Solving the problems associated with the housing market is clearly a major priority for the government. Everyone accepts that Hong Kong has a serious problem in this area that needs to be addressed. With more than 250,000 applications for public rental housing, the long queues of those waiting for flats shows the true severity of the problem. Those who cannot afford to buy a house have costly rent to pay, unless they are fortunate enough to live in public rental accommodation with rents lower than market rates.

It is not surprising that many people complain about high rents for apartments in Hong Kong. While some commentators say the city should introduce rent control measures, others are strongly opposed to this.

As an economist, I oppose rent controls and do not believe they are a workable solution.

From an economic point of view, rental control is neither sensible nor effective.

From a philosophical perspective price controls - in whatever guise - are contrary to free-market principles. Rent is the one housing price which should always be determined by free market mechanisms.

It is understandable that many people now cannot afford the high cost of housing in Hong Kong. However, the solution to this can only be solved by increasing the housing supply. Man-made regulations (or rent freezes) distort the operation of market forces. Quite simply, if you increase the supply of homes, then rental prices will drop. This is a basic principle of supply and demand.

In order to have a greater supply of residential property, more land must be made available for housing. This is where the root of the problem lies. If the government does not increase the supply of land, then rent controls of whatever kind will solve nothing because the problem of limited supply will dictate prices. And no matter how stringent these controls, there will still be those who cannot afford to pay rent.

Second, there is also the question of how "rent" is defined. If rent controls are introduced, then rents will no longer reflect true market prices. This will put the landlord at a disadvantage. To obtain a fair market rent, the landlord will then be tempted to seek ways to compensate himself for the rent controls.

In economics literature, many studies exist on the true impact of rental controls. There have been cases where the landlord has asked the tenant to pay other fees or costs. For example, a landlord might ask a tenant to rent furniture in addition to renting an apartment. The rent paid on this furniture might actually be higher than its true market value. The high rental charges for furniture are part of the rental cost of the apartment. When Hong Kong introduced rent controls in the past, it was common for landlords to require tenants to pay high charges for the use of keys and other items associated with their flats. The evidence demonstrates time and again that landlords will always find ways to compensate themselves for rent controls. Such measures are therefore ultimately self-defeating.

Third, rent controls require monitoring. Disputes will require mediation mechanisms. Higher costs will always be associated with rent control schemes. When rental controls were used in Hong Kong in the past, the government established a tribunal for resolving disputes on rent levels. The costs of such tribunals will either be borne by the society, or ultimately by tenants through higher rental charges in the future.

Fourth, rent controls discourage tenants from moving out of apartments. This can create problems for landlords. Tenants know they are protected by rent controls. For example, if someone moves to a new job far from their home, normally they will find a flat near their work. However, to do this they will need to negotiate a new rent contract with the landlord. The tenant knows he will have to pay a higher rent and so will tend not to move under these circumstances - even if he needs to. This translates into higher transaction costs for society.

Fifth, if there are rent controls landlords will be deprived of true market rents. To compensate themselves, they will find less incentive to carry out maintenance work on their flats.

Rental charges have to be a fair reflection of housing conditions. While it is true that with controls the tenant will pay a lower rent, it will be at the expense of the quality of his accommodation. Ultimately this will not be beneficial to tenants. Neither would this fulfill the original aims of rent control advocates.

Campaigning for rent controls is understandably appealing - particularly for those who are paying high rental prices. Nevertheless, there would be numerous consequences of such legislation. The problems in the housing market can only be resolved using market mechanisms. As I have already stated, this can only be done by creating more residential property by increasing the supply of land.

The author is dean of the School of Business at Hang Seng Management College.

(HK Edition 07/17/2014 page9)