IA04: Rent Control Laws a Well Intentioned But Misguided Move

New rent control laws were passed by the National Assembly with support from both major parties, and will be implemented in the coming year. The law mandates a freeze on rental prices for garment workers for two years, during which time the rental price may not be increased.

Electricite du Cambodge (EdC), the state electricity provider, has been tasked with surveying the areas with a high density of dwellings rented by garment workers in order to assess rent prices, which will be fixed when the law is implemented. The rent control laws are implemented concurrently with laws to reduce the price of electricity for tenants using less than 50 kilowatt-hours per month, which will cut the expenses of low-income workers including those in the garment industry.

The intention of labor unions and NGOs who pushed for rent controls was to ensure that garment workers were not ovecharged for accommodation. While this is a noble goal, the unintended consequences of the law will likely end up hurting factory workers more than it will benefit them.

The first consequence is that landlords are likely to respond immediately by increasing rents before EdC has the opportunity to survey the dwellings, putting immediate financial pressure on existing tenants. Landlords will factor in future inflation, expected market changes, and the increased risk they face due to rent control, and so they have an incentive to increase rents now to levels above the market rate.

Second, since the rent control only applies to students and factory workers, the law will create an incentive for landlords to rent to other people who are not covered by the law. Ironically, this law will end up hurting the people it is trying to help, and accidentally helping other groups who are not covered by the law.

Third, government price controls will make property development more risky and less rewarding, so there will be a decrease in the supply of housing. There has been an increase in demand for housing in Phnom Penh, which has resulted in higher rents. The only sustainable solution is to also increase the supply of housing, but rent control laws achieve the opposite. These laws will create a shortage of rental housing and so make it harder for students and factory workers to find accommodation.

One consequence of rent controls—observed around the world—is long waiting times. In Stockholm, rent controls have resulted in waiting times of 10 to 20 years before people could find cheap accommodation in the city, and in one case there were 2,000 applicants for a single apartment.

Ultimately, rent control laws will increase housing prices for workers higher than market rates, and force them to live further from the garment factories, or share accommodation with others in cramped living conditions. The limited choices available to garment workers will decrease the quality of housing.

Some garment workers already residing in low-cost dwellings will be protected from rent increases for the next two years, which creates the insider-outsider problem. Those with established rental agreements will benefit, to the exclusion of new tenants, predominantly garment workers moving to Phnom Penh from the provinces with limited education attempting to earn money for themselves and their families.

The shortage of accommodation will make it more difficult for poor Cambodians from rural areas to move to Phnom Penh to work in the garment manufacturing industry, which will further entrench them in the cycle of poverty.

Another concern with the law is that it may end up as another excuse for corruption. Double contracts are known to occur in Cambodia. This involves renters, employees, and businesses signing two contracts—one reflecting the official price to present to authorities and regulators, and another unofficial contract, which more accurately represents the agreement. The problem with double contracts is that they are unofficial and therefore not enforceable through the courts, which increases the risk for everybody involved, and therefore decreases the supply of housing and increases rents. Once again, laws designed to help renters will end up hurting them.

The manufacturing boom has resulted in steady growth in manufacturing jobs and wages. This is a good thing, but one of the consequences has been an increased demand for accommodation, and higher rents. These changes are not a conspiracy, but simply the inevitable result of changing supply and demand, and the only sustainable solution is to encourage more supply of accommodation. If the government wants to help reduce the costs of living then they need to allow further property development. The rent control law achieves the exact opposite result.

Rent control laws aimed to protect garment workers have tremendous unforseen consequences that will unfairly affect garment workers. At best, it will benefit some workers in the short term, but will ultimately lead to the deterioration of garment worker ghettos into urban slums, make it harder for workers to find accommodation, and hurt the very people the law is designed to help.

Gabrielle Ward and Prum Seila are researchers with the Professional Research Institute for Management and Economics.

* IA04 = Issue Analysis 04 - Originally published in the Cambodia Daily on 30 July 2015: https://www.cambodiadaily.com/opinion/rent-control-laws-a-well-intentioned-but-misguided-move-90041/ and later published in the Khmer Times on 4 August 2015: http://www.khmertimeskh.com/news/14051/rent-control-laws-end-up-strangling-housing-supplies/

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