The Effect of Rent Controls and Regulations on Fighting Against Inflation and The Applicability of These Policies in Turkey

Abstract

There is a strong relationship between the increase in rental prices and the cost of living since asignificant portion of personal income is allocated to housing. It is assumed that individuals in manycountries allocate approximately one-third of their income to rent, and housing expenses have asignificant share in the goods and services baskets used in inflation calculations. However, in caseswhere rent increases are determined according to the inflation rate, this relationship becomes a cyclethat feeds each other. Although other important expenditure classifications, such as food, includemany different products, a very large part of the housing cost consists of rent alone. In addition, renthikes may indirectly cause the price of many different products to increase. This situation brings alongthe thought that inflation can be restrained if rent increases are limited. It is possible to present manydifferent examples in which certain rules are applied to the determination of rental prices and increaserates and the eviction of the tenant. These applications can be in different forms such as thedetermination of the rental price per square meter by the state, limitation of the reasons for eviction,application of the ceiling price, and freezing of prices. Although price controls and other restrictionswithin the free market mechanism are not tolerated that they will disrupt the supply and demandbalance of the market, it is seen that there are controls on rental prices or other regulations have beenmade in this regard in many countries that have adopted the free market economy. The generalpurpose of these controls and regulations is to enable large masses to access housing, to protect thetenants, and not to allow rent increases to trigger inflation. Although the target inflation rates couldnot be fully reached, it is possible to say that the price increases in our country remained at relativelyacceptable levels throughout the 2000s. However, with the reflection of the recent poor economicpolicies and external developments on the general level of prices, Turkey again faced the phenomenonof very high inflation. In addition, the average rental prices in Turkey approached the minimum wagein many provinces and reached figures that even exceeded the minimum wage in provinces such asMuğla, Istanbul, and Izmir. While the impact of the various economic problems that emerged with thepandemic has not passed, the serious increases in both the average rent and the general level of priceshave increased the living problem in the country and left many people below the poverty line, evenhunger. Refusing to increase interest rates, which is the most basic intervention tool of the orthodoxeconomic policy against inflation, and even going for an interest rate cut in the opposite direction,Turkey tries to restrain both exchange rates and inflation with practices such as regulations on reserverequirement ratios, changes in duty rates and threshold values, and offering exchange-rate-protecteddeposit accounts. However, it is difficult to say that these interventions have the desired effect on thegeneral level of prices and exchange rates. Factors such as the payments that the Treasury has toundertake due to exchange-rate-protected deposits, unavoidable dollarization, high current accountdeficit, and foreign debt make it difficult to keep inflation under control. In a situation whereexpectations are negative and there is a loss of confidence in economic policies, increasing the policyinterest rate alone will not be sufficient as an intervention against inflation. At the point that theTurkish economy has reached, heterodox economic policies remain in order to prevent thedepreciation of the Turkish lira. The legal regulation limiting the increase in rent prices by twenty-fivepercent, which is on the agenda of the Turkish Grand National Assembly in June, is an example of anincomes policy implementation in this respect. The aim of the study within this framework is toexamine the effect of rent controls and regulations on inflation and to discuss how these practices willaffect inflation in Turkey and other economic outcomes, especially the developments in the housingmarket. In the first part of the study, general information about rent controls and regulations is given,while in the second part, different application examples in the world are explained. In the thirdchapter, while the price controls and regulations that have been put into practice in Turkey aresummarized, the most recent rent increase limitation and its possible consequences are emphasized.In the conclusion part, rent controls and regulations, as an example of heterodox economic policies,and the effects of these policies on reducing inflation in Turkey and their reflections on the marketsare evaluated.