,12 Cal. Reptr. 488,361 P.2d 20.

Law Commissioners, Codification of the Law Landlord and Tenant (1975), Law Com. No.67.

Los Angeles, Cal. (1996), Ordinance 171074 (March 6).

Loretto v. Teleprompter Manhattan CATV Corp. (1982), 458 U.S. 419, 734, Ed. 2d 868, 102S.Ct. 3164.

Marina Point Ltd. v. Wolfson (1982), 30 Cal. 3d 721, 640 P.2d 114. 180 Cal. Rptr. 446,cert. Denied, 1035 S.Ct. 129.

New Jersey Stat. Ann. (West Supp. 1974) §2A. 18-53.

Nolan v. California Coastal Commision (1987), 483 U.S. 825, 834-837, 974, Ed. 2d 677,107 S.Ct. 3141.

Palos Verdes Shores Mobile Estates, Ltd. v. City of Los Angeles (1983), 142 Cal. App. 3d362, 190 Cal. Rptr. 866.

Rent Act 1965, s. 27 (I): Rent Act 1977, s. 70(I).

Santa Monica Beach Ltd. v. The Superior Court of Los Angeles County (1996), 42 Cal. App.4th 1228.

Title VIII of the Civil Rights Act of 1968, 42 U.S.C. §3601-3631.

Unruh Civil Rights Act (1982), Cal. Civ. §Code 51 West.

Yee v. City of Escondido (1992), 503 U.S. 519, 522-523.

© Copyright 1998 Xerner Z. Hirsch