Central bank warns rent cap could undermine its goals

Iceland’s central bank says a proposed rent cap could eventually reduce the supply and quality of rental housing and lengthen waiting lists, working against the bill’s own aims, mbl.is reports.

The bank made the assessment in a submission on a bill from the minister for social affairs and housing to amend the Residential Tenancies Act. The bill would limit regular rent increases to once every 12 months and cap them at the rise in the consumer price index. Its stated aims are to improve housing security, reduce indexation and strengthen tenants’ position.

The bank says reducing automatic and frequent price indexation is generally positive, because widespread indexation can make inflation more persistent. But it says the frequency of rent adjustments alone would not affect inflation over the long term. With monthly updates, rents would track monthly inflation; with annual updates, an average of one-twelfth of contracts would be adjusted each month in line with inflation over the previous year. Annual adjustments could cluster at certain times of year, causing seasonal changes in measured rent inflation.

The bank also warns that if housing prices rise faster than general prices while rents are held back, renting out homes could become less profitable. Landlords could have less incentive to offer homes for rent or to maintain and improve them. The resulting shortage could put upward pressure on rents over time, while landlords might also favour shorter contracts over long-term or open-ended agreements.

The bill would also apply the restrictions to commercial property, but the bank says the bill’s explanatory material does not explain why. It argues that commercial rents do not directly affect measured inflation and that housing security concerns do not apply in the same way, and says the reasons for including commercial property should be examined before the law is changed.