Security of Tenure, Costly Tenants and Rent Regulation

Many jurisdictions give residential tenants legislated packages of rights known generically as 'security of tenure', and some protect tenants further by prohibiting unjustified rent increases. The paper considers the effects of security of tenure on a competitive rental housing market. To illustrate the concepts, the paper describes current security of tenure and rent regulation provisions in the province of Ontario, Canada. A model of rational behaviour by landlords is then presented in which landlords choose simultaneously a rent for a standard lease and the quality of tenant to be accepted. Heterogeneity among landlords and tenants and imperfect information are introduced. The effect of security of tenure legislation on this behaviour is assessed. The paper then considers the difficulty of defining an unjustified rent increase when some tenants are more costly to serve than others and when the landlords have imperfect information about prospective tenants.