Most people are convinced that housing shortages are the result of greedy landlords charging rents that are unjustly high.
Landlords are also held responsible for the low quality of affordable housing — apparently their fixation on short-term financial returns stops them from maintaining properties in a satisfactory manner, aided by their callous disregard for the interests of tenants.
Therefore, in an attempt to tackle the housing shortages, especially for the poorest segment of society, a favoured policy among policymakers is rent controls. Such measures are common across the Arabian Gulf: Abu Dhabi introduced a rent cap in 2006 to prevent soaring rents when the population was rising rapidly, and housing construction was failing to keep pace. But do the good intentions of rent-control advocates result in good outcomes?
Price controls in general, as well as the specific case of rents, are a well-studied phenomenon in economics and, for the most part, they do not serve their intended purpose. In fact, like many populist government policies, they end up hurting the very groups they are nominally designed to assist.
The total stock of housing — similar to most commodities — is not fixed. The total number of units available for rent or purchase at any given point in time is determined by the volume of resources dedicated by capitalists to the production of housing, including land, material inputs (concrete, wood, steel and so on) andlabour (construction workers, equipment operators and foremen, for instance). Therefore, if society wants to have more housing, unless the government is going to produce or commandeer housing units, private capitalists have to be given an incentive to produce more housing units.
In particular, they have to be convinced that building housing units serves their interests better than any one of the numerous alternative uses they have for these inputs. For example, they could build a supermarket, a hotel, or a factory; or they may choose to transform the land into a farm.
The key variable in determining the option that capitalists go for is the financial return they can earn compared with the alternatives. If market conditions allow capitalists to earn a lot from renting out their housing units, and modest amounts from opening a store or a restaurant, then they will choose to produce more housing.
Consequently, if the government imposes a ceiling on rents, then it is also capping the attractiveness to capitalists of producing housing units. If the rent control is quite stringent compared with the rent level that would balance markets, then the rent control will cause a shortage directly. Prospective lessors will demand more units than are available and capitalists will fail to respond to the shortage because they are being legally denied the financial compensation they require to commit the necessary resources. In the absence of rent controls, shortages are transient because rents will rise to the level required to induce sufficient supply. Therefore, rent controls create sustained housing shortages by impairing the market’s ability to solve shortages.
Unfortunately for tenants, the fallout from rent controls goes beyond shortages: they also lead to a deterioration in the quality of housing units. Just like the production of housing units, the maintenance of housing units is the result of purposeful decisions by capitalists to dedicate resources to the activity, and rent controls forcibly reduce the financial rewards they can earn. Thus, the imposition of rent controls inevitably results in the under-maintenance of housing units, reducing quality of life and possibly even creating a safety risk to tenants.
The experience of Communist economies prior to 1990 confirms that this logic extends to most commodities: countries such as the USSR, where price controls were common, were characterised by extreme shortages and terrible quality. Would you not be reluctant to work, and deliver lower quality work, if your wages were artificially capped?
Everyone with knowledge of housing markets will concede that rent controls create shortages and diminish quality.
However, a legitimate response would be that the alternative, unrestricted rents, is potentially worse, because it guarantees that low-income groups are priced out of renting. This is a key driver of the Abu Dhabi Government’s decision to impose rent caps. In effect, governments may decide they prefer shortages that allow at least some low-income groups to afford houses, to a balanced housing market where the less fortunate can never summon the necessary resources.
In the next article in the series, we will see why some rent-control regimes systematically discriminate against low-income households, with the lucky tenants who manage to secure housing being disproportionately rich; while alternative rent control regimes simply drain the resources of low-income households in other ways.
Should we, therefore, simply let the market determine rents, and accept the pricing out of low-income households as inescapable collateral damage? In the final article in the series, we will explain why governments persist with rent controls, despite their apparent ineffectiveness, and we will also examine some of the effective alternatives for defending the rights of all income-segments to safe, quality housing.
We welcome economics questions from our readers via email to omar@omar.ec or via twitter at @omareconomics.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
The biog
From: Ras Al Khaimah
Age: 50
Profession: Electronic engineer, worked with Etisalat for the past 20 years
Hobbies: 'Anything that involves exploration, hunting, fishing, mountaineering, the sea, hiking, scuba diving, and adventure sports'
Favourite quote: 'Life is so simple, enjoy it'
How to come clean about financial infidelity
- Be honest and transparent: It is always better to own up than be found out. Tell your partner everything they want to know. Show remorse. Inform them of the extent of the situation so they know what they are dealing with.
- Work on yourself: Be honest with yourself and your partner and figure out why you did it. Don’t be ashamed to ask for professional help.
- Give it time: Like any breach of trust, it requires time to rebuild. So be consistent, communicate often and be patient with your partner and yourself.
- Discuss your financial situation regularly: Ensure your spouse is involved in financial matters and decisions. Your ability to consistently follow through with what you say you are going to do when it comes to money can make all the difference in your partner’s willingness to trust you again.
- Work on a plan to resolve the problem together: If there is a lot of debt, for example, create a budget and financial plan together and ensure your partner is fully informed, involved and supported.
Carol Glynn, founder of Conscious Finance Coaching
The rules on fostering in the UAE
A foster couple or family must:
- be Muslim, Emirati and be residing in the UAE
- not be younger than 25 years old
- not have been convicted of offences or crimes involving moral turpitude
- be free of infectious diseases or psychological and mental disorders
- have the ability to support its members and the foster child financially
- undertake to treat and raise the child in a proper manner and take care of his or her health and well-being
- A single, divorced or widowed Muslim Emirati female, residing in the UAE may apply to foster a child if she is at least 30 years old and able to support the child financially
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Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
Zayed Sustainability Prize
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Final scores
18 under: Tyrrell Hatton (ENG)
- 14: Jason Scrivener (AUS)
-13: Rory McIlroy (NIR)
-12: Rafa Cabrera Bello (ESP)
-11: David Lipsky (USA), Marc Warren (SCO)
-10: Tommy Fleetwood (ENG), Chris Paisley (ENG), Matt Wallace (ENG), Fabrizio Zanotti (PAR)
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Volvo ES90 Specs
Engine: Electric single motor (96kW), twin motor (106kW) and twin motor performance (106kW)
Power: 333hp, 449hp, 680hp
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On sale: Later in 2025 or early 2026, depending on region
Price: Exact regional pricing TBA
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