Alexandrian economy lurches left

A distinct socialist hue has blanketed Alexandria’s economy as government legislation controlling rents received Royal Assent this week. The legislation imposes maximum rental rates on landlords until the end of 2020, in an attempt to reduce the cost of living for average Alexandrians.

The Rent Control Law of 2017 represents the most significant encroachment into the free market by the Alliance Liberal government of Primo de Aguilar. With the legislation having received Royal Assent on March 28, landlords in Alexandria are no longer permitted to increase rents until 2018, when a maximum increase of 5 pc of 2016 market prices will be allowed. The allowable increase in 2019, which is required to remain in-force until the end of 2020, will be 10 pc of the 2016 price.

Controlling rents is a policy largely predicated on a belief that Alexandrians are downtrodden and unable to afford home ownership. “It secures [the average Alexandrian] a decent home at an affordable rate,” said Mr Aguilar in tabling the bill.

It is however unclear whether a decent home will result from the measures. With annual inflation in Alexandria trending at 2.3% last year, any freeze requires landlords to cover the associated higher maintenance costs from their own pocket in 2017. While generally equalized with inflation in 2018 and 2019, landlords again must cover such a loss in 2020. Any unforeseen major capital or maintenance costs, or inflation above 2.5%, would place landlords at a clear net financial loss throughout the period.

This financial burden imposed by the government is likely to be offset with less investment and maintenance in existing properties and a lack of new construction. According to an Alexandrian Broadcasting Corporation report, the shuttering of rental properties is also being considered, if the tenants are unable to buy the units out. Such a reaction may trigger a housing crisis in the near term; in the long term, the need for landlords to spike rents in 2021 to recover losses and fund deferred maintenance may trigger a similar crisis.

Landlords who are tempted to violate the controls to offset any financial burden the government has imposed will face fines ranging from 200 pc to 500 pc of any charge in excess of the maximum, as well as business licence revocation and hard labour. Such punishments are, in the government’s view, required to correct an economy in which the average Alexandrian spends 35% of income on housing.

For his part, Mr Aguilar, in celebrating the law’s passage, suggested that Alexandrians use their personal savings from the controls to “earn a decent return and safeguard capital that may lead to owning [a] home.”

It is unclear whether that goal will be achieved. With extra cash in their pockets, Alexandrians may instead buy household wares, food or luxuries as opposed to investing in a downpayment for a home. If that is the case, Mr Aguilar’s celebration may be premature.

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