HM released a decree yesterday (unusually, a Friday) that caps rents for 3 years to a 7% rise, makes lease contracts for residential dwellings effectively 4 years, and (finally) explicitly tries to control the previous ‘work-arounds’ landlords were using to evict tenants and then re-lease after a 50% or more hike, such evicting ‘for a relative’ to use the house, for ‘renovations’, or even selling the house to a relative, and then repurchasing once the tenants were gone. See the story in The Oman Tribune here.
Of course, there will be side-effects to this new decree too. Firstly, the prices of houses and especially land should drop a bit, but that’s probably a good thing. Secondly, there will now be 2 types of leases, those that are effectively rent-controlled by being under a lease before 23 May and those that are not (for example a newly built house). So, I’d expect new leases post 23rd May to be very expensive, but if you’ve just signed a lease with increased rent, lucky lucky you, it looks like you’re in great shape for ~3 years.
The more nasty side effects will be present, as anywhere with controlled rents. There will a huge (and growing) temptation for landlords to use threats to force tenants out, to cease doing any maintenance, or perhaps even to cut off power and water or other such tricks. We’ll see. Hopefully the decree status will encourage the press to publish reports of any such miscreant landlords.
Next post will be a suggested cyclone emergency kit for Oman.
Amendments in rent law to ensure stability
MUSCAT HE Sheikh Saif Bin Mohammed Bin Saif Al Shabibi, Minister of Housing and Chairman of the committee formed by the Council of Ministers to devise a mechanism to address the problem of rising rents, said in a statement to ONA that the issue has been one of the main concerns of His Majesty Sultan Qaboos Bin Said.
Shabibi said the new amendments introduced by the Royal Decree No.72/2008 aim at preserving the contractual relationship between the landlords and the tenants and also maintaining the interest of both parties.
He said the ministerial committee has taken into consideration the various social and economic aspects while drafting the amendments to ensure stability in contractual relations. The provisions of the Royal Decree are applicable to both existing and future tenancy contracts, he added.
According to the new amendments, the landlord does not have the right to raise the rents of residential, commercial and industrial units before three years from the date of the lease contract or from the last increase introduced in these contracts. The increase, when eligible, should not be more than 7 per cent of the annual rate shown in the contract. The landlord also does not have the right to request the eviction of tenants of residential units before four years from the date of lease contract and seven years in case of commercial and industrial units.
In case, the landlord wishes not to renew the lease contract, he should notify the tenant at lease three months before the expiry of the lease contract. The lease contracts will remain valid until the expiry date and will be automatically renewed during the period at which the landlord is not entitled to request eviction of the tenants.
The landlord has the right to request eviction in the following cases:
-If the unit is utilised for purposes other than those specified in the lease contract or in violation of laws, which includes those on public morality.
-If the tenant subleased the unit or assigned it to a third party without getting prior approval from the landlord except in cases of the commercial and industrial units which is included in the lease contract.
-If the landlord wishes to operate the unit himself or by any of his close relatives who do not have vacant units, provided the tenant is given a six month notice period. If the same unit is not utilised within three months from the date of eviction, the tenant may be reinstated.
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I'm not an economist, but from the bit of economics I've had and read, I'd tend to think that the rise in rents is not solely ruthless opportunism, but a case of demand outstripping supply, in part. Why else would landlords be so eager to boot paying tenants, other than that there are others eager to pay much higher prices just to find a home?
ReplyDeleteSecondly, I imagine that rents cannot be returned to their previous levels just by magically opening up more units. In personally heard anecdotal evidence and press evidence (i.e. I don't have hard numbers), it seems that land, construction materials, and rental construction instruments (such as the jacks used to hold up concrete forms) have AT LEAST doubled over the past six months.
Demand is rising, the cost of new units is rising rapidly, so in my limited economic knowledge, I'd think that price controls will only limit supply, leading to (a) homelessnes and (b) informal economic (illegal) workarounds. Yes?
Good analysis. Don’t forget the unintended consequence of rental housing disrepair. Landlord do not have an incentive of maintaining their property, regardless of their efforts the can not recoup the cost by increasing their rent. The biggest problem, as you have mentioned, is that if you’re a new renter in the market get ready to pay the discounted value of previously observed rental increases upfront. In another words, property owners will recoup the rental increases at lease signing.
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ReplyDeleteLeo, Per
ReplyDeleteAbsolutely. Supply and demand are cruel task masters. However, some part of the problem may be the dominance of the margin. IE The rise in expats coming into company provided accommodation, and with the companies able to claim the rents as fully deductible costs (ike BP or BG), could drive up prices beyond simple supply and demand.
But I agree Per, the cost of new leases will have just gone through the roof, while existing leases will see a total drop in maintenance.
Luckily, I'm now in a rent controlled house, so for a while, I'm in much better shape...
UD,
ReplyDeleteIf the contractors are driving up prices beyond simple supply and demand (which I imagine they are for exactly your reasoning) then perhaps a more targeted effort would help. I.E., maybe some oversight to ensure that (a) landlords aren't gouging deep-pockets corporations (hardly a concern at first glance, but the secondary effects on overall rent prices warrant it) and (b) to ensure that deep-pockets can't use their deep pockets to pay well above market prices in order to muscle into housing in a tough market, thereby driving prices up.
I think that narrowly targeted measures are generally better to hit the culprit without causing greater distortions in the market.
Now landlords will take part of the rent in cash as "black" and official rent will be as per rental agreement. Nowadays there are people who will just grab any thing available.
ReplyDeleteLeo,
ReplyDeleteHard to see how that would work, unless they capped rents at a maximum price per square meter perhaps. They could also get a bit tougher on the use of villas as places of business, increasingly common in Shatti and MQ.
Anon, yep. Its always the way with Gov controls, the market will seek to work around them. Another good one for the landlords would be to exclude maintenance payments from the rent.
But generally I'm sympathetic that at least something has been done, and that it seems more thought through this time.