24 June 2022, 14:45
Rental housing during the war: can the state influence prices?

The russian-Ukrainian war has led to the largest population movement in Europe after the Second World War. Millions of people acutely faced the housing issue. And because schools, houses of culture, or gyms are difficult to call comfortable for long stays (especially with children and pets), the rental market has been in unprecedented demand. Due to the hype, the amount of affordable housing in Ukraine has decreased, whereas prices went up to 225% as compared to the pre-war time.

In the blog, we discuss the possibility of state regulation of rental prices, and provide the decisions of national and local authorities during the housing crisis.

One-room apartment for UAH 80,000: current situation in the rental market

According to the International Organization for Migration, as of May 23, more than 7 million people are internally displaced within Ukraine, and according to the Office of the United Nations High Commissioner for Refugees, about 3.5 million people have registered for shelter abroad. This figure is not a final one because the war is ongoing. At the same time, it is becoming increasingly difficult to rent housing, which is so rapidly increasing in price.

Prices in the western regions have increased the most. In Zakarpattia oblast, they increased by 225%, in Chernivtsi oblast — by 156%, in Ivano-Frankivsk oblast — by 128%, in Lviv oblast — by 96%. Such data was published by the Flatfy team (the LUN project), comparing rental prices in October 2021 with May 2022.

If we compare rental prices in May 2022 with the pre-war period, then in Lviv:

— the monthly rent for a one-room apartment has increased by an average of UAH 3,000 and amounts to UAH 10,000-13,000.

— a two-room apartment can be rented from UAH 15,000 in general;

— a room in a dormitory with a shared kitchen and bathroom costs UAH 3,500-4,500 UAH.

However, in the same very Lviv, it came to such absurd cases with price increases when a one-room apartment cost more than UAH 80,000. Such rapid increase is becoming a barrier for many displaced people in need of housing.

Point solutions to housing problems

In order to contain the cases of unreasonable increase in rental prices, the mayors of Ivano-Frankivsk and Lutsk publicly addressed the lessors. In Khmelnytskyi and Lviv, mayors declared their readiness for tougher methods of influence, such as confiscation of property, although local governments lack the authority to do so, as is the case with state authorities.

During martial law, only military and civilian administrations can establish military and apartment duty. The creation of hotlines for reporting unreasonable price increases in Lviv and Zakarpattia can also be considered purely instruments of moral pressure.

Neither do the central authorities have legal mechanisms for regulating rental prices. Since the beginning of the war, the Bureau of Economic Security has been gathering complaints about overpricing, but the consequences of such overpricing for tenants are unclear. In practice, neither the National Police, nor the State Service of Ukraine on Food Safety and Consumer Protection, nor the State Fiscal Service have real mechanisms of punishment for local overpricing.

But there are also alternative ways to counter the increase in rental prices, not just information ones. One option could be state regulation of rental prices.

At the end of March 2022, draft law No.7239 “On Amendments to Certain Legislative Acts of Ukraine on Ensuring Price Stability during the Martial Law Period” was registered. It proposes to expand regulatory powers for local government, military-civil administrations and government. The draft law imposes an obligation on these authorities to maintain price stability during the war.

If the law is adopted, the Cabinet of Ministers of Ukraine and its designated authorities will be able to: 

— set a marginal limit on the cost of services (including rent of housing, utility services, and hotel services);

— monitor compliance with them;

— draw up administrative protocols in case of violations. 

Consequently, this law will give the government the opportunity to delegate these powers to local governments and military-civil administrations. 

Regulation under the draft law provides for the establishment of marginal prices for rent. However, there are also alternatives — linking price increases to inflation or freezing prices at a stable level specified in the contracts. It is these policy options that are common in Organisation for Economic and Social Development (OECD) countries, which include the world's most developed countries. Such methods were actively implemented in periods of wars, economic crises, the coronavirus pandemic, as well as for redistribution of income in the fight against inequality.

Effects and risks of regulating housing rent prices

Without a comprehensive approach to solving the problems of the rental market, potential regulation in Ukraine can only exacerbate the situation. The lion's share of the market is in the shadow (70-90% according to the Ministry of Communities and Territories Development). Accordingly, increased control by the state may encourage homeowners to avoid signing formal lease agreements or paying taxes. This significantly differentiates Ukraine from most OECD countries, where the rental markets are transparent. Lessors may lose interest in leasing housing altogether if marginal prices turn out to be significantly lower than market prices.

In addition to reducing the supply of housing on the market, regulation can lead to:

  • reducing the mobility of the population; 
  • reduction of owners' investments in existing housing (improvement of its conditions, purchase of furniture, major repairs); 
  • increase in prices in those segments of real estate that are not regulated (non-residential premises); 
  • real estate reorientation to non-residential needs; 
  • growth of budget expenditures (for administration and control of regulation);
  • reduction of tax revenues (if housing owners paid taxes on rental income). 

Despite the negative effects outlined, rent regulation remains a consistent practice in many European and American countries. This is justified because solving housing issues in a crisis is more important than the likely negative effects in the future.

How best to regulate?

Effective price control is possible in the case of additional measures that will contribute to the formation of a more transparent rental market, as well as differentiation in regulation.

First, incentives (both positive and negative) should be introduced for rental housing and, in general, an increase in the supply of housing as such, as well as for the de-shadowing of the housing market. One of the key policies in this area could be the control of vacant, empty housing — its additional taxation or the loss of real estate tax benefits on housing where no one is registered, or the housing is not leased. This will encourage housing owners to formalize the actual rental relationship or to enter the rental market in cases where they own vacant housing.  

Secondly, the regulation of rental housing should be moderate and differentiated by territories and types of housing. Prices should be regulated at the level of individual regions, where the need is most urgent, rather than imposing restrictions at the national level. In addition, it is necessary to consider pre-war housing prices: it is incorrect to set uniform marginal prices for all regions due to different levels of income.

Thirdly, it is necessary to regulate with variability the type of housing: it is the lower and middle price segment of real estate rental that requires intervention. Regulating the higher price segment does not make much sense because its lessees are not socially insecure.

When developing policies and introducing regulation, it is necessary to realistically assess the administrative capacity of the government/municipalities to control prices — it is important not only to introduce restrictions, but also to verify compliance with prices.    

The possibility to impose restrictions on price increases is a justified step. Today, millions of displaced people who have lost property and jobs are forced to rent housing at extra high prices. Regulatory policy differentiated by territory and type of housing will help to manage the situation. And policies to increase supply, such as the introduction of a tax on vacant housing, will facilitate the de-shadowing of the rental market.

You can read more about the regulation of rental prices in our analytical note.

The blog was co-authored with Bohdan Baliuk, analyst of the Transparent Cities program.