Rent Control: Soon the Norm for Major Cities?

With rent control coming into force in Lyon and Villeurbanne on 1st November 2021, it is worth examining this practice set to spread rapidly across other major cities. In Paris, where control has been mandatory since July 2019, a study by the consumer group Consommation logement cadre de vie (CLCV) in early 2020 reveals that 40% of rental listings nonetheless fall outside the permitted limits. We look at the ins and outs of this rent control policy, its intended effects and known limitations.

The Principle

Rent control involves applying a ceiling on rent amounts for unfurnished and furnished rentals used as the tenant’s principal residence, as well as for mobility leases. In the cities concerned, a reference rent is set according to:

• the type of property (flat or house);
• whether the rental is unfurnished or furnished;
• the date of construction;
• the surface area and number of rooms;
• the address, with some areas being more “tight” than others.

The municipality uses these criteria to establish a calculation which, via an internet platform, enables the landlord to find the monthly reference rent to apply, per square metre of rented space and excluding charges. This reference rent, plus 20% or minus 30%, constitutes the permitted rent range, with exceptions.

In cases of non-compliance, the prefect may require a reduction in rent, and a landlord who fails to comply faces a fine of €5,000, or €15,000 if it is a legal entity. In practice, rent monitoring can only come through a dispute with the tenant, and very few cases are brought before the authorities.

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Rent Control Spreads to Tight Areas

This is a requirement from the 2018 Elan Act, that areas where the property market is “tight” implement rent control by 2020. The target is municipalities where acquisition prices, and consequently rental prices, reach peaks; this is enabled by the scarcity of properties against growing demand. In these areas, a tax may also apply to vacant dwellings, and council tax may be increased.

The only provincial municipality to have implemented the measure on time is Lille, with rent control in place since March 2020. Prior to Lyon and Villeurbanne, a group of municipalities in the Paris region adopted the measure in June: the nine towns of the Plaine Commune Territorial Public Establishment (Aubervilliers, Épinay-sur-Seine, Pierrefitte-sur-Seine, Saint-Denis, Villetaneuse, Stains, L’Île-Saint-Denis, La Courneuve and Saint-Ouen).

On 1st December 2021, it will be the turn of the nine municipalities of Est Ensemble, whose applications were accepted and validated by a decree in May. These are Bagnolet, Bobigny, Bondy, Le Pré-Saint-Gervais, Les Lilas, Montreuil, Noisy-le-Sec, Pantin and Romainville. Finally, the measure will apply before summer 2022 in Bordeaux and Montpellier.

There are also cases where applications are not accepted: Grenoble-Alpes Métropole and Grand Orly Seine Bièvre were refused the right to impose this constraint on their property owners. The government considered that these municipalities did not meet the conditions to qualify their market as a tight area, notably a high median rent and a significant gap between private sector rents and those in social housing.

The Interest of the Measure

Let us turn to why rent control is spreading, and the expected effect on the property market. The urban areas concerned and requesting it note a significant imbalance between the supply of housing available to rent and demand that is often far higher. The consequence is sometimes extreme increases in actual rents, making access to housing difficult for a growing proportion of the population.

The legislator’s intention is not to undermine landlords’ investment plans, who are sometimes simple savers looking to protect their retirement: rent ceilings do not affect current tenancies or tacit renewals (at 3 and 6 years). Those affected will be renewals at the end of the lease, new lettings and mobility leases.

The aim is to limit the greed of landlords who might take advantage of strong demand to apply unreasonable and unjustifiable rents. The population without the means to pay high rent would thus be assured of being able to find housing within the municipality.

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The System’s Limitations

While the idea is commendable, rent control in the private rental sector nonetheless has a fundamental limitation, which results in the opposite effect to that sought. Indeed, it discourages investment or rather, shifts it elsewhere than to the cities covered by the measure.

Anyone putting themselves in the position of an investor risking their savings to acquire a rental property will, quite reasonably, want to set a rent that enables them to recoup the investment. However, since acquisition prices are not controlled, a drop in rent would immediately undermine profitability – and therefore the incentive – to invest. The saver will quickly change their investment method, or rather, invest in another city not subject to this constraint.

The outcome: major cities may see their rental supply decrease, and landlords offering lower rent will nonetheless select the best applications. The highest salaries will remain favoured, and those with fewer means will struggle just as much, not because of the rent amount but due to a lack of available housing.

Second consequence: rents will increase more rapidly in suburbs, where demand and investment will migrate.

Finally, it should be noted that the constraint is subject to exceptions, and a rent supplement may be applied according to criteria that remain fairly subjective: additional comfort features, or a view of a historic monument for example.

Ultimately, rent control in major cities is not a far-fetched idea, but it can only achieve the true objective sought if control is implemented across the entire national territory. This would a priori be the only way to maintain the balance between major cities and suburbs, or even nearby rural areas, and would make affordable rents available to the smallest budgets throughout France. Something to watch!