The NPP launched its manifesto for this year's election two days ago. They proposed at least five main interventions in the housing market. A key one is the proposal to establish a National Rental Assistance Scheme (NRAS) to address the short-to-medium term market failures in the renter-segment of the housing market. The Scheme will provide low-interest loans to eligible Ghanaians to enable them pay rent advance.
This particular proposal has aroused discussions about its appropriateness and feasibility relative to the need to enforce rent controls imposed by the Rent Act, 1963 (Act 220) and the Rent Control Law, 1986 (P.N.D.L[1] 138). In other words, why not enforce the existing laws instead of providing loans to the target group? I believe that making a good judgement of this proposal requires a good understanding of why the conditional rent payment-in-advance exist in the first place. This is the subject of two feature articles I wrote about a year ago. (See PART 1: https://www.linkedin.com/…/why-do-landlords-ghana-charge-t…/) and PART 2: https://journalofalandeconomist.blogspot.com/…/why-do-landl…).
In this brief note, which is a precursor to a longer proposition on this proposed intervention, I highlight one reason why the Rental Assistance Scheme might be better than government spending more resources to control rents by enforcing the already outdated Rent laws.
Economics 101 teaches us that conditional and preferential sales emerge in markets characterised by a deficit in supply relative to demand of a good or service. Thus, it is only a regularity that our housing market, which has a huge deficit of about 2 million units, especially in terms of low- and middle-income housing, is characterised by a conditional sale feature - rent payment in advance. This is a major financial burden to most Ghanaians, both according to anecdotal and empirical evidence (See Ehwi, Asante & Morrison, 2020 - https://www.tandfonline.com/…/full/10…/10511482.2020.1782451).
A market solution to rent payment in advance is to shift market power from landlords to tenants by giving them more options - i.e. supply more houses than demanded to dissipate any incentive for the landlord to increase rent. On paper, this solution sounds simple but is often not achieved because of limited resources inter alia. As a result, most housing markets like ours are landlords' markets. In other words, landlords have market power to determine market conditions including prices (rents), when and how it is paid (conditional sale) as well as who gets to use the property (preferential sale).
To protect tenants from the profiteering landlords between the 1960s and early 1990s, most countries passed laws to control rents and other lease features. Rent controls are a form of price ceilings above which landlords cannot fix rent. This simple solution worked in the short-run because most houses are not boxes that can easily be carried away or converted to other uses if the current uses were unprofitable due to the rent controls. In many cases, landlords must apply to the Planning Authorities for a change in use of the property if other uses were more profitable. However, this process takes time, sometimes years especially in countries with well-function planning systems.
The same rent controls however harmed tenants in the long-run because it reduced the stock of houses available to the poor and its quality. This happened because of the law of supply - less is supplied as prices decrease - and capital flight - investors and landlords invested their surplus funds in other assets other than the rent-controlled housing market. Informally, this resulted in rising house prices and rents on the few housing stock because demand exceeded supply greatly. More financially capable tenants often ignored the law and paid the highest rents to secure their accommodation - i.e. black market activities became prevalent! This is a clear case of unintended consequences of a 'bad' policy that distorted prices and market signals.
Many countries have thus move away from rent controls to alternatives that improve the demand side of the market with minimal distortions to houses prices (and rents) and thus housing supply. This alternative includes the use of subsidies, which is considered as a best practice. Here, the government subsidises housing for the poor through various mechanisms including the voucher systems, which seek to improve their capacity; i.e. ability to afford. This is what the NPP Rental Assistance Scheme is seeking to do. Unlike rent control, which distorts prices and hence reduces housing investment by the private sector, the Rental Assistance Scheme, which combines the features of subsidy and a loan, will rather incentivise and stimulate supply as a response to increased effective demand by the target group - youth.
However, subsidies could be expensive and must be paid for by the tax payer. Therefore, some Social Commentators argue that it would be better to enforce the existing rent control laws than to provide such huge subsidies to tenants. This argument however ignores the fact that enforcement also requires resources, which could be more expensive than subsidies with added distortionary effects. The reason is that law enforcement is less costly and works well when there is high voluntary compliance. For instance, if 2 out of 100 landlords breach the Rent laws (i.e. there is high voluntary compliance), it would be cheaper to enforce the law (all things equal) than the case of only 2 or none of the landlords complying (low voluntary compliance), which is the current situation in Ghana. In this case, more resources will be needed to bring the 98 landlords to book. Therefore, the idea of enforcing a badly designed rent control law may be counterproductive! Our focus should be on the structure and implementation details of the scheme.
As indicated above, there are many good sides to this proposed Rental Assistance Scheme which cannot be discussed in detail in one article. I will therefore treat the various components in separate articles starting with this general observation.
