The €700 Rent Cap in Sliema
Sliema has roughly 4,200 two-bedroom flats let on the long-term market at a median rent of €950 a month. Housing charities report that 40% of tenants in these flats spend more than 35% of their disposable income on rent. Ahead of an election, a group of MPs proposes a legal cap of €700 a month on long-term residential rents. The Rent Regulation Unit estimates that at €700 landlords would offer only about 3,300 flats, while tenants would want about 5,400. Landlords' associations point to a 22% rise in maintenance costs since 2021 and note that several owners have already switched to short holiday lets, which the proposed cap would not cover. Landlord supply is thought to be fairly unresponsive to rent changes within a two-year horizon, but much more responsive over ten years. The government must decide whether to introduce the cap, and if so, whether to accompany it with other measures.
1. Using the figures in the case, calculate the shortage at a €700 cap and explain how the size of that shortage would change over a ten-year horizon.
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At €700, quantity demanded is 5,400 flats and quantity supplied is 3,300, so the shortage is 5,400 - 3,300 = 2,100 flats - about half of the 4,200 currently let.
That 2,100 is the smallest the shortage will be, not the largest. Supply is inelastic over two years: leases run for a year, nobody builds quickly, and some owners would rather leave a flat empty than let it below the cap. So supply barely moves at first, and the arithmetic holds. Over ten years supply is much more elastic, but the response is not a movement along a fixed supply curve - the curve shifts left. Owners sell to owner-occupiers, convert to short holiday lets (outside the cap), or stop replacing flats as they wear out. Each of these removes flats from the controlled market permanently.
Demand also moves the other way: a €700 rent draws in tenants who currently share or live outside Sliema, so quantity demanded can exceed 5,400. The shortage therefore widens over time from both directions, which is why short-run arithmetic understates the long-run problem.
2. Assess whether the cap makes tenants better off overall.
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The gain is real but concentrated. A sitting tenant in a €950 flat who keeps the tenancy gains €250 a month, or €3,000 a year - a large sum relative to income for the 40% spending over 35% on rent. For those tenants the cap works.
The losses are diffuse and less visible. With 5,400 wanting 3,300 flats, roughly 2,100 households are rationed out. They do not vanish; they queue, they pay key money, they accept poorer conditions, or they stay in overcrowded arrangements. Landlords facing a capped rent have a clear incentive to cut maintenance, since they cannot compete on price and the return on repairs is capped. Some exit to short lets, shrinking the stock further and pushing the rationed households into the unregulated sector at higher prices.
So the honest judgement is distributional: the cap transfers from landlords and from excluded would-be tenants to existing tenants. Whether that is an improvement in welfare depends on the weights you place on each group, and on how far the short-let escape route is closed. If it is not closed, the policy largely relocates the housing problem.
3. Recommend one complementary policy and justify it against the alternatives.
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The cap attacks the price and leaves the shortage untouched. A better-targeted instrument would be a housing benefit paid to low-income tenants, funded from general taxation, because it raises what a household can afford without capping what a landlord may charge. The price signal survives, so owners keep letting long-term and the 4,200 stock is not eroded.
The trade-offs must be stated. A subsidy raises demand in a market with inelastic supply, so unless it is paired with supply measures it partly capitalises into higher rents - the benefit leaks to landlords. That argues for combining it with releasing government land or vacant property for long-term letting, and with a tax or registration requirement on short holiday lets so that owners cannot arbitrage between the two regimes.
Compared with the alternatives: direct public building is slow and costly; rent controls are cheap on the budget but produce the shortage above; doing nothing leaves the 40% affordability problem. A capped, means-tested benefit plus a supply release is more expensive than the cap but does not create rationing - which is the decisive point.