Regulation of the Property Rental Market

The aim of this policy paper is to provide policymakers and the Israeli public with current, research-based information relevant to the discussion on the question of regulating the property rental market in Israel, in an attempt to address to primary challenges pertaining to the Israeli rental market: a substantial increase in rent over the last few years, and the instability and uncertainty of renters regarding their continuing residence in the rented property, due to the single-year rental agreement which is ubiquitous in Israel.

The consequences of rent control, which is meant to lower the rent below market price, are well-known and agreed upon among economists. Rent control disincentivizes landlords to maintain and renovate their property, induces poor maintenance of exiting properties, reduces the worthwhileness of building new rental properties, and increases demand for housing services. These trends, in turn, lead to the development of a black market, to discrimination among renters, and to a shortage of rental homes, resulting in increased difficulty to rent a home or to move between rented properties. Such disturbance to the operation of the rental market has implications on housing prices in unregulated alternatives, on the ability to match suitable homes for changing needs, and on occupational mobility. In cases where the relationship between renter and tenant is regulated in regard to various aspects, such as the responsibility for property maintenance, the definition of a “livable property”, or stipulations for contract termination aiming to ensure rent stability, globally accumulated experience does not give any indication that the benefits of regulation exceed its cost and negative effects. The legislative proposals promoted in Israel recently are based on premises which in some cases have not been tested elsewhere, and analyzing these proposals leads to the conclusion that, in most likelihood, the proposed legislation would cause more harm than good, and that the apparatus which would be established to enforce regulation would turn out to be a waste of public funds.

The only solution which would decrease rent is expanding housing supply, particularly in central Israel, where the demand for residential rentals is great and prices are high. Implementation of the “Fair Rent” law would probably not be helpful in the best scenario, and might actually be harmful in the worst case. In any case, it would only serve to mislead the general public who believes in the power of regulation to improve the quality of life of Israeli tenants.