Debates over rent control have a long history, with activists and economists highlighting both the benefits and drawbacks. This column revisits these arguments and examines empirical findings from Catalonia, where a recent rent-cap programme illustrates the policy’s consequential trade-offs. Though rent control can deliver short-run price relief, it also risks reducing supply and redistributing burdens across renter segments. As more governments consider such policies, it is crucial to study their effects across the entire distribution. Focusing solely on average impacts may miss key dynamics and unintended consequences.
The debate over rent control has a long history, with social activists and economists highlighting both its potential benefits and its drawbacks. Since the seminal work of Friedman and Stigler (1946), critics have warned of supply distortions, mismatches in the housing market, and the deterioration of rental properties. Proponents, in contrast, argue that rent controls help preserve neighbourhood stability, redistribute surplus from landlords to tenants, and provide much-needed affordability in overheated housing markets.
As rising rental prices strain affordability in major cities, policymakers are increasingly turning to rent controls to stabilise housing markets. These policies vary in design: some limit rental price growth within tenancies while others also limit increases across tenancies. More recently, several European cities have implemented unit-specific rental price indexes. These are often presented as short-term fixes to curb rising rental prices.
In a new paper (Monras and Montalvo 2025), we revisit standard economic arguments for and against rent caps and examine recent empirical findings.
Why rent control caps?
The policy rationale and economic implications of rent caps depend on how competitive housing markets are. In standard models with perfect competition and homogeneous housing, rent caps redistribute surplus from landlords to tenants but also create deadweight losses. Lower prices reduce landlords’ incentives to supply rental housing, shrinking the market. Tenants who secure units benefit, but others may face shortages.
Rent controls may also lead to mismatches – tenants remaining in units unsuited to their evolving needs – or reduced investment in housing.
However, some assumptions in the standard model may be unrealistic. For example, landlords may not take prices as given. In tight markets, they may appear to have pricing power. But does this reflect market power or simply high demand? Like small businesses that set prices, individual landlords may not exercise true market power.
Still, market power can exist – such as when landlords own multiple units in the same area, limiting tenant options. In these cases, a cap set at the competitive price could enhance welfare by reducing monopoly distortions and redistributing surplus.
Another setting where rent controls are welfare improving is when they solve search frictions. Search frictions may induce landlords to play games. Some might decide to set high prices, knowing that it is costly for tenants to search for housing units and some might settle for high price options. Other landlords might offer their unit at low prices, which could ensure finding tenants more quickly. These various strategies de facto generate price dispersion in the market. Tenants are then induced to search both for low-price options, which they prefer but are hard to find, and high-price units, which they dislike but are easier to obtain. This price dispersion may create extra congestion in the market, coming from the various strategies that tenants need to employ. In this case, a rent cap is also welfare enhancing. It unifies markets and lowers search frictions.
What is the existing empirical evidence?
The growing availability of rental microdata enables more rigorous evaluations. Studying the end of rent control in Boston, Sims (2007) found that rent caps reduced rents and led to the withdrawal of units from the rental market. Autor et al. (2014) reported similar effects in Cambridge, Massachusetts, including large spillovers to nearby properties. Diamond et al. (2019) examined the expansion of rent control in San Francisco, where tenants initially benefited before rent control reduced affordability and increased gentrification.
These studies primarily evaluate the long-term consequences of removing rent controls. More recently, some jurisdictions have experimented with unit-specific rent caps. In September 2020, Catalonia introduced a reference price for each unit based on the 25 nearest rental properties. Landlords in selected municipalities – those with tight markets – were prohibited from charging more than this index.
The way this policy was implemented created a natural experiment: affected municipalities and high-priced units within them faced the cap, while others did not. We use this variation to study the effect of the policy along the entire distribution of what we label ‘excess’ prices, defined as the price of the rental contract relative to the unit-specific price index. There were some units in the market (prior to the implementation of the policy) that were charging above their reference price; we label those ‘high-price’ units. Other units, which we label ‘low-price’, were already charging prices below reference price. After September 2020, units in affected municipalities could no longer charge prices above their reference price.
Using this framework, we find:
- Price declines at the top, increases at the bottom. Average rents declined 5% in treated areas, but effects varied: high-priced units saw declines while low-priced units experienced moderate increases.
- Supply contraction at the upper end. New rental contracts fell by about 10%, driven by the exit of high-priced units. This was not offset by additional low-priced supply.
- Welfare redistribution, not just between renters and landlords. We argue that the evidence is best interpreted through a model that allows for (unobserved) quality differences. Some units in the market charge high and some low prices, potentially because of quality differences. This generates two sub-markets. The reference price is more binding among high-price units. With the binding reference price, landlords of these units have incentives to exit the market. Tenants in high-price units who remain in the market, instead, benefit from the reference price, but some need to search for lower price units, creating extra demand pressure at this other end of the market. This model rationalises the data and suggests that redistribution does not necessarily go from landlords to tenants, as in standard models: tenants in previously expensive units benefit, while those in lower-priced units face rising prices due to increased demand. The reverse is true for landlords.
Conclusion
Catalonia’s rent control policy illustrates the trade-offs of rental caps. They can deliver short-run price relief – as seen elsewhere (e.g. Mense et al. 2019 and 2023, Jofre-Monseny et al. 2023) – but they also risk reducing supply and redistributing burdens across renter segments. As more governments consider such policies, it is crucial to study their effects across the entire distribution. Focusing solely on average impacts may miss key dynamics and unintended consequences.
Source : VOXeu
